Managerial Economics

Managerial Economics can be defined as amalgamation of economic theory with business

practices so as to ease decision-making and future planning by management. Managerial
Economics assists the managers of a firm in a rational solution of obstacles faced in the firm’s activities. It
makes use of economic theory and concepts. It helps in formulating logical managerial decisions. The key
of Managerial Economics is the micro-economic theory of the firm. It lessens the gap between economics
in theory and economics in practice. Managerial Economics is a science dealing with effective use of
scarce resources. It guides the managers in taking decisions relating to the firm’s customers, competitors,
suppliers as well as relating to the internal functioning of a firm. It makes use of statistical and analytical
tools to assess economic theories in solving practical business problems.

Study of Managerial Economics helps in enhancement of analytical skills, assists in rational configuration
as well as solution of problems. While microeconomics is the study of decisions made regarding the
allocation of resources and prices of goods and services, macroeconomics is the field of economics that
studies the behavior of the economy as a whole (i.e. entire industries and economies). Managerial
Economics applies micro-economic tools to make business decisions. It deals with a firm.

The use of Managerial Economics is not limited to profit-making firms and organizations. But it can also
be used to help in decision-making process of non-profit organizations (hospitals, educational institutions,
etc). It enables optimum utilization of scarce resources in such organizations as well as helps in achieving
the goals in most efficient manner. Managerial Economics is of great help in price analysis, production
analysis, capital budgeting, risk analysis and determination of demand.

Managerial economics uses both Economic theory as well as Econometrics for rational managerial
decision making. Econometrics is defined as use of statistical tools for assessing economic theories by
empirically measuring relationship between economic variables. It uses factual data for solution of
economic problems. Managerial Economics is associated with the economic theory which constitutes
“Theory of Firm”. Theory of firm states that the primary aim of the firm is to maximize wealth. Decision
making in managerial economics generally involves establishment of firm’s objectives, identification of
problems involved in achievement of those objectives, development of various alternative solutions,
selection of best alternative and finally implementation of the decision.

The following figure tells the primary ways in which Managerial Economics correlates to managerial
decision-making.
Scope of Managerial Economics
Managerial Economics deals with allocating the scarce resources in a manner that minimizes the cost. As
we have already discussed, Managerial Economics is different from microeconomics and macro-
economics. Managerial Economics has a more narrow scope - it is actually solving managerial issues
using micro-economics. Wherever there are scarce resources, managerial economics ensures that
managers make effective and efficient decisions concerning customers, suppliers, competitors as well as
within an organization. The fact of scarcity of resources gives rise to three fundamental questions-

a. What to produce?
b. How to produce?
c. For whom to produce?

To answer these questions, a firm makes use of managerial economics principles.

The first question relates to what goods and services should be produced and in what
amount/quantities. The managers use demand theory for deciding this. The demand theory examines
consumer behaviour with respect to the kind of purchases they would like to make currently and in future;
the factors influencing purchase and consumption of a specific good or service; the impact of change in
these factors on the demand of that specific good or service; and the goods or services which consumers
might not purchase and consume in future. In order to decide the amount of goods and services to be
produced, the managers use methods of demand forecasting.

The second question relates to how to produce goods and services. The firm has now to choose
among different alternative techniques of production. It has to make decision regarding purchase of raw
materials, capital equipments, manpower, etc. The managers can use various managerial economics
tools such as production and cost analysis (for hiring and acquiring of inputs), project appraisal methods(
for long term investment decisions),etc for making these crucial decisions.

The third question is regarding who should consume and claim the goods and services produced by
the firm. The firm, for instance, must decide which is it’s niche market-domestic or foreign? It must
segment the market. It must conduct a thorough analysis of market structure and thus take price and
output decisions depending upon the type of market.

Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying

simple models, managers can deal with more complex and practical situations. Also, a general approach
is implemented. Managerial Economics take a wider picture of firm, i.e., it deals with questions such as
what is a firm, what are the firm’s objectives, and what forces push the firm towards profit and away from
profit. In short, managerial economics emphasizes upon the firm, the decisions relating to individual firms
and the environment in which the firm operates. It deals with key issues such as what conditions favour
entry and exit of firms in market, why are people paid well in some jobs and not so well in other jobs, etc.
Managerial Economics is a great rational and analytical tool.

Managerial Economics is not only applicable to profit-making business organizations, but also to non-
profit organizations such as hospitals, schools, government agencies, etc.

Nature of Managerial Economics

Managers study managerial economics because it gives them insight to reign the functioning of the
organization. If manager uses the principles applicable to economic behaviour in a reasonably, then it will
result in smooth functioning of the organisation.

Managerial Economics is a Science

Managerial Economics is an essential scholastic field. It can be compared to science in a sense that it
fulfils the criteria of being a science in following sense:

 Science is a Systematic body of Knowledge. It is based on the methodical observation.

Managerial economics is also a science of making decisions with regard to scarce resources with
alternative applications. It is a body of knowledge that determines or observes the internal and
external environment for decision making.
 In science any conclusion is arrived at after continuous experimentation. In Managerial
economics also policies are made after persistent testing and trailing. Though economic
environment consists of human variable, which is unpredictable, thus the policies made are not
rigid. Managerial economist takes decisions by utilizing his valuable past experience and
observations.
 Science principles are universally applicable. Similarly policies of Managerial economics are also
universally applicable partially if not fully. The policies need to be changed from time to time
depending on the situation and attitude of individuals to those particular situations. Policies are
applicable universally but modifications are required periodically.

Managerial Economics requires Art

Managerial economist is required to have an art of utilising his capability, knowledge and understanding
to achieve the organizational objective. Managerial economist should have an art to put in practice his
theoretical knowledge regarding elements of economic environment.

Managerial Economics for administration of organization

Managerial economics helps the management in decision making. These decisions are based on the
economic rationale and are valid in the existing economic environment.
Managerial economics is helpful in optimum resource allocation

The resources are scarce with alternative uses. Managers need to use these limited resources optimally.
Each resource has several uses. It is manager who decides with his knowledge of economics that which
one is the preeminent use of the resource.

Managerial Economics has components of micro economics

Managers study and manage the internal environment of the organization and work for the profitable and
long-term functioning of the organization. This aspect refers to the micro economics study. The
managerial economics deals with the problems faced by the individual organization such as main
objective of the organization, demand for its product, price and output determination of the organization,
available substitute and complimentary goods, supply of inputs and raw material, target or prospective
consumers of its products etc.

Managerial Economics has components of macro economics

None of the organization works in isolation. They are affected by the external environment of the
economy in which it operates such as government policies, general price level, income and employment
levels in the economy, stage of business cycle in which economy is operating, exchange rate, balance of
payment, general expenditure, saving and investment patterns of the consumers, market conditions etc.
These aspects are related to macro economics.

Managerial Economics is dynamic in nature

Managerial Economics deals with human-beings (i.e. human resource, consumers, producers etc.). The
nature and attitude differs from person to person. Thus to cope up with dynamism and vitality managerial
economics also changes itself over a period of time.

Managerial Economics and Micro

Economics
Managerial Economics is basically a blend of Economics and Management. Two branches of economics
i.e. micro economics and macro economics are the major contributors to managerial economics.

Micro Economics is the study of the behaviour of individual consumers and firms whereas
microeconomics is the study of economy as a whole.

Managerial Economics and Micro Economics

All the firms operating in the market have to take under consideration the constituent of the economic
environment for its proper functioning. This economic environment is nothing but the Micro economics
elements.

Micro Economics is a broader concept as compare to Managerial Economics. Micro Economics

forms the foundation of managerial economics. Almost all the concepts of Managerial Economics are
the perceptions of Micro Economics concepts.

Managerial economics can be perceived as an applied Micro Economics. Demand Analysis and
Forecasting, Theory of Price, Theory of Revenue and Cost, Theory of Supply and Production are major
bare bones of Micro Economics that underpins the Managerial Economics. Managerial Economics
applies the theories of Micro Economics to resolve the issues of the organization and for decision making.

All Managers want to carry out their function of decision making with maximum efficiency. Their business
planning can be effectively planned and performed with comprehensive knowledge and understanding of
micro economic concept and its applications. Optimum decision making to achieve the objective of the
organisation i.e. for profit maximizing or for cost minimizing, is possible with proper compliance of micro
economic know how, regardless of the technological constraints and given market conditions. Micro
Economic Analysis is important as it is applied to day to day dilemma and concerns.

The reliance of Managerial Economics on Micro Economics is made clearer in the points below:

 If a manager wants to increase the price of the product due to increase in cost of production, he
will analyze the price elasticity of demand for that product so that price rise is not followed by
substantial fall in the demand of the product. It is the application of demand analysis to the real
world situation.
 For fixing the price of the products managers applies the pricing theories, cost and revenue
theories of micro economics.
 Decisions regarding production and supply of the product in the market, knowledge of availability
of fixed and variable factors of production, state of technology to be used and availability of raw-
material are essential. This can be determined with the knowledge of theory of production.
 Determination of price and output is possible with the acquaintance of market structures and
approaches pertinent for determination of price and output in the given market setup.
 Managerial economics utilizes statistical methods such as game theory, linear programming etc
for application of Economic Theory in Decision making.
 One of the responsibilities of Manager is to workout budgets for different departments of the
organization which is learned from Capital Budgeting and Capital Rationing.
 Cost and benefit analysis helps the manager in decision making.
 Study of welfare economics helps Manager in taking care of social responsibilities of the
organization.
 Microeconomics is the study that deals with partial equilibrium analysis which is useful for the
manager in deciding equilibrium for his organization.
 Managerial Economics also uses tools of Mathematical Economics and econometrics such as
regression analysis, correlation analysis etc.
 Theory of firm, an important element of microeconomics, is one of the most significant element of
Managerial Economics.

Principles of Managerial Economics

Economic principles assist in rational reasoning and defined thinking. They develop logical ability and
strength of a manager. Some important principles of managerial economics are:

1. Marginal and Incremental Principle

This principle states that a decision is said to be rational and sound if given the firm’s objective of
profit maximization, it leads to increase in profit, which is in either of two scenarios-

 If total revenue increases more than total cost.

 If total revenue declines less than total cost.

Marginal analysis implies judging the impact of a unit change in one variable on the other.
Marginal generally refers to small changes. Marginal revenue is change in total revenue per unit
change in output sold. Marginal cost refers to change in total costs per unit change in output
 produced (While incremental cost refers to change in total costs due to change in total output).
The decision of a firm to change the price would depend upon the resulting impact/change in
marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost,
then the firm should bring about the change in price.

Incremental analysis differs from marginal analysis only in that it analysis the change in the firm's
performance for a given managerial decision, whereas marginal analysis often is generated by a
change in outputs or inputs. Incremental analysis is generalization of marginal concept. It refers
to changes in cost and revenue due to a policy change. For example - adding a new business,
buying new inputs, processing products, etc. Change in output due to change in process, product
or investment is considered as incremental change. Incremental principle states that a decision is
profitable if revenue increases more than costs; if costs reduce more than revenues; if increase in
some revenues is more than decrease in others; and if decrease in some costs is greater than
increase in others.

2. Equi-marginal Principle
Marginal Utility is the utility derived from the additional unit of a commodity consumed. The laws
of equi-marginal utility states that a consumer will reach the stage of equilibrium when the
marginal utilities of various commodities he consumes are equal. According to the modern
economists, this law has been formulated in form of law of proportional marginal utility. It states
that the consumer will spend his money-income on different goods in such a way that the
marginal utility of each good is proportional to its price, i.e.,

MUx / Px = MUy / Py = MUz / Pz

Where, MU represents marginal utility and P is the price of good.

Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the technique of
production which satisfies the following condition:

MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3

Where, MRP is marginal revenue product of inputs and MC represents marginal cost.

Thus, a manger can make rational decision by allocating/hiring resources in a manner which
equalizes the ratio of marginal returns and marginal costs of various use of resources in a specific
use.

3. Opportunity Cost Principle

By opportunity cost of a decision is meant the sacrifice of alternatives required by that decision.
If there are no sacrifices, there is no cost. According to Opportunity cost principle, a firm can hire
a factor of production if and only if that factor earns a reward in that occupation/job equal or
greater than it’s opportunity cost. Opportunity cost is the minimum price that would be necessary
to retain a factor-service in it’s given use. It is also defined as the cost of sacrificed alternatives.
For instance, a person chooses to forgo his present lucrative job which offers him Rs.50000 per
month, and organizes his own business. The opportunity lost (earning Rs. 50,000) will be the
opportunity cost of running his own business.

4. Time Perspective Principle

According to this principle, a manger/decision maker should give due emphasis, both to short-
term and long-term impact of his decisions, giving apt significance to the different time periods
before reaching any decision. Short-run refers to a time period in which some factors are fixed
 while others are variable. The production can be increased by increasing the quantity of variable
factors. While long-run is a time period in which all factors of production can become variable.
Entry and exit of seller firms can take place easily. From consumers point of view, short-run refers
to a period in which they respond to the changes in price, given the taste and preferences of the
consumers, while long-run is a time period in which the consumers have enough time to respond
to price changes by varying their tastes and preferences.

5. Discounting Principle
According to this principle, if a decision affects costs and revenues in long-run, all those costs
and revenues must be discounted to present values before valid comparison of alternatives is
possible. This is essential because a rupee worth of money at a future date is not worth a rupee
today. Money actually has time value. Discounting can be defined as a process used to transform
future dollars into an equivalent number of present dollars. For instance, $1 invested today at
10% interest is equivalent to $1.10 next year.

FV = PV*(1+r)t

Where, FV is the future value (time at some future time), PV is the present value (value at t0, r is
the discount (interest) rate, and t is the time between the future value and present value.

Role of a Managerial Economist

A managerial economist helps the management by using his analytical skills and highly developed
techniques in solving complex issues of successful decision-making and future advanced planning.

The role of managerial economist can be summarized as follows:

1. He studies the economic patterns at macro-level and analysis it’s significance to the specific firm
he is working in.
2. He has to consistently examine the probabilities of transforming an ever-changing economic
environment into profitable business avenues.
3. He assists the business planning process of a firm.
4. He also carries cost-benefit analysis.
5. He assists the management in the decisions pertaining to internal functioning of a firm such as
changes in price, investment plans, type of goods /services to be produced, inputs to be used,
techniques of production to be employed, expansion/ contraction of firm, allocation of capital,
location of new plants, quantity of output to be produced, replacement of plant equipment, sales
forecasting, inventory forecasting, etc.
6. In addition, a managerial economist has to analyze changes in macro- economic indicators such
as national income, population, business cycles, and their possible effect on the firm’s
functioning.
7. He is also involved in advicing the management on public relations, foreign exchange, and trade.
He guides the firm on the likely impact of changes in monetary and fiscal policy on the firm’s
functioning.
8. He also makes an economic analysis of the firms in competition. He has to collect economic data
and examine all crucial information about the environment in which the firm operates.
9. The most significant function of a managerial economist is to conduct a detailed research on
industrial market.
10. In order to perform all these roles, a managerial economist has to conduct an elaborate statistical
analysis.
11. He must be vigilant and must have ability to cope up with the pressures.
12. He also provides management with economic information such as tax rates, competitor’s price
and product, etc. They give their valuable advice to government authorities as well.
 13. At times, a managerial economist has to prepare speeches for top management.

Consumer Demand - Demand Curve,

Demand Function & Law of Demand
What is Demand?

Demand for a commodity refers to the quantity of the commodity that people are willing to purchase at a
specific price per unit of time, other factors (such as price of related goods, income, tastes and
preferences, advertising, etc) being constant. Demand includes the desire to buy the commodity
accompanied by the willingness to buy it and sufficient purchasing power to purchase it. For instance-
Everyone might have willingness to buy “Mercedes-S class” but only a few have the ability to pay for it.
Thus, everyone cannot be said to have a demand for the car “Mercedes-s Class”.

Demand may arise from individuals, household and market. When goods are demanded by individuals
(for instance-clothes, shoes), it is called as individual demand. Goods demanded by household constitute
household demand (for instance-demand for house, washing machine). Demand for a commodity by all
individuals/households in the market in total constitute market demand.

Demand Function

Demand function is a mathematical function showing relationship between the quantity demanded of a
commodity and the factors influencing demand.

Dx = f (Px, Py, T, Y, A, Pp, Ep, U)

In the above equation,

Dx = Quantity demanded of a commodity
Px = Price of the commodity
Py = Price of related goods
T = Tastes and preferences of consumer
Y = Income level
A = Advertising and promotional activities
Pp = Population (Size of the market)
Ep = Consumer’s expectations about future prices
U = Specific factors affecting demand for a commodity such as seasonal changes, taxation policy,
availability of credit facilities, etc.

Law of Demand

The law of demand states that there is an inverse relationship between quantity demanded of a
commodity and it’s price, other factors being constant. In other words, higher the price, lower the demand
and vice versa, other things remaining constant.

Demand Schedule

Demand schedule is a tabular representation of the quantity demanded of a commodity at various

prices. For instance, there are four buyers of apples in the market, namely A, B, C and D.

Demand schedule for apples

PRICE (Rs. Buyer A Buyer B Buyer C Buyer D Market Demand
per dozen) (demand in (demand in (demand in (demand in (dozens)
dozen) dozen) dozen) dozen)

10 1 0 3 0 4

9 3 1 6 4 14

8 7 2 9 7 25

7 11 4 12 10 37

6 13 6 14 12 45

The demand by Buyers A, B, C and D are individual demands. Total demand by the four buyers is market
demand. Therefore, the total market demand is derived by summing up the quantity demanded of a
commodity by all buyers at each price.

Demand Curve

Demand curve is a diagrammatic representation of demand schedule. It is a graphical representation

of price- quantity relationship. Individual demand curve shows the highest price which an individual is
willing to pay for different quantities of the commodity. While, each point on the market demand curve
depicts the maximum quantity of the commodity which all consumers taken together would be willing to
buy at each level of price, under given demand conditions.

Demand curve has a negative slope, i.e, it slopes downwards from left to right depicting that with increase
in price, quantity demanded falls and vice versa. The reasons for a downward sloping demand curve can
be explained as follows-

1. Income effect- With the fall in price of a commodity, the purchasing power of consumer
increases. Thus, he can buy same quantity of commodity with less money or he can purchase
greater quantities of same commodity with same money. Similarly, if the price of a commodity
rises, it is equivalent to decrease in income of the consumer as now he has to spend more for
 buying the same quantity as before. This change in purchasing power due to price change is
known as income effect.
2. Substitution effect- When price of a commodity falls, it becomes relatively cheaper compared to
other commodities whose price have not changed. Thus, the consumer tend to consume more of
the commodity whose price has fallen, i.e, they tend to substitute that commodity for other
commodities which have not become relatively dear.
3. Law of diminishing marginal utility- It is the basic cause of the law of demand. The law of
diminishing marginal utility states that as an individual consumes more and more units of a
commodity, the utility derived from it goes on decreasing. So as to get maximum satisfaction, an
individual purchases in such a manner that the marginal utility of the commodity is equal to the
price of the commodity. When the price of commodity falls, a rational consumer purchases more
so as to equate the marginal utility and the price level. Thus, if a consumer wants to purchase
larger quantities, then the price must be lowered. This is what the law of demand also states.

Exceptions to Law of Demand

The instances where law of demand is not applicable are as follows-

1. There are certain goods which are purchased mainly for their snob appeal, such as, diamonds,
air conditioners, luxury cars, antique paintings, etc. These goods are used as status symbols to
display one’s wealth. The more expensive these goods become, more valuable will be they as
status symbols and more will be there demand. Thus, such goods are purchased more at higher
price and are purchased less at lower prices. Such goods are called as conspicuous goods.
2. The law of demand is also not applicable in case of giffen goods. Giffen goods are those inferior
goods, whose income effect is stronger than substitution effect. These are consumed by poor
households as a necessity. For instance, potatoes, animal fat oil, low quality rice, etc. An increase
in price of such good increases its demand and a decrease in price of such good decreases its
demand.
3. The law of demand does not apply in case of expectations of change in price of the commodity,
i.e, in case of speculation. Consumers tend to purchase less or tend to postpone the purchase if
they expect a fall in price of commodity in future. Similarly, they tend to purchase more at high
price expecting the prices to increase in future.

Price Elasticity of Supply

Just like the law of demand, the law of supply also explains the qualitative relationship between price and
supply. Qualitative relationships do not reveal the complete picture. For instance, it helps only up to a
certain point to know that the quantity supplied as well as price move in the same direction. However, this
is incomplete information. Economists and decision makers needed to know the magnitude of this
movement. It is for this reason that they created this concept of price elasticity of supply.

In a way, the concept of price elasticity of supply is a mirror image of the concept of price elasticity of
demand. There are however, some minor differences which will be discussed in this article. The elasticity
of supply is based on the seller’s willingness to change the quantity supplied at different prices. In this
article, we will look at this concept of elasticity of supply in a little bit more detail:

Concept: The definition of price elasticity of supply is as follows:

The measure of how much the quantity supplied of a good responds to a change in the price of that good,
computed as a percentage change in quantity supplied divided by the percentage change in price.

In simpler words, the idea is to look at how many percentage points does the supply change if the price
changes by 1%. Based on the law of supply it is assumed that the change will always be in the same
direction i.e. if price moves upwards, so does the quantity supplied and vice versa.
Calculation:

From the definition discussed above, we can derive the formula for price elasticity of demand as follows:

Price Elasticity of Supply = Percentage Change in Quantity Supplied / Percentage Change in

Prices

= (Q2-Q1) / Q1 * 100 / (P2-P1) / P1 * 100

Let’s consider an example for better understanding. Let’s say that for a given product X, the price earlier
was $2 and the units supplied were 400. Now, the price increased to $2.5 and the units supplied have
changed to 600. In this case, the calculation will be as follows:

= (600 - 400) / 400 * 100 / ($2.5 - $2) / $2 * 100

= 50% / 25%

=2

In this case the interpretation is that a 1% change in price will lead to a 2% change in the quantity
supplied. As we can see here, that the elasticity of supply could range anywhere between negative infinity
to positive infinity. However in 95% of the cases, it will be restricted from negative 10 to positive 10.

In many markets as well as well as industries, the idea that the elasticity of supply remains the same
across the supply curve is not well received. There are economists who believe that suppliers react more
to price changes when they first happen and when they happen in large magnitudes. Hence, in these
cases elasticity may be computed at multiple points on the same curve to receive different elasticity
numbers.

In fact, the concept of elasticity has a major correlation with the shape of the supply curve. However,
discussing the same is beyond the scope of this article.

Only One Type: The price elasticity of supply looks at the market from the point of view of the supplier.
Hence, in almost all cases it is only sensitive to prices. It is not affected by factors such as income levels
of suppliers. Hence, we do not have such a concept as income elasticity of supply. Also, the supply of
one product is less likely to interfere in the quantity supplied of another product. Hence, cross elasticity of
supply is also not much of a consideration. Hence, unlike elasticity of demand where there are different
types possible, the elasticity of supply is more or less based on a single type.

Determinants of Price Elasticity of

Supply
Like price elasticity of demand, price elasticity of supply is also dependent on many factors. Some of
these factors are within the control of the organization whereas others may be beyond their control.
Regardless of the control, if the management has knowledge about these factors, it can manage its
supply better.

Here is a list of determinants which generally affect the price elasticity of supply in the market:

Capacity Addition: The theoretical model stated in the law of supply simply assumes that supply will be
able to adjust up and down as and when the price changes. In doing so, the law of supply ignores the
ground realities that are related with supply.
Consider for instance the fact that most manufactured goods today are mass produced in massive
factories and most of these factories are working to their optimum levels. Hence, if supply has to be
increased new capacity needs to be added i.e. new factories need to be built.

This obviously means that supply will remain stagnant for a while when capacity is stagnant and may then
increase by leaps and bounds when additional capacity is introduced. This is an important determinant of
elasticity of supply. Products where capacity can be easily added and reduced have an elastic supply
whereas products where it is difficult to increase or decrease capacity have inelastic demand.

Related Infrastructure Growth: Industry is usually an interconnected supply chain. If one part of the
supply chain grows, whereas the rest of the supply chain remains stagnant, the growth will be lopsided.
This affects the elasticity of supply as well.

Consider the case of agriculture. Let’s assume that farmers have got hold of a revolutionary technique
with which they can increase productivity two fold. However, more production would mean more
warehouses, more cold storages and even more transport vehicles. If this related infrastructure does not
grow, producers may have to willfully cut down their production to avoid wastage. So, if the related
infrastructure is easily scalable, then the supply of such a product will be highly elastic or else it will be
inelastic.

Perishable vs. Non Perishable: Storage capacity is not the only issue. The supplier also needs to
consider whether or not the goods that they hold are perishable or not. Perishable goods have a limited
shelf life and the buyers know it.

The buyers can wait for some time and producers will have to lower the prices or take the losses that
arise from wastage. The supply of perishable goods is therefore highly elastic since whatever has been
produced has to be disposed off at the earliest. However, when it comes to non perishable goods it has
been observed that the supply is usually inelastic since producers can hold on for as long as they have to.
They are under no immediate compulsion to sell and hence the supply is inelastic.

Length of Production Period: The law of supply assumes that changes in price will produce an
immediate effect in the quantity supplied. This may be theoretically correct. However, this is not possible
in reality for many products.

Production is a time and resource consuming process. Hence, it cannot be scaled up or down with that
much ease. In many cases, the time required for production stretches to many months or even years.
Hence, there is a lagging effect on supply. This is another important determinant of the elasticity of
supply. Products whose production times take longer have relatively inelastic supply compared to those
products where the production time is less.

Marginal Cost of Production: The law of supply also assumes that the profitability of the supplier does
not change with the number of units sold. That is not the case. In reality, we have something called the
economies of scale and diseconomies of scale. This influences the marginal cost of production.

Hence, it may sometimes make economic sense to sell more whereas at other times, it may make more
economic sense to sell less! Because producers consider marginal cost of production while making their
decisions, it has become an important determinant in the elasticity of supply.

Long Run vs. Short Run: In the short run, the supply of all products is more or less inelastic. This is
because there are many factors which producers cannot vary in the short run. However, in the long run,
all the factors are variable and hence the supply of all products is completely elastic. Hence companies
must be careful while making capital decisions.

The above mentioned list of factors is not exhaustive. However, using the reasoning behind these factors
one can easily come up with more and more factors that may determine the price elasticity of supply.
Marketing and Seasonal Demand for
Goods and Services
What is Seasonal Demand ?

Marketing is the process of meeting needs that are both existing as well as unmet. To explain, marketers
promote and sell goods and services which the consumers want as well as determine what they want and
which does not exist at the moment.

In other words, marketing is all about identifying which goods and services the consumers would likely to
buy and consume as well as determining which goods and services cater to unmet needs.

This means that marketing is geared towards satiating and satisfying the needs and desires of
consumers. Having said that, there is also the concept of seasonal demand for goods and services which
means that not all goods and services can be marketed around the year.

For instance, it is during the summer months that the sales of air conditioners and air coolers spike
whereas it is during the winter months that sales of sweaters and other clothing spike.
Therefore, marketers have to be conscious of the seasonal variations in demand and hence, tailor
their strategies accordingly.

What is Elasticity of Demand ?

Indeed, the related concept of elasticity which determines the correlation between goods and services
and seasonal variations is an important concept that marketers must be aware of.

For instance, everyday FMCG (Fast Moving Consumer Goods) are sold throughout the year since
consumers do not stop consuming soaps and detergents as well as homecare products according to the
seasons. In other words, these goods sell irrespective of the season and hence, they are deemed to
be inelastic to seasonal variations.

On the other hand, goods such as appliances are bought based on the seasons and hence, they
are elastic to the seasonal variations.

Apart from the example of air conditioners that has already been discussed, it would be worthwhile to
note that goods such as washing machines, TVs to some extent, and in recent years, Smartphones spike
during festival seasons because consumers typically schedule their purchases to coincide with the happy
occasions in addition to setting aside some money for festival purchases.

Real World Examples

In India, it is not uncommon for consumers and families as well as households to buy large quantities of
gold during Danteras which is considered auspicious for buying gold. Further, consumers also buy luxury
and expensive goods during Diwali as such purchases are deemed to bring good luck and prosperity for
the consumers.

Indeed, the fact that in recent years, there has been a tendency to consume more during certain seasons
has led to marketers’ worldwide announcing sales and discount bargains to coincide with the festival
seasons.
While the Western world always had a practice of Christmas sales and the so-called Black Friday where
unheard of discounts are offered, the rest of the world is not witnessing similar phenomenon wherein
marketers are targeting the consumers with heavy discount sales during important festivals.

Indeed, this has become the norm in Asian countries such as China where the Chinese New Year
witnesses frenetic shopping sprees and hence, marketers being acutely conscious of the spike in demand
tailor their ad campaigns and strategies to take advantage of the consumers’ propensity to buy more
goods and consume more services.

Rise of Consumerist Societies and Global, Local, and Glocal Strategies

So far we have discussed how seasonal demand is changing the marketing strategies. Turning to the
other aspect of marketing which is fulfilling unmet needs, it is also the case that just like in the West,
Asian marketers have begun to identify those unmet needs that can be satiated and hence, fulfilled.

For instance, the time share holiday resorts are one such strategy wherein marketers realize that spurring
people to take holidays during summer and winter depending on their unmet need for travel and leisure is
fast catching on in China and India.

There are many tour and travel operators who have created compelling holiday packages for those
consumers who would like to take some time off during summer when their kids have vacations and
hence, would like to travel and tour other parts of the country and even abroad.

Indeed, while traditionally Asian families used the summer vacations to visit their relatives and other
friends and family acquaintances, the current trend is to encourage them to travel and tour important
tourist destinations of historical and cultural importance as well as a way out to beat the summer heat by
holidaying in exotic locales within the country as well as abroad.

From the points made so far, it is clear that as societies become consumerist, marketers have to adopt
and adapt to the changing consumer preferences as well as aspirations. While marketing was always
about such adaptation, the stakes are higher now than before since worldwide countries and the
consumers are becoming more homogenized and similar in their preferences. No wonder that the current
breed of eCommerce portals in China and India are adopting and adapting the Western practices of
discount sales and seasonal bargains to the needs of the local markets in which they operates.

This is the so-called Glocal Strategy at work which combines global thinking with local execution and
hence, is considered a sure fire strategy to ensure that global trends are merged with local imperatives to
create a win-win strategy for all stakeholders.

Indeed, this can be seen in the way the F&B or the Food and Beverages companies such as Pepsi,
Coke, and McDonald’s tailor their marketing strategies to suit seasonal variations as well as adapt to local
tastes so that consumers worldwide would experience the consumption of global brands without
sacrificing their cultural and social traditions.

Introduction to Business Economics

Historical Development of Business Economics

For much of the 20th century, if you had wanted to study business management, you probably would
have enrolled in a course in economics. This was because of the prevailing wisdom at that time that
businesses are run according to economic concepts and hence, any aspiring manager would have to
study economics as a means of actualizing their aspirations. However, in the 1960s and 1970s, there was
an emerging trend of offering business management programs by leading universities in the world as by
then, the field of business management had spawned several sub disciplines like Marketing, HRM,
Operations Management, and Finance. Indeed, it can be said that these sub-disciplines grew out of the
basic economics courses that we mentioned earlier. In the current context, many aspiring managers
study economics as a compulsory course in the first year of their b-school education, managerial
economics, and business economics in other basic courses. Indeed, managerial economics and business
economics are now taught in b-schools distinct from pure economics because the application of
economics to business management is what these courses are all about. Whereas the basic economics
course introduces the student to micro and macroeconomic concepts, managerial economics and
business economics are geared towards equipping the student with the economic concepts
necessary to run firms.

Key Themes in Business Economics

This module on business economics is organized around the four themes as described below:

 How to get a firm started

 How to keep the firm in business in the face of growing competitive rivalry
 How to grow the firm into a much larger operation
 And, How to Rejuvenate the firm in the face of declining demand

Considering the fact that there is a separate module on managerial economics, this module deals with the
economic issues faced by the firms at a macro level instead of the micro decisions that are taken by
managers. Further, given the fact that entrepreneurship is central to the setting up of new businesses,
there is a need to discuss how entrepreneurs make economic decisions. The next aspect of business
economics is how consumers make purchasing decisions. Indeed, the motivations and the decision
making process that underlies consumer behavior is an aspect that can be studied through the lens of
economics. The point here is that whereas marketing and other branches of management deal with these
aspects according to behavioral and other theories, business economics focuses on how consumer
behavior is influenced by economic aspects.

How Students and Professionals can Benefit from this Module

At the macro level, the firms must know how to survive and thrive in intense competition and hence the
study of this decision making process helps us gain insights into how firms can earn more profits even
during recessionary times. As mentioned in the bulleted point list, the key decisions confronting the firm
right from inception to operation to growth is themes that business economics can explore and which are
useful for entrepreneurs and business leaders. With increasing globalization, the fact that firms now
operate in a global arena means that they must have the knowledge of how macroeconomic trends affect
microeconomic decisions and hence, one of the topics that business economics studies is the interplay
between international trade, exchange rates, and globalization. As students of management, many of you
would have intimate knowledge of these aspects. However, for many professionals well into their careers,
sometimes they would need to be refreshed about these concepts. Hence, this module is designed in a
manner that would help students engage with the concepts and for professionals to get a primer of these
concepts.

Closing Thoughts

Finally, the field of business economics owes a lot to the contributions of Alfred Marshall, Joseph
Schumpeter, and Alfred Chandler. Hence, we would be covering their theories in detail in this module.
With this brief overview, we welcome the readers to this module on business economics.
What is Fractional Reserve Banking
and its Connection to Modern
Economics
What is Fractional Reserve Banking ?

If you are entrepreneur setting up your own business, you need to understand how banking and
economics work in tandem with your business to gain insights into how you can run your business
profitably. Fractional reserve banking can be explained in the following manner: Customer A deposits 100
Dollars in the Bank and the Bank accepts the deposit. The bank in turn to make profits on the deposits
lends out loans totaling 1000 Dollars. Before you wonder how the bank can do this, you need to
understand that unless Customer A walks into the bank one fine day and demands the entire 100 Dollars
back; the bank is safe. Further, according to the central bank requirements, banks are supposed to have
cash at hand that varies from country to country.

For instance, in many countries central banks have decreed that banks must hold 25 percent of their total
reserves in cash. Therefore, the bank that accepted the deposit from Customer A need to hold only 25
Dollars in the form of cash and it is free to do whatever it wants with the other 75 Dollars. Similarly, other
customers deposit money and the bank likewise loans them out to other customers. In this way, your
deposit of 100 Dollars multiplies to a large amount by the system of fractional reserve banking. In other
words, banks must hold a fraction of their reserves in cash and can lend out the rest to the other
customers.

Leverage, Bank Runs and the Perils of Fractional Reserve Banking

Supposing all customers who have deposited 100 Dollars want their entire money back on day based on
some economic event that would have happened. Then, this situation is known as a “run on the bank”
and as the bank holds only a fraction as cash, it would be in dire straits needing bailouts from the central
banks. The economic event that would have happened can be as simple as the loans that the bank made
going bad or what are known as NPA’ s or Non Performing Assets. The event can also be due to the
value of the assets that the bank bases its loans on going down. This depreciation in the leverage or the
ramping up of loans based on the value of the underlying asset is known as leverage. Take for example,
the loan that the bank would have made from the 100 Dollars deposited by customer A. Since only 25
Dollars are to be held in reserve, the bank can loan out the other 75 Dollars. If the loan is for 750 Dollars,
the leverage is 10 times. In this case, if the value of the asset depreciates by 10 percent the bank is under
water as the leverage is 10 and the depreciation is 10%. Therefore, this leads to a run on the bank once
news of this gets out to the depositors. This is the situation in the United States and Europe where banks
are heavily leveraged and since the assets or the homes that they used as collateral have depreciated,
the banks needed to be bailed out by the governments.

Closing Thoughts

There are many who argue that fractional reserve banking is needed for the economy to grow and that
the incidence of bank runs is a statistically minor occurrence. However, there are others who point to the
recent troubles in the US and Europe to make the point that fractional reserve banking must be stopped if
not regulated. Whichever side you are in, the basic fact remains that leverage is something that must be
reined in urgently as the stability of the banking sector is at risk. Since entrepreneurs are depositors and
borrowers at the same time, they must know these terms and concepts before setting up businesses. The
subsequent articles discuss how the changes in the real economy affect the operations of businesses and
their implications for businesses and the people who run them.
The Changing Contours of the Global
Currency Reserve System
What is a Reserve Currency ?

The term reserve currency means that it is the currency that is used by the countries of the world to trade
with each other. For instance, if India or China have to trade with Saudi Arabia for oil, then they use the
US Dollar as the reserve currency. Further, if the countries in Europe have to trade with Malaysia or
Australia, they too have to use the USD as the reserve currency. In other words, a currency that is used
by all countries of the world to trade with each other is known as a global reserve currency. As we shall
discuss later, there are many advantages for a country to have its currency as the global reserve
currency. For the moment, it would be useful to consider the fact that all countries in the global trading
system have to hold reserves of the reserve currency if they are to continue trading with other countries in
the world. This means that this reserve currency or “hard currency” becomes the currency of choice for all
countries of the world.

The US Dollar’s Exorbitant Privilege

As the USD is the global reserve currency, it enjoys exorbitant privilege in this status. This means
that the US can print as much money as possible and still maintain its superior position since the world
uses the USD as the reserve currency, which translates into the fact that the world cannot do without the
USD. This confers advantages on the USD and by extension, the US as it can run huge trade deficits and
at the same time not worry about whether it would run out of reserves like the other countries. As it has
the USD under its control, it need not worry about depleting currency reserves as it can print as many
dollars as possible. Indeed, as the reasons for the global economic crisis have been analyzed, it became
clear that the US was being profligate and careless in its consumption and standard of living patterns that
were conferred to it by the USD being the reserve currency. This unparalleled and hegemonic position
meant that even now the US cares little about the effect of its printing money or Quantitative Easing
policies on the world.

The Threat from the Chinese Yuan

However, it appears that things are changing with the Chinese Yuan being increasingly used in
bilateral trade. In recent months, several countries of the world have agreed to trade in Yuan with
each other leading to a dent in the status of the USD as the reserve currency. This means the
Chinese are announcing their arrival on the world stage with the Yuan and its use gaining traction. The
implications of this trend are worrisome for the US, good for the world as the former needs to seriously
rethink its consumption-based model, and the latter can instead hold Yuan rather than USD. Once a
country like India runs huge trade deficits, it becomes impossible for it to finance it at each turn meaning
that it has either to buy dollars or increase exports. On the other hand, if the Yuan were made the reserve
currency, countries in Asia would find it easier to trade as they have good trading relationships with
China. This is the real significance of the recent moves to have Yuan as the reserve currency, which
translates into waning American influence and increasing Chinese assertiveness.

Concluding Remarks

Further, the countries of the world need not subsidize the American consumer meaning that
overconsumption would lessen and the rest of the world would not need to bear the environmental and
social costs of this consumerism. In conclusion, while it is early days in the global currency games, it is
fair to say that the future would certainly depend on Asian countries gaining traction and the US having to
live with the new realities.
What is Capital Account Convertibility
and How it Affects a Country
What is Capital Account Convertibility ?

Capital Account Convertibility means that the currency of a country can be converted into foreign
exchange without any controls or restrictions. In other words, Indians can convert their Rupees into
Dollars or Euros and Vice Versa without any restrictions placed on them. The reason why it is called
capital account convertibility is that the conversion of domestic currencies into foreign currencies is
allowed in the capital account and not only the current account.

Capital account refers to expenditures and investments in hard assets, physical premises, and
factories as well as investments in land and other capital-intensive items. Current account on the
other hand, refers to investments that are short term in duration and hence, they fall under the current
account head. As we shall discuss later, there is a significant difference between capital and current
accounts as they are different in the period of holding and the kind of investments made. A precondition
for many countries to get IMF (International Monetary Fund) or World Bank assistance is to make their
currencies capital account convertible so that foreign investors have the exit option quickly and without
hassles in times of economic crises.

Partially and Fully Convertible Currencies

Partially convertible currencies are those where the currency can be converted in the current account.
This means that investors can invest in stock markets and bond markets of the target countries with an
option to repatriate their holdings. Further, ordinary citizens can convert their domestic currencies to
dollars for expenses like going abroad for work, tourism, and education. On the other hand, capital
account convertibility or fully convertible currencies are those where just about anybody can convert the
local currency for foreign currency without any questions or restrictions placed on such conversions.

The key aspect here is that many countries do not allow their currencies to be fully convertible if they do
not hold significant foreign exchange reserves. This is also the reason why capital controls are imposed in
times of economic crises to prevent a capital flight from these countries. Many Asian countries have learnt
from the bitter experience of the Asian financial crisis of 1997 and the Russian Default of 1998 where full
convertibility lead to a stampede of foreign investors fleeing the countries in the aftermath of the
economic crisis. The other aspect here is that even in the European Union, capital controls are being
planned to contain flight of capital to other countries as the Eurozone crisis deepens.

Impact on Countries

The previous sections discussed the difference between fully convertible and partially convertible
currencies. The impact of convertibility on economies is felt in the way assets held in the domestic country
can be repatriated with ease or partially. For instance, in India where the currency is partially convertible,
investors cannot liquidate their assets and leave the country without approval. On the other hand, they
can repatriate the money that they have invested in the stock market, as was the case in recent months.
The effect of this is that many foreign companies do not hold assets like buildings, premises, and other
items that fall in the capital account. They also tie up with local companies because in times of crisis, they
can exit the joint venture easily and get back their monies invested in the merged entity. As for other
countries in South East Asia that were fully convertible, the Asian financial crisis of 1997 was a wakeup
call for them as investors fled the country and capital flight accelerated leading to a near collapse of the
economies in the region with the exception of Singapore.
Concluding Remarks

Having considered the pros and cons of the issue, it must be said that emerging market economies must
consider the kind of convertibility after taking into account the various factors that are internal to their
functioning and must not make their currencies convertible because of external pressures.

The Rise of the Informal Economy and

the Need to Embrace it and engage
with it
What is the Informal Economy or the System D ?

We seem them everywhere and we even do business with them without pausing to think whether they
belong to the organized economy or the informal economy. The we that are being referred to are the
street vendors, the service providers, the waiters and waitresses in restaurants and hotels, the drivers
who ferry us around in their taxis and countless other workers who are faceless and nameless in our
interactions as part of our daily existence.

While the formal economy consists of salaried employees with defined pension schemes and assured
perks and benefits, the workers in the informal economy do not have such luxuries and instead, they have
to contend with variable pay and work that sometimes dries up, living on the edge of cities, and generally
not being counted as part of the workforce. This rise of the informal economy has been dubbed as the
growth of the “System D” that is as crucial and critical to the success of the global economy as the formal
economy. The workers in this informal economy have been characterized as the “Precariat” class or those
whose lives are forever precarious and liquid. However, the point to note here is that businesses have
begun to realize the importance of this System D and have started to engage with it and embrace it.

The Perils of Not Including the Informal Economy in the Mainstream

The informal economy does not pay taxes to the government, does not appear in the official GDP (Gross
Domestic Product) figures except in those cases where the government imputes a certain amount to their
contributions based on rough calculations. This means that the informal economy does not appear in
any of the official policies and programs and is instead operating outside the pale of the formal
and the organized sector. However, estimates suggest that the size of the informal economy as a
percentage of the total economy could be as high as a third or even half and hence, there has to be a
way of estimating and including their contributions as part of the computation of the statistics. Further, the
sheer number of jobs created by the informal economy makes it a key component of the overall economy
and this is more the reason why businesses and policymakers must step up their efforts to include this
component in the mainstream. Already, there are many countries in Asia where the courts and the
government are devising ways and means of accommodating the informal economy within the
mainstream and regularizing their existence by passing laws and statutes that absorb them into the
formal economy.

The Case for Engagement with the Informal Sector

Studies have shown that by 2020, the informal economies in many parts of the world would be
more than the formal economies and the rise of the mobile, itinerant, and global workforce that
thrives in the parallel realm would be impossible to ignore. In recent months, Saudi Arabia has
started the process of integrating the informal workers or the Precariat class into the mainstream and
India has already taken steps to engage with the informal sector. Considering the fact that many
businesses that operate in the informal economy do not have an incentive to be part of the mainstream,
there is a need for a deeper engagement with the informal sector and ensures that it contributes to the
mainstream. Further, there is also the aspect of illegal activities and undesirable elements taking
advantage of the fungible nature of the informal economy and proving to be a threat to the existence of
the states.

Concluding Thoughts

Finally, in as much as globalization has helped the rise of the global worker, it has also contributed to the
rise of the Precariat class as the shrinking of the world, and the borderless nature of the process has
helped the informal economy more than it has helped the formal economy. Therefore, one can no longer
dismiss the informal economy as being peripheral and as the points made in this article show, we would
soon reach a situation where the informal economy would overtake the formal one.

Currency Wars and the Making of the

Next Financial Crisis in the Global
Economy
The Recent Currency Wars

The recent drop in the value of several emerging market currencies coupled with the fact that the BOJ
(Bank of Japan) has embarked on extreme monetary stimulus and the US Federal Reserve’s unlimited
bond buying spree have rekindled fears of a currency war among the currencies of the world. Added to
this scenario is the fact that the Chinese Yuan is also depreciating against the major currencies leading to
the markets around the world betting on which currency is the next to join in the currency war. Of
particular importance is the sharp drop in the value of the Indian Rupee, the South African Rand, and the
Indonesian Rupiah over the last few days. All these moves come in the backdrop of worsening economic
conditions around the world, which means that countries intentionally debase their currencies to remain
competitive. This and the fact that central banks around the world are engaged in unlimited bond buying
and monetary easing means that the surfeit of liquidity in the system is making the currencies lose value
because there are too many of them circulating in the market.

The Nature of Currency Wars

A currency war by definition starts when a country intentionally makes moves that lowers or
increases its value when compared with other currencies. This is done either as a means to increase
export competitiveness or to discourage imports. Exports earn more money for the same dollar value
when currencies depreciate, as the value of the currency is lower when compared to the dollar making
the proceeds from exports get more local currency value. On the other hand, imports are made more
expensive as the same dollars need more local currencies values to buy the goods and services. This is
the reason why many countries usually embark on currency wars because when the global trade and
macroeconomic situation is weak, they need more exports and one way of increasing exports is to lower
the value of their currencies. The other reason why currency wars take place is that countries around the
world are engaging in monetary expansion, which is a euphemism for printing money. When central
banks print money in local currencies to monetize the debt or to convert the debt into assets held by
them, the result is too much liquidity leading to the value of the currency being lowered and inflation which
is another topic altogether.
The Consequences of Currency Wars

Many economists fear that the current round of competitive monetary expansion would result in a
protracted round of currency wars which might even provoke retaliations from other countries and lead to
conflicts both in the markets and in the geopolitical sense. For instance, China has long maintained its
value of the Yuan low so that its exports are competitive and it has done this despite opposition from the
US and other trading partners who have always expressed their concerns about the Chinese Yuan being
undervalued. With so many countries around the world now jumping into the currency wars arena, it is
high time for order to be restored as such chaotic conditions in the currency markets do not augur well for
the global economic recovery. This is the reason why the IMF (International Monetary Fund) and the
World Bank have called upon member countries to desist from currency wars and have explicitly warned
countries from doing so. However, this does not seem to have had the desired effect on the members of
the global economic system as can be seen from the recent wild gyrations and fluctuations in the values
of the global currencies.

Concluding Thoughts

Finally, in the absence of growth in the global economy, currency wars are inevitable and hence, it is in
the interests of all the nations to recover from the crisis without a beggar thy neighbor attitude, which
would only worsen the situation for everybody. More than anything else, it is for this reason that currency
wars must be avoided.

The Future of Energy and its

Implications for Businesses and
Societies
The Oil based Paradigm and its Impact on Businesses and Societies

The whole edifice of society is built on energy. We need energy to power our vehicles, electrify our homes
and offices, and to give us products that are manufactured by byproducts of oil and gas. It is common to
talk of oil and gas as the primary products whenever the topic of energy comes up. This is because the
industrial revolutions as well as the stupendous advances made during the 20th century were all powered
by oil and to a lesser extent by natural gas.

It is safe to say that oil is the lubricant that greases the wheels of modern civilization and there is no way
we can live without it and not cause dislocations and collapse of modern civilization. However, oil is a
finite resource and though we might not ever run out of oil, it becomes progressively difficult to extract it
and the era of cheap oil is over. This phenomenon is known in technical jargon as “peak oil” or the point
beyond which it becomes costlier to extract oil. Many experts believe that we have passed the peak and
some have also attributed the present economic crisis to the depletion of oil and it becoming costlier to
explain why the disposable incomes of Americans have taken a hit.

Envisioning a Post Petroleum World

This means that we need to start thinking beyond oil if businesses and societies have to transition from oil
energy based paradigm to an alternative energy based paradigm. Though this talk of energy transition
has been going on for some time now, no concrete action on a large scale has been taken to wean the
world away from oil and to transition to an alternative energy based paradigm. Indeed, the situation is dire
and urgent, as any alternative energy source needs to build infrastructure like storage depots, transport
mechanisms, and conversion methods to be commercially viable. This infrastructure cannot be built
overnight, it would take years before that are in place, and hence, the time is now to transition into a post
oil based world. We often hear business leaders and policymakers talk about sustainable development
and one of the first points in their speeches is about how we need to find alternative energy sources to
carry forward the industrial civilization that we have built for ourselves. Apart from this, the other aspect
about moving beyond oil is that it has been the primary reason for conflicts in the oil producing countries
of the Arab world and Africa as well as in Russia and hence, for a peaceful and stable world, it is high
time we moved beyond oil.

Some Alternatives to Oil

In recent months, much has been said about shale gas as an alternative to oil and indeed, the
hype around it is growing as it is touted to free the United States from dependence on the Middle
East and make the country a net exporter of energy as opposed to the present situation where it is
a net importer of energy. Apart from this, countries like India are also supposed to have deposits of
shale gas, which means that their importance to the global economy would increase. However, as
mentioned earlier, it is not enough to find an alternative source of energy. What is important is to have the
infrastructure in place to make it commercially viable. This is the reason why wind power, solar power,
and fuel cells or the hydrogen alternative have not taken off in a major way as the commercial viability of
these sources of energy has not been proved demonstrably.

Concluding Thoughts

Finally, it is understood that oil is going to be around with us in the near future. After all, the Stone Age did
not end because we ran out of rocks. Therefore, the oil age would not end because we ran out of oil but
because the environmental, social, efficiency, economic, and political costs of the oil age have reached a
point where we must address them or risk the collapse of modern civilization.

Why There Cannot be Growth without

an Energy Transition
The Other Causes of the Present Recession

We all need to grow in order to survive and progress through our lives and careers. Whether it is
individuals who climb the corporate ladder, companies that bring in more profits and record higher growth
each year, or countries that grow their GDP (Gross Domestic Product) each year, growth is a necessary
and established fact. In recent years, the aspect of growth has taken a hit because of the ongoing
economic crisis. Though there are many experts who have pointed to the high levels of debt and
indebtedness as the reasons why economies are faltering, as they need to payback the debt and hence,
their revenues are being consumed by debt repayments, the key term is that the revenues can accrue
only if there is growth.

Given the fact that growth cannot materialize out of thin air without corresponding economic
activity, the focus now shifts to how economic activity can be kick started. This is where the role
of Energy and especially oil enters the picture as basic economics would tell you that in order to
grow, one needs investments, and the investments must be transformed into output through
productivity and the use of energy. Of course, it is common for many mainstream experts to proclaim
that we can still grow with higher energy prices. However, the fact remains that in most conditions, unless
oil prices are reasonable, recessions would be common.
Peak Oil and the Need to Find Alternative Sources of Energy

Given the fact that we have passed the peak oil phenomenon, which indicates that getting more oil out of
the ground would be progressively more expensive, it is indeed a dire situation we are faced in as we
confront a future where high oil prices and high indebtedness means that growth is the casualty. This is
another fact that is usually ignored in the mainstream analysis. Without going into the reasons for this, it
would suffice to state here that the transformation of raw materials into usable finished products and
goods requires human labor and energy and without energy, we cannot actualize growth. Which brings us
to the topic of this article and that is that we need to find alternative sources of energy as quickly as
possible if we are to go from zero growth and no-growth to full growth. Indeed, this aspect is crucial to our
future as we are going to face a slow growth scenario in the absence of low energy prices. The other
aspect that is connected to this is that unless we grow, we cannot payback our debts and we can only
grow when we have abundant energy. Taken together with other resources that are needed for our
growth, the implication is that resource depletion is going to hurt us badly in the near future.

Energy Transitions take Time

With these points in mind, it is essential to remember that energy transitions take time to actualize as the
infrastructure for the extraction, transport, and the last mile connectivity which denotes how the energy is
delivered to the consumers all need a lot of time to be built and actualized. This is the reason why the
situation is so urgent as estimates indicate that we would have to transition to a new energy paradigm in
this decade if we are to avoid economic depressions and even, a collapse of our industrial and
consumerist civilization. That means that we do not have much time left in our quest to transition to a new
energy source and this is the reason why many experts are already sounding alarm bells about the future
that we face.

Concluding Thoughts

Finally, the simple fact that humans need energy everyday to work and live can be applied to the whole
economy. Without food and energy, we atrophy and become unproductive and even die in the process.
Similarly, without energy our civilizations would collapse. When that energy is scarce, we either need to
conserve it our find new energy sources to stay fit and healthy. This is the theme that this article is
propagating.

Tough Times Ahead for the Corporates

because of Macroeconomic Scenario
Maturing of Debt

Corporates all over the world face tough times ahead because of a number of factors. These include
maturing of the debt that has to be repaid over the next year, falling prospect for growth and revival, and
private equity financing coming due, which means that they would have to budget for this eventuality as
well. If we take the first aspect, corporates around the world and especially in China and India have taken
on huge foreign currency loans in the heady days of the economic boom of the last decade. This debt is
maturing in the next one year and has to be repaid in Dollars and Euros. This means that they have to
budget for a huge outflow of Dollars, which is becoming increasingly difficult because countries like India
already have seen their currencies take a hit and are facing shortfall in the amount of Dollar reserves that
they have. The situation in China is somewhat better in this respect as the country has huge Dollar
reserves. However, China is sitting on a time bomb of domestic debt that its corporates have
accumulated over the last decade or so. This debt is partly the result of frenzied borrowing for expansion
and partly the result of the extravagant stimulus that the government pumped into the economy after
2008.

Falling Growth, Rising Costs, and Short Term Liquidity Crunch

The second factor, which is to do with falling growth rates feeds into the first factor as in the absence of
growth, it is not possible to repay debts because short-term liquidity crunch might result consequently.
This is the reason why many corporates are sitting on huge cash reserves as then they would be in a
better position to take care of debt repayments in case of falling revenues and rising costs. Of course, this
is not the case with all corporates and many of them are being taken over by stronger firms or are being
declared insolvent by the banks and the creditors. This is the case with conglomerates like Kingfisher in
India where banks and financial institutions have started the process of recovery of debts by attaching
their assets. The alternative to this is governmental support or what are known as bailout packages like
what was done in the United States with the government rescuing the corporates. However, in India such
packages are not yet the norm because of political and social factors. The situation in China is different,
as the government has bailed out the corporate sector to a large extent. The point to note here is that
even when the governments’ bailout the corporates, the resulting debt has to be repaid and this is the
scenario in China where corporates have large debt on their balance sheets.

Private Equity the coming Buyout of Corporates

The third factor is the coming private equity implosion. Private equity means that significant percentage of
the stake in companies are held by these PE firms and where significant debt is held by them as well.
Again, this is something that is likely to mature over the next year or so where the PE firms and the debt
owed to them would have to be repaid. Unlike in the two factors discussed above, this is more of a
private_sector-to-private_sector interaction that might result in the buyouts of corporates by the PE firms
and the investment banks. However, this buyout would result in negative consequences for the
corporates, as the normal procedure in such cases is to hive off the unprofitable firms and sell them to
others or the PE firms themselves taking over the businesses.

Concluding Thoughts

These three factors that have been discussed point to a scenario where the corporates have a problem
on their hands in the next year or so. Of course, corporates being smart have already budgeted for these
eventualities and the likely impact would be felt by the employees (first) and the shareholders (next).

Role of Venture Capitalists and Angel

Investors in Incubating New Ventures
Venture Capitalists as Incubators of New Start-ups

Venture capitalists or Angel investors are entities and individuals who fund startups and new
businesses. There are many entrepreneurs with great business ideas but who are in need of funding for
their ventures. It is not enough to have a great innovative idea when you cannot find funding to take it to
fruition. This is where venture capitalists enter the picture as they provide the much needed seed capital
to get the venture going. In other words, venture capitalists are those entities or individuals who when
they find a business idea compelling and makes economic sense, they provide the ideators with funding
so that their startups can be incubated. The term incubation is used to denote to the fact that the initial
handholding of the startups must be done in a manner similar to how infants are incubated in their
infancy. This means that the venture capitalists and angel investors not only provide initial funding but
also guide the startups through their infancy so that they can be put on their feet and hit the ground
running.

Venture Capitalists as Drivers of Economies

Venture capitalists drive innovation and profitability of new ventures. Any economy needs new ventures to
succeed as part of the creative destruction process of capitalism. This means that for an economy to
grow, it needs constant innovation and productivity leaps that new ventures often provide. As the new
ventures need funding and support during the initial phases, venture capitalists are needed for these
startups to hit the ground running. Moreover, new ventures have to be profitable as well as it has been
estimated that nearly 50 percent of new ventures fail. This is where venture capitalists who evaluate the
business ideas and separate them according to how profitable they would be play a critical and a crucial
role in determining the success or otherwise of these ventures. As the examples of Silicon Valley in the
United States and to some extent Shanghai in China show, venture capitalists with their deep pockets
and keen economic and financial sense can indeed be an asset to the economies of the countries. This is
the reason why the US is way ahead of other countries as far as innovation and innovativeness is
concerned as it has a long history of venture capitalists and angel investors funding startups and bringing
them to fruition.

Reasons why we need Venture Capitalists

It has often been said that venture capitalists fill the void that is created between the government
and the private sector. However, many governments across the world actively fund new ventures,
the bureaucracy, and the red tape that is involved in governmental decision making often stymies
the funding of startups and the new venture incubation process. Further, it is not possible for the
government or the banks and financial institutions to fund every good idea that comes their way.
Moreover, the venture capitalists are usually staffed with industry veterans and experts who can evaluate
a business idea in an expert manner and decide on the profitability or otherwise of the idea. Apart from
this, venture capitalists are also needed for guiding the startups in their formative phase.

Venture capitalists are needed as they make the creative destruction process smoother and make the
startups transform themselves from chaotic outfits to well-oiled organizations. This means that venture
capitalists have a key role to play in shaping the economic destinies of countries. Finally, without venture
capitalists, the private sector would be left with no one to guide them on the future directions of the
economy and society.

Concluding Remarks

We have considered how venture capitalists contribute to the economies of nations. It must be noted that
almost all great business ideas and innovations like Microsoft, Google, Apple, and Facebook have all
come about because of active venture capitalist support and guidance. This is the reason why venture
capitalists are so crucial to the eventual success of capitalism.

Building Walls in a Flat World: New

Immigration Policies in the West and
their Impact on Immigration
It is not a Flat World After All

The famous cheerleader for globalization, Thomas Friedman, called the current day world as flat as
because of globalization, barriers have come down and anyone is free to invest anywhere and compete
with everyone from everywhere. However, in recent months, the notion of a Flat World has taken a
beating because countries in the West are raising the bogey of protectionism and the specter of building
imaginary walls between themselves and the rest of the world is becoming a reality. We are referring to
the decisions of the US and the UK governments to impose tighter restrictions on immigrants from other
countries. Though in the US, there is a proposal to reform the immigration laws, it has met with fierce
resistance from the Republicans as far as the entry of low skilled workers is concerned.

Further, the US has in parallel made it tighter for highly skilled professionals in the H1B Visa category to
enter the country and work there. The UK has similarly put in place a risk security deposit to deter and
discourage immigrants from entering the country. All these measures indicate that the flat world paradigm
is crumbling and what we have are the old world style restrictions on the free movement of people.

The Rise of Anti Immigrant Lobbies

The rise of the anti-immigrant lobbies has been the characteristic of the last few years though some
would say that they were never away and that they were biding their time. The ongoing recession has
given them a great opportunity to press their cause as they feed upon the insecurities of the native
population about jobs being taken away by foreigners. What exacerbates the situation in countries like the
US and the UK and in Europe is that many of the existing jobs have been outsourced and what are left
are being filled by low cost immigrants. These conditions make it ripe for the right wing politicians and
demagogues to prey upon the fear of the people and propose strict anti-immigration policies that many
previously liberal voters are now backing. This means that the anti-immigration lobbies are growing in
importance steadily and it is only a matter of time before they take center stage unless viable alternatives
are found by the pro globalization and pro immigrant lobbies.

Protectionism and the Global Economic Crisis

The trends discussed above are typical protectionist measures that are put in place whenever economic
conditions turn gloomy. As the present global economic crisis has darkened the mood in many Western
countries, it is but natural for protectionism to rear its ugly head. This means that politicians with vested
interests and hidden agendas of promoting right wing nationalism and jingoism take the center stage.
Already this is happening in countries like Greece where many hitherto fringe groups are growing in
popularity. As mentioned earlier, gloomy economic conditions are ripe for politicians to take advantage as
the insecurity among the people about losing their jobs and livelihood to foreigners is potent and can be
exploited to the hilt. Further, protectionism in the form of policies favoring domestic companies and native
workers against foreign competition and immigrants is a byproduct of dark economic times. This is the
reason why many experts believe that the flat world is no longer flat and walls are being built again to
protect domestic interests over free trade and commerce. Whether this is, a good thing or a bad thing
depends on one’s perspective, as there are many who stand to gain by globalization and there are many
who stand to gain by protectionism.

Concluding Remarks

Finally, the point to be noted is that whether the west insulates itself again or lets the winds from
everywhere blow into their countries, the temptation to write off either globalization or ignore
protectionism must be avoided and the way out is for a moderate approach to be adopted.
Economic Benefits of Immigration and
how to Manage Flow of Migrants
Recent Developments in Europe

In recent months, the world has witnessed unprecedented flows of refugees and migrants from the
conflict zones in the Middle East towards the West where these refugees plan to begin a new life in
countries in Europe as well as the United States.

While there has been much opposition to the acceptance of refugees and migrants in Europe and the US,
there have been others who have pointed to the immense benefits of migration especially when the West
is aging and hence, needs steady supply of workers to power its growth in the coming decades.

On the other hand, there is the opposition to such uncontrolled migration which insists that accepting
refugees and migrants would disturb the cultural and social fabric of their societies.

The Successive Waves of Migration

Indeed, ever since the end of the Second World War and the beginning of the second wave of migration
that began slowly and accelerate to the third wave of migration from the East to the West from the 1970s
and coinciding with the processes of globalization, Western countries have been debating the pros and
cons of migration.

On the positive side, the West and the United States in particular has gained a lot because of
migration as the countries that have welcomed economic migrants have transformed themselves into
global innovation hubs as well as economic powerhouses.

Indeed, the United States is perhaps the only country in the world that has been built because of
migration and it is rightly called “an immigrants dream” or a “melting pot” that draws in migrants from all
over the world.

Pros of Migration

Further, the advocates of migration also point to the fact that immigration results in a steady supply of
cheap labor on the lower end and a steady influx of professionals who can help the countries move up the
value chain on the upper end of the economic pie.

They also point to the fact that migrants help the countries economically as the increase in the workforce
especially when the countries are going through a demographic shift would help the economy in
maintaining the balance between retiring workers and incoming workers into the workforce.

Indeed, perhaps the biggest advantage of migration for the west is that since the number of old and
retiring workers is increasing, there needs to be a steady supply of workers to fill the dwindling
number of workers. In this respect, it is the case that by ramping up supply of workers through
migration, the demand for more workers can be met.

As economics teaches us, growing economies as well as developed economies need adequate
workforces as well as labor pools to remain competitive and hence, migration does help the West in this
respect.
Cons of Migration

Having said that, there are an equal number of opponents of migration who at times tend to play on the
economic insecurities of laid and unemployed low wage workers as well as the cultural and the social in
addition to the religious fears of the majority population.

Their contention is that migrants take away the jobs of the domestic workers and also do not assimilate
into the mainstream thereby causing social unrest and tearing of the social fabric. Moreover, they also
invoke what is known as the “sons of the soil” argument wherein they insist that jobs must first be filled
with locals and then with foreigners.

An On Balance Assessment

As can be seen from the points made above, the topic of migration is indeed divisive and has led to sharp
divergences as well as polarization in the West. However, without an objective assessment, one cannot
take either side of the debate along emotional lines and hence, there needs to be an on balance
assessment of the topic.

For instance, the Western countries must regulate migration by dividing the flow of migrants into
economic and humanitarian migrants. The first category would mean that only those who can contribute
to the economic growth and who would be productive as well as add value to the economy must be
allowed in.

Economics and Humanitarian Impulses

Having said that, economics cannot be the sole criterion to evaluate and judge everything and hence,
there must be allowance for migration on humanitarian grounds so that refugees from conflict zones and
other places can indeed build a better life in the West. Even more, these refugees if treated properly and
in turn, do their best to assimilate, can also contribute economically, and help the West reap the benefits
of diversity.

Thus, what we have is a situation where the West must allow migration by taking into account the various
aspects. As can be seen from the recent surge or even a mass migration into Europe, the European
countries cannot simply close their eyes to the suffering of refugees and at the same time, must also
safeguard their interests.

Conclusion: Taking Stock

Therefore, as some leaders have suggested, allowing genuine migrants as well as those on humanitarian
grounds and at the same time, creating “buffer zones” in the neighboring countries of the conflict zones
would be the best possible solution at this point given the various dynamics and the factors at work.

Before concluding this article, it must be noted that the migrants too have a responsibility and which is far
greater than the responsibilities of their host countries in terms of contributing to the growth of their hosts
as well as by assimilating themselves into the culture and not taking to crime or terrorism.

How Employment Rules and Tax Laws

Affect Managers and Working
Professionals
How Labor Laws and Employment Rules Impact Managers

The nature of the employment rules and the governmental policies that regulate the working of
companies in each country affect managers and working professionals in many ways. For
instance, if the government adopts a strict policy governing hire and fire of workers and prohibits firing of
workers according to the seasonal and business cycle fluctuations, the result is that managers have less
latitude in hiring at will and firing workers at will. Further, the labor laws in different countries dictate the
working hours, the number of leaves that are allowed for the workers, and the list of holidays that are
announced each year. All these rules and regulations have the effect of either liberalizing the working
conditions or restricting the free flow of workers in the industry. For instance, in the developed west, that
follows a neoliberal and capitalist model, the managers have greater flexibility in choosing whom to hire
and when to fire depending on the economic conditions or the financial state of the company. On the
other hand, in the developing countries in Asia and Africa, there are strict rules against firing employees
and therefore, many managers are wary of building up overcapacity because the slack cannot be cut
during unfavorable economic conditions. Of course, in the past decade or so, many countries like China,
India, Indonesia, and countries in Africa have liberalized rules and policies related to employment with the
result that these countries are now more amenable to pure capitalist type employment conditions.

The Impact of Tax Laws on Managers

Turning to the tax laws that impact managers and working professionals, the first and foremost effect that
a strict tax regime would have on managers is that they cannot offset many of the profits as expenses
under accounting principles and instead, have to pay taxes more than those in the pure capitalist
countries. For instance, many firms in the West have offshore subsidiaries and headquarters in tax
havens that lets them do transfer pricing and other forms of accounting tweaks, which effectively reduces
their tax burden. This is something that many developing countries are experimenting with in a bid to
attract more investment into their economies. However, this is easier said than done as was evident in the
way the Indian government handled the Vodafone tax case, which ultimately resulted in the government
amending the law to make the company pay which also has the knock on effect of scaring other investors
from investing in the country.

Razor’s Edge: The Need to Balance Workers’ Rights with Foreign Investor Expectations

The point here is that managers and working professionals operate in a micro and a macro environment
where the policies in the macro sphere impact their working terms in the micro sphere. This is the reason
why many investors look for those countries that are stable macro economically and pursue policies that
are favorable to foreign capital. Of course, this has also resulted in a competition between the developing
countries to attract foreign capital that has been described as a “race to the bottom” wherein each country
tries to outdo the other in liberalizing its economy. This has given rise to the phenomenon of
“Sweatshops” where factories in countries like China and Bangladesh have abominable working
conditions, which leads to social unrest and howls of protest by international activists. This means that
there is a fine line between overprotecting the economy and the workers from exploitation and the need to
attract more foreign capital into the country. This is the fine line that many countries grapple with as they
try to master working adroitly on the line without compromising on either side and ensure that both sides
gain from the process.

Advantages and Disadvantages of

Deregulation for Businesses and
Consumers
What is Deregulation and how does it Work ?

Deregulation is the phenomenon wherein governments signal their intention to leave the market
economy to the market forces and not stifle it and constrain it with myriad laws, rules, and
regulations. Deregulation entails overseeing and supervising the economy in a manner that would
largely be a hands off approach combined with oversight over its functioning related to legal and
compliance aspects alone. In other words, deregulation means that the governments do not interfere with
the businesses in a day-to-day manner and act only when specific complaints against businesses are
brought before them. Further, deregulation also means that governments do not set prices or put in
motion price controls leaving the process of determining the optimal pricing to the market forces of
demand and supply. Deregulation has been in vogue in emerging markets or the developing countries
ever since the 1990s when these markets began to globalize their economies and open them up to
foreign competition as well as liberalize their economies internally so that domestic firms are able to
compete freely without the heavy hand of the state. This means that instead of the heavy hand of the
state, markets are left to work according to the invisible hand of the market economy.

The Advantages of Deregulation for Businesses

Deregulation brings many advantages to businesses. First, the businesses are left to themselves to
determine their operational processes and strategic imperatives without the government interfering in
their working. This means that they can launch new products, set prices according to demand and supply,
expand into newer territories and regions, acquire land and other fixed assets without having to take a
thousand permissions, and finally, the businesses interact and interface with the consumers directly
without the state setting the agenda or the action plan. Further, deregulation in an emerging market
economy also means that the state is at last giving full play to market forces as opposed to centralized
planning those results in greater efficiencies for the businesses and more profits as well. This is the
reason why many businesses welcome deregulation with open arms and exhort the governments to
decontrol and deregulate more sectors so that the private companies would have the chance to bring in
efficiencies and actualize synergies leading to a win-win situation for both the businesses and the
consumers. Apart from this, deregulation also means that businesses can focus on their core
competencies without having to submit themselves to constant scrutiny and constant pressure from the
government. The infamous “License-Quota-Permit” system that emerging markets had until the 1990s
meant that businesses had to apply for licenses for even the most mundane things, were constrained by
quotas that determined how much they can produce, and had to take permits even for the smallest
expansion.

The Advantages and Disadvantages of Deregulation for Consumers

Deregulation brings both advantages and disadvantages to the consumers. Unlike the mostly benefits
that deregulation has for businesses, there are some pitfalls of deregulation for the consumes. If we look
at the advantages first, consumers benefit because they have more choices and hence, can affect the
demand for a particular product by switching to competitors when they find the products as inferior or
pricey. Further, deregulation also benefits the consumers because they can participate in efficient
purchase and efficient consumer behavior as well as be rewarded with superior customer service, as the
customer is the king in a market economy. However, there are some disadvantages as well as consumers
might be hit with the side effects of too much liberalization in the form of the businesses having more
power than before leading to arrogance towards the consumers, especially those who cannot pay more
for products because of their socioeconomic condition. The point here is that deregulation impacts those
at the bottom of the economic ladder most as without the protective hand of the state; they might left at
the mercy of the profits first businesses who care more for their profits rather than social and
environmental responsibility.
Impact of Political Stability on
Businesses and Working Professionals
The Perils of Political Instability and Uncertainty

If there is one thing that business leaders and entrepreneurs hate that is instability in the macro
environment. Businesses operate according to forecasts and scenarios about the future that comprise
surprises as well as certainties. However, as much as businesses factor in uncertainty, the one thing that
wants to avoid at all costs is the instability in the macro environment that results from political gridlock,
extremism, and political dysfunction. This is the reason why many emerging markets in Asia and Africa
either attract or repel foreign investors. For instance, until recently, African countries were shunned
because of the civil war like situation there whereas some Asian countries were similarly avoided by
businesses because of the political uncertainty due to frequent regime changes and even coups. As the
case of India and China, which we shall discuss in detail in the next section, illustrate, businesses flock to
regions and states where there is political stability. Further, businesses like to operate in an environment
that is not marred by frequent strikes, social unrest, and chaos as their operations would be hit adversely
due to these factors.

The Contrasting Examples of China and India

Turning to the contrasting examples of China and India, the former attracts foreign capital and
businesses, as the country is relatively stable politically and socially. Though there are sporadic instances
of social unrest that recur in some volatile regions and provinces of the country, on the whole, the country
is attractive to foreign businesses. Indeed, the attractiveness is so intense that different regions of the
country compete and vie with each other for businesses to set up their operations there. In contrast, India
is in the recent past fallen out of favor with businesses that prefer doing business elsewhere and taking
their investments to countries that offer political stability. Further, the case of India also resembles China
in so far as the competition for businesses to setup their operations is concerned. Indeed, some states in
India offer more stability than the others as well as continuity of policies. The last point is very important
as more than anything else; businesses prefer the policies that were followed during a government’s
tenure to be continued even when there is a change of government. In other words, India and the states
where the incoming government changes the policies are certainly not acceptable to the investors who
take their projects elsewhere.

Why Businesses Like a Stable Macro Environment

The reasons for businesses favoring political stability is that once they get the permits and the licenses to
operate in regions and states, they invest a lot of money in setting up facilities. Further, even during the
process of acquiring land and other assets, they need the cooperation of the government to facilitate the
same. Apart from this, political instability hurts them as their employees are often forced to skip work
because of strikes and other protests and this impacts the profits of the businesses negatively. Moreover,
businesses like a region that is friendly and welcoming towards them and not a hostile and unfriendly
dispensation. The point here is that political instability hurts everything from profits to operations to the
working conditions of the employees and hence, businesses avoid it. The other aspect about political
instability is that key laws and regulations are often stuck in the legislatures and the parliaments and key
approvals are mired in bureaucratic delays. All these factors conspire to create a situation that is not
conducive for businesses. Finally, it is indeed the case that capital is country blind and region blind and
migrates and flows to wherever it is welcome and wherever the macro situation is conducive. This is the
lesson that politicians of all hues must understand if they are to develop their constituencies.
What is Inflation and How Does it
Affect Professionals, Businesses, and
Individuals
Inflation and What it Means for Consumers

We all would have heard the term inflation and most of us would be fretting about how the rise in prices
affects our ability to spend and our rapidly shrinking disposable incomes. Inflation is the percentage
increase in prices measured over a specific time period. For instance, inflation can be calculated
on a year on year basis, quarter or quarter basis and monthly as well.

There are different indices that are followed when computing inflation. For instance, there is the WPI or
the Wholesale Price Index that measures the rise in prices of commodities that are sold at the wholesaler.
This means that the prices, which the consumers pay, are not part of this calculation. To get around this,
there is the CPI or the Consumer Price Index, which measures the rise in prices that the consumers pay
for the goods and services. Apart from this, there is also the Workers Price Index that measures the
increase in prices that the typical consumer pays. Finally, there is the food inflation that measures the rise
in food prices of a basket of commonly consumed food items. The reasons for so many indices is that
price rise can happen in some specific goods and not in others. Further, the rise in the basket of items
that make up the indices is different as one cannot compare apples and oranges and hence, there needs
to be a distinction between the commodities being measured.

Inflation and What it Means for Professionals

Inflation affects working professionals as it reduces their ability to spend and save. For instance, if the
monthly salary is 10,000 units of whatever currency (USD etc) and the inflation is at 10% that means that
the salary hike must be more than 10% if the expenditure has to remain the same. In other words, if one
spends 4000 on monthly expenditure, an inflation of 10% means that the monthly expenditure is 4400,
which reduces the money available for loan repayments, savings, and other expenses. This means that
the salary hike must be done accordingly as otherwise, savings and loan repayments would be hit.
Further, if one spends 6000 or more on the basket of commodities as monthly expenditure, it means that
the ability to save and repay loans is curtailed even more. This is the reason why inflation is a killer for
many salaried individuals and professionals who see their savings depreciating because of price rise.

Inflation and its Effect on Businesses and Economies

Inflation affects businesses and economies as well and this is because growth rates have to be more than
inflation if net savings or net investments have to grow. In other words, growth rates below the inflation
level means that industry has less money left over for dividends, investments, and for growth in the next
year. This is the reason the central banks’ of countries often use monetary policy that targets inflation
primarily. One possible way in which central banks’ target inflation is by keeping the interest rates high.
This means that an interest rate of 11% when the inflation is at 10% means that one’s savings are
growing instead of depreciating.

Further, by keeping interest rates high central banks ensure that too much money is not flooding the
system by removing the incentives for individuals to borrow more. When interest rates are high, it often
results in businesses keeping the money in the banks rather than splurging on new projects. Thus means
that the excess liquidity in the system is drained. The textbook definition of inflation is that it is caused
when more amount of money chases the same goods as in this case; there is more demand for the same
supply of goods leading to an increase in prices.
The Gloomy Outlook for the Real
Estate Sector in Most Countries
The Current Situation in the Real Estate Sector

The real estate sector in most countries around the world is bleeding and suffering from a case of acute
crisis because of a number of reasons. These range from building up of inventory in anticipation of sales;
heavy investments made into the sector by businesspersons and realtors in the expectation that house
prices would not fall further than they had over the last four years; and a general drop in demand or the
“death of the demand” from home buyers that resulted from the shrinking disposable income as a result of
the ongoing economic crisis. Though the slump and the bust in the real estate sector was the reason for
the subprime crisis in the United States and Europe, most Asian countries witnessed robust pickup in
demand in 2008 and 2009 mainly because a large percentage of the population wanted to own houses.
Further, the Asian economies like China and India had benefited from the flood of easy money in the
aftermath of the crisis and this liquidity found its way into the real estate sector. However, the situation
over the last three to four years has somewhat been different as explained below.

The Primary Reason for the Slump

The primary reason for the crisis in the real estate sector in the Asian countries is that excess inventory
has been built up over the years. Whereas an inventory buildup of 12-15 months is considered normal
and something that would sustain the sector, the current situation in many Asian countries is of
inventories being held in excess for a longer period. Indeed, in China, the incidence of “ghost towns” with
complete or nearly complete houses, malls, and offices lying vacant with no occupancy is the situation
prevailing in many provinces. In India, excess inventory has been built up to the tune of almost 24-48
months, which indicates a sector in deep depression. Further, with home prices still high which is
contradictory given the lack of demand, the builders are finding that there are no takers for their projects.
The reason for the high prices in times of lack of demand is mainly the huge investments that have been
made in the sector in anticipation of sales and the fact that builders did not expect the prices to fall further
than they did in 2008-09. Apart from this, there are many projects where the builders are unwilling to
lower prices because that would result in huge losses to them and instead, are willing to wait that much
longer for the buyers. However, this has the knock on effect of the loans made by the realtors coming due
and the situation is only helped because the bankers and the financial institutions are willing to give the
builders a lifeline by not insisting on immediate repayment and instead content with interest payments
alone.

The Secondary Reason for the Bust

The secondary reason why the real estate sector is in crisis worldwide is that along with excess
inventories and the flow of liquidity that made these inventories possible, the rising interest rates are
discouraging home buyers from making fresh purchases of residential units. The corporate sector is also
not expanding as much as desired to absorb the office space and the drop in consumer demand has
meant that malls and other shopping and leisure units are not witnessing an uptick in demand. All these
conditions have brought about a “Perfect Storm” for the real estate sector, it is only a matter of time
before the realtors start defaulting on the loans that they have taken, and as the banks are also under
pressure to be capitalized adequately, the time is running out for all the stakeholders.
How Rising Oil Prices Threaten
Economic Growth and Impact
Businesses and Managers
How Rising Oil Prices Cause Inflation

It is a fact of business that increases in the prices of raw materials increase the overall costs of doing
business. This is simple common sense as the businesses use the inputs to process into finished
products and hence, any rise in the input costs leads to overall increase in the prices of the products.
However, the case of a rise in oil prices is completely different as not only do the input costs rise, it also
leads to an across the board rise in costs. This is because oil is an integral component of the modern
global economy as virtually every aspect of economic activity depends on oil for its sustenance. Consider
for instance, the business of making steel. An increase in oil prices leads to an increase in the Processual
costs as the Blast Furnaces depend on oil for their operations. Next, as the transportation of iron ore
needs oil, this cost also increases. Further, the finished steel bars and ingots have to be transported
which again raises the costs incurred. Therefore, an increase in oil prices leads to an across the board
costs of doing business.

How Rising Oil Prices Threaten Economic Growth

Now, consider what happens to entire economies when the prices of oil increases. Just like the example
of steel, an increase in oil raises the costs of virtually every component of the economy leading to
inflation. For instance, transport costs, input costs, Processual costs, and virtually all-economic activities
witness a rise in costs leading to all round inflation. Further, we use oil in virtually all products that we use.
Plastics, metal items, electronic goods, and even processed food items that depend on oil for their
manufacture all witness an increase in costs leading to all round inflation. This is the reason why the
saying that without oil, the modern industrial civilization would collapse is considered a truism among
economists and policymakers alike. This is also the reason why market analysts, stockbrokers, and
virtually everyone dealing in finance watch the developments in the oil markets around the world along
with the geopolitical happenings in the Middle East. This is because this region contributes to the lion’s
share of the world’s oil production and hence, is considered sensitive and crucial to determining the price
of oil. Apart from this, it can be said that oil is the lifeblood of the modern economy that we have now and
hence, we cannot simply ignore the importance as well as the centrality of oil in our lives.

The Oil Age will not end because we ran out of Oil

Turning to the eventual decline in oil production that experts predict would happen soon, it is the case that
we need to transition to an alternative source of energy. As the saying goes, the Stone Age did not end
because we ran out of stones. In the same manner, the oil age will not end because we ran out of oil. On
the contrary, the oil age would slowly screech to a halt as the costs of extracting and finding new oil
sources became more and hence, it would no longer be feasible to make a profit from oil or even recover
the costs. The result would be that the price of oil would continue to stay high leading to less economic
growth as inflation takes its toll on modern economies. This is the reason why despite all promises of
recovery, the world is yet to emerge fully from the slump as high oil prices lead to all round price
increases and cause growth to sputter. Therefore, it would be advisable in the interests of the future
generation to find alternative sources of energy quickly and without causing too much disruption so that
we can at least hope for a smooth transition to an age beyond oil.
Will the Republicans Force the United
States to Default in the Next Few
Months ?
The Upcoming Debt Ceiling Fight

The United States has exceeded its debt limit and the limit has to be raised in the next couple of months
to avoid defaulting on its debt. Indeed, some experts are saying that the debt limit has already been
breached and the Treasury is resorting to extraordinary measures to keep the economy going. Further,
the point needs to be understood that raising the debt limit means that the United States has the facility to
fund what has already been spent and raising the debt limit does not mean that the country is engaging in
more debt.

In other words, what politicians across the spectrum have to keep in mind is that the debt limit is all about
repaying what is already spent and hence, it is not an indicator of how much the United States has to
borrow in future. That is a separate issue altogether and the reason for discussing this aspect in detail is
that the Republicans have been consistently insisting that the US cannot go on borrowing without cuts in
spending.

Insistence on Spending Cuts to Cooperate on Raising the Debt Ceiling

To continue the last point made above, the Republican Party is stuck on the demand that in order for
Congress and the Senate to increase the debt ceiling, there must be a corresponding agreement to cut
spending on social and welfare related services. This means that the Republicans are tying the deal to
increase the debt limit on the Obama administration agreeing to spending cuts. Without going into too
much detail about how these spending cuts would impact the economy, it needs to be mentioned that
spending cuts in welfare and social related schemes would hurt the poor and the needy more than they
would hurt the rich and the privileged.

Considering the fact that the poor and the needy have already been hurt and impacted by the ongoing
recession, it would be fair to say that such spending cuts would deal a double whammy to them and
would leave them without any state guaranteed social services. The point here is that spending cuts can
also be in the realm of defense and other areas where the US is already a profligate spender and hence,
spending cuts can be actualized in those areas.

Worst Case Scenarios and Best Case Scenarios

The worst case scenario would be one where the US defaults on its debt which would lead to a
catastrophic effect on the global financial system since the US is the world’s largest economy and the
pivot on which the global economy rests. This means that all stakeholders have to realize that actualizing
the agreement on the debt limit is in everybody’s interest and hence, they must sit down at the negotiating
table and thrash out an agreement on raising the debt limit. The last time such an eventuality was
contemplated which was in fall 2011; the US had to suffer a ratings downgrade because of the
brinkmanship of the Republicans. Therefore, the worst-case scenario cannot be contemplated at all and
so, the best-case scenario would be one where the Republicans take the fight till the last moment and
then agree on raising the debt limit. Even this best-case scenario is dangerous because delaying the
agreement till the last minute would spook the markets and cause the interest rates to rise, which would
have knock on effects on all sectors of the economy. The point here is that the situation is such that both
the worst-case scenario and the best-case scenario offer dangerous times for the US economy and this is
the key point that is being made in this article.
Concluding Remarks

Finally, it is our recommendation that investors and professionals prepare themselves for all eventualities
and take steps accordingly. The show of brinkmanship that is being played out in Washington makes for
good theater but bad economics.

Conflict between Reformers and the

Populists in Developing Countries
The Conflict of Ideologies

In many developing countries that are undertaking large-scale reforms in their economies, there is a
conflict between reformers and populists among the policymaking elite on the kind of policies that have to
be pursued for the economic welfare of the citizens. While the reformers want neoliberal and globalist
policies to be implemented that would integrate these economies into the global economy and reap the
benefits of foreign investment and greater share for the free markets, the populists want the countries to
put welfare of the citizens first in the assumption that neoliberal policies work only for the privileged and
the wealthy. The key aspect here is the ideological divide over whether neoliberal policies favor the skilled
and the educated apart from the elites and leave those who are less privileged behind. In other words, the
conflict is between those who believe that free markets and neoliberal policies benefit everybody and
those who believe that handing out freebies and subsidies is the only way to bring those who are left out
in the neoliberal paradigm up to the level of those who are benefiting from the reforms.

The Case of India as an Example of the Conflict

This conflict and divide between the reformers and the populists can be seen best in the way India has
taken hesitant steps on the road to liberalization and economic reforms. Ever since the country started
liberalizing in the 1990s, there has been a tendency to take one-step forward and two steps backward, as
the reformers have been stymied by the populists in their attempts to introduce neoliberal reforms and
globalize the economy. Often, this manifests itself in the manner of the reformers opening up a particular
sector for foreign competition or undertaking reforms in the public sector enterprises only to be met with
vociferous opposition to their attempts that result in stalled reforms and setbacks. A case in point is the
recent passage of several populist schemes aimed ostensibly at the poor and the needy. While one does
not dispute the fact that these schemes are needed to lift the poor out of poverty, the fact remains that
India already doles out subsidies in a manner that exceeds the subsidies of many other countries. The
key aspect here is that despite all these subsidies and sops, the underprivileged have not benefited which
raises serious questions about the way in which these subsidies and welfare schemes and the populist
policies are implemented.

Global Ideological Clash and the Present Situation

The other aspect about the conflict between the reformers and the populists is the manner in which the
prevailing global situation affects the fortunes of these two opposing camps. For instance, when the world
was divided into the Socialist camp led by the erstwhile USSR or the Soviet Union and the US led
capitalist camp, many developing countries allied themselves with either of the two superpowers and
followed socialism or capitalism. However, the fall of the Soviet Union pushed many socialist countries
towards capitalism and for the decades of the 1990s and the 2000s, it seemed that capitalism had won
the ideological battle. Of course, this was short-lived as the global economic crisis of 2008 proved that
capitalism was also vulnerable to excesses and that the growth of the previous two decades was an
illusion. Therefore, the situation in many developing countries at the moment is a state of confusion over
reforms and populism and it is our view that it would take some time before equilibrium is established
between the competing camps of reformers and populists. It would be safe to say that the present out of
balance world is likely to persist being in a state of crisis for some time to come as the developing
countries look towards the US and the Europe for the kind of economic ideology that has to be followed.

Rekindling the Animal Spirits in the

Global Economy to Rejuvenate Growth
The Metaphor of the Animal Spirits to Describe the Markets

For those of us who observe the financial markets gyrate wildly from highs and lows to periodic booms
and busts, the analogy of a beast that has periodic bouts of aggression and depression is the most apt
metaphor to describe these swings and mood shifts in the markets. No wonder that many economists
liken the financial markets and the economy to that of animal spirits, which drive growth through a
process of aggressive wealth creation and at the same time, when they are not tamed properly, lead to
busts and market crashes. The key aspect here is that the economy needs to be stimulated in the same
manner that as humans, we have to be aggressive in our careers and at the same time, know when to
stop and quit. In other words, kick starting an economy after it crashes is like an individual who
rediscovers his animal side after languishing in the doldrums for a while and starts to rebuild and
rejuvenate him or herself. This metaphor of an economy that is powered by animal spirits is the title of a
popular book by famous economists, which is indicative of the hold that this metaphor has on popular
imagination.

Oscillating Between Excess and Moderation

The point here is that economies and societies are comprised of individuals and hence, markets
represent the popular mood of the individuals who make up the same system. As any student of
economics would tell you, an economy grows and crashes in the same manner that individuals have
highs and downs throughout their lives. This is where the metaphor of rejuvenating growth by rekindling
our animal spirits is so apt to describe the manias, panics, and the crashes. In other words, when we are
facing a downturn in the economy or in our professional or personal lives, the best way to bootstrap and
lift ourselves and the economy up is through reconnecting with our animal nature and hitting the ground
running so that we finish ahead of the others. Of course, the animal spirits metaphor is also used to
describe how individuals in societies and economies once they lose their Mojo can flounder, languish,
and hence, need a dose of adrenaline to rouse themselves and motivate themselves to perform well and
succeed.

How Markets Correct Themselves and Why we need Animal Spirits Now

However, just like rekindling animal spirits would lead to highs in our careers and by extension the
economy can do well when individuals pour all their energies, there needs to be some moderation as well
as otherwise excesses can lead to crashes and busts. This is precisely what happened in the decades of
1990s and the 2000s when the excess of speculation and financialization led to the global economic
shock of 2008. Therefore, many economists who use the animal spirits metaphor also say that the beast
needs to be tamed from time to time and this is the power of the free markets that correct themselves
when the balance is exceeded. In other words, a well functioning economy based on markets would find
the equilibrium between excessive manias and booms and would correct itself when faced with too much
of the good thing. This is the central theme that many economists point to when they talk about the
economy being rejuvenated through the rekindling of animal spirits. Further, they also point to the fact
that of all markets, the stock market in particular resembles animal spirits in action as the wild swings that
we witnessed in recent years are certainly like an animal that is out of control at times but nonetheless
provides the much needed energy and momentum for the creative destruction processes of capitalism.
Is Less Government the Answer in
Market Economies or the Other Way
Around ?
The Debate between Neoliberalism and Socialism

An ongoing debate in the United States and in Europe is whether there must be less government or more
government. This means that there are proponents of the government extending its sphere of influence
into all sectors and opponents of this view who see this as socialism creeping into the West. In other
words, the debate is over whether the governments in the West have to assume powers over the
functioning of the economies or let the private sector do its job without governmental interference. The
genesis of this debate dates back to the 1970s when neoliberalism as an ideology first appeared on the
scene. The proponents of free markets and governmental non-interference carried the day as those on
the other side of the debate lost in the battle of ideas. Since then the West has been an exemplar for how
the private sector and free markets work without governmental interference. However, the global
economic crisis of 2008 brought the issue back into focus because many experts saw the crisis as a
manifestation of how neoliberalism failed as an ideology. Further, the fact that big banks and financial
institutions along with manufacturing behemoths had to be bailed out by the government provided
impetus to the argument that free markets left to themselves create mayhem and chaos and hence, there
has to be governmental supervision and regulation in the market economies.

A Case for Governments and the Private Sector to work hand in hand

Without taking sides in this debate, it needs to be mentioned that markets left to themselves totally are
not the solution and at the same time, total governmental control over the economy is not the answer as
well. Therefore, the considered view being propagated here is that governments and the private sector
both have a role to play in ensuring that markets work to the advantage of the people and in the best
interests of the countries. For instance, in both China and India, capitalism is managed with active
governmental assistance and in other Asian countries as well, the government and the private sector
works hand in hand to steer the economies and ensure that social welfare and social justice remain on
the high priority of the economies. Further, the fact that markets need to be guided and regulated is borne
from the statement that though the invisible hand of the market is supposed to make them self correct,
sometimes a moderation and a steadying of the invisible hand is needed to ensure that markets do not go
out of control.

The Return of Capitalism minus the Negatives

Having said that, it must be remembered that free markets and market-based economies have until now
been left to themselves and as mentioned earlier, the triumph of neoliberalism as an ideology has led to
many positive contributions to society. Of course, the recent trends indicate that free market ideologies far
from being buried are staging a comeback in the West and the net result of the crisis has been a
chastening of the private sector in the sense that it has learnt not to overdo the neoliberal experiment.
Apart from this, the fact that there is no serious competitor to capitalism as an economic system means
that there is no alternative to the world except for capitalism. As one expert noted, one can predict the
end of the world but one cannot predict the end of capitalism. This is the core idea that has ensured that
market economics around the world has taken deep roots and hence, a balance between the
unrestrained capitalistic tendencies and the need for social welfare and social justice has to be
maintained.
Concluding Thoughts

Finally, the recent crisis has also served to highlight the fact that one needs to separate the locusts from
the bees when it concerns capitalism. In other words, just as a bee contributes productively to the
ecosystem and the locust is like a parasite on the ecosystem, there are both good and bad things about
capitalism and hence, one must take the good and leave the bad parts out.

Are Asian Economies headed for a

Repeat of the 1997 Asian Financial
Crisis?
Slowdown in China

There has been a noticeable slowdown in the Chinese economy over the last few months. Coupled with a
draining of the excess liquidity that was introduced into the economy through massive monetary stimulus
in the wake of the global economic crisis, the Chinese economy suddenly looks vulnerable. Added to this
is the fact that the Chinese economic model is driven by exports and low domestic consumption which
means that as the target countries of the West to which China exports slow down, there is going to be a
corresponding slowdown in the Chinese economy as well. Further, the fact that the Chinese economy has
been pump primed heavily meaning that the Central bank engaged in massive monetary stimulus has
only exacerbated the problem wherein it is now engaged in an exercise to control inflation. Moreover, the
statistics put out by the Chinese government about its economy are suspect leading to doubts over
whether there is really growth happening now or it is just creative accounting, which is a euphemism for
window dressing of statistics.

Japanese Style Monetary Easing

The Great Japanese experiment in Quantitative Easing or pumping extraordinary amounts of money into
its economy looks like it is a failure, as the growth that was expected has not materialized. In other words,
despite massive monetary stimulus, the GDP (Gross Domestic Product) hardly registered an increase
and this was the reason why many experts are predicting that the present policies of the Central Bank of
Japan would be a failure. Apart from this, there has been a noticeable slowdown in other Asian
economies with only a few countries being the exception. These Vietnam, Cambodia, and Malaysia are
now being considered as the additions to the list of emerging markets. The point here is that despite
many Asian countries indulging in monetary stimulus, the effects are hardly visible and though many
experts blame the global slowdown for this, the fact remains that the Asian countries are still in a situation
where the economies are not mature enough to handle high deficits and inflation. Of course, Japan
cannot be considered as part of this since it is considered a developed country. However, the fact
remains that Japan has been unable to manage its economy properly leading to many observers
questioning whether it has its priorities right.

Repeat of the 1997 Asian Financial Crisis?

The preceding discussion indicates that a repeat of the 1997 Asian Financial crisis cannot be ruled out,
as the conditions now are similar to the conditions at that time. In other words, with high deficits, falling
currencies, and rampant inflation, Asian economies are also beset with high levels of corruption and
crony capitalism. All these factors make for a lethal cocktail of dangerous dimensions that can easily
translate into a crisis of the highest order. This is the reason why many experts believe that despite the
claims of the policymakers in the Asian countries, the reality might be otherwise. The irony of the situation
is that the Asian economies do not seem to have learnt the lessons from the previous crises and are
going down the same path that they have taken earlier. This is the tragic situation as it exists and
therefore, one must be wary and weary of the claims made by the policymakers in these countries. Added
to this is the fact that all these countries have gotten used to cheap money flowing from the US courtesy
the Federal Reserve with its loose monetary policy. Therefore, any tapering off the Quantitative Easing in
the US will lead to serious repercussions in Asia.

Concluding Remarks

Finally, whether there is going to be a repeat of the 1997 Asian financial crisis or otherwise, the fact
remains that the people of this region are paying the price for the perverse macroeconomic policies
pursued by the policymakers. Therefore, it is high time the policymakers did something that is in the
interest of the ordinary citizens of these countries.

The Age of Austerity in the West in

Response to the Global Economic
Crisis
The Age of Austerity

The gloomy economic conditions all over the world have prompted governments to cut back on social
spending and curtail budgetary expenditures on sectors like health, education, and provision of basic
services. The intention behind this entire pullback from spending is to promote fiscal discipline and
impose austerity on the peoples of the world. This age of austerity means that citizens in the developed
west including the US and the Europe can no longer look to the state to take care of all their needs and to
provide them with social security nets as well as subsidized services. This has major repercussions as
until now Europe and the US were held up as role models for providing basic services at dirt-cheap rates.
The situation is especially dire in Europe where for much of the 20th century, the people were used to the
state looking after their needs. Therefore, the latest round of austerity has not gone down too well with the
people of Europe who are protesting in large numbers in almost all the peripheral countries of the
Eurozone where Austerity is being implemented. This has led to prolonged periods of social unrest
punctuated by strikes and large-scale protests by labor unions and citizen movements.

Arguments for and Against Austerity

The argument made for austerity is that the good times are over and especially so when one considers
the rather easy life that many in the West got accustomed to, the point being made by the governments is
that it is time to buckle up, tighten belts, and ensure that growth is given priority over reckless spending.
However, the same argument is being contested by the people who point to the fact that they got used to
the welfare state model and hence, did not plan for this situation where they are being forced to contend
with unemployment, reduced salaries, and cutbacks to social schemes. The case of unemployment is
especially telling as many youth are without jobs and without state support, which is turning into a deadly
cocktail that can degenerate into social chaos and spell trouble in these countries. Further, the people are
also angry at the prevailing situation, which they blame on the bankers and the governments who got
them into the present sorry state of affairs. Whichever side one belongs to, it is clear that the Age of
Austerity is here to stay and therefore, the people in the West have to get used to an austere lifestyle
where most luxuries that they took for granted earlier have now been taken away from them.
Need for Austerity

Apart from this, Austerity is also needed from a fiscal prudence perspective as well as from the
diminishing returns from growth perspective. To take the latter aspect, it is clear by now to many people
the world over that the growth rates seen in earlier decades are not going to be actualized anytime soon
because of depleting resources, overpopulation, and a general rate of return that follows the law of
diminishing returns where growth hits limits and even productivity jumps cannot make up for it. As for the
fiscal prudence angle, countries that have overspent their money and indebted the future generations are
now realizing that more debt is not the answer to existing debt and hence, they must cut back on
spending and ensure that their budgets are balanced and in tune with the harsh economic realities. This
is the crux of the argument that governments in the West are trying to tell their people that for the sake of
future generations, they must sacrifice something now.

Concluding Thoughts

Finally, the austerity versus spending debate has only intensified in recent months and we would be
looking at the theoretical basis for the debate as well as the social consequences of the same in
subsequent articles. It would suffice to state here that once people get used to an easy life, it is difficult to
make them adjust to hardships and hence, the governments and the policymakers must take this into
account when try to impose austerity on their citizens.

What Is Hyperinflation ?
Hyperinflation is what, in layman terms can be called as the economic equivalent of doomsday. Modern
societies have become more and more accustomed to having inflation in their daily lives. This has been
the case ever since the world went off the gold standard at the “Bretten Woods Conference” and almost
all countries worldwide accepted fiat currencies as being the basis of their monetary system.

The popular view is that inflation is a harmless byproduct of the modern monetary
system. Hyperinflation, as some economists describe is this very same “harmless” inflation on
steroids. It is nothing but a result of rising rates of inflation for multiple years.

Hyperinflation is a grim reminder as to how inflation can wreck havoc on a monetary system and bring
about it’s complete breakdown overnight! In this article, we will have a look at this interesting
phenomenon. You can obtain a more detailed explanation from the following video.

Imagining Hyperinflation

The economic definition of hyperinflation is defined in terms of percentages and figures. This definition is
interesting to read but to the average person they appear like big numbers. The average person is unable
to fathom what hyperinflation really means until they are asked to imagine the following scenes:

 Imagine a scenario wherein a sweeper is sweeping on the streets except for the fact that he is
sweeping away currency notes! Dollar bills and pounds just lying on the street as if they are
worthless. The sweeper doesn’t steal these notes and run away because these notes are indeed
worthless. He quietly sweeps the streets, disposes millions of dollars in the garbage and heads
home!
 Imagine a woman trying to keep her house warm in winters. Usually people use wood or old
newspapers to keep the fire burning. Imagine a world where a woman uses currency notes to
keep that fire burning. They are so worthless that the woman feels if she could heat her house by
burning away millions of dollars, she has got a good deal!
Now, once again read the words “complete breakdown of monetary system” and understand this is what
the world looks like when this economic cancer of hyperinflation wrecks havoc. There is no such thing as
“normal life” during the period of hyperinflation. Everything about life becomes bizarre and unreal.

Consequences of Hyperinflation

Now since we know a fair bit about what hyperinflation really means, let’s look at the consequences that
hyperinflation is capable of causing in our daily lives:

 Daily Price Rise: Hyperinflation is a period when trust is in short supply. Everybody wants to buy
their essentials before the money loses its value. It is for this reason that they all rush to spend
their money as soon as they receive it causing a drastic rise in prices. In worst cases of
hyperinflation, prices were doubling every couple of hours.
 Daily Payment of Wages: Since prices of goods are rising daily, wage earners will not wait till
the end of the month or week to obtain their wages. They want their wages to be paid to them
every day. A lot of businesses have to shut down because they do not have the cash flow to
sustain this, complicating the problem further!
 Breakdown of Monetary System: In most cases there is complete breakdown of the monetary
system. For an interim period of time, the nation resorts back to the gold standard. Later, usually
the World Bank or IMF interferes and introduces some form of currency to stabilize the system.
Usually currencies like the dollar and pound sterling are used for this purpose.
 Savings Wiped Out: Since so much excess money is created, the amount of money lying in the
bank loses its value. It does not matter whether there was a billion dollars or one single dollar in a
bank account. In the event of hyperinflation their value is the same i.e. zero!

Major Currencies in Crisis: Another common misconception is that hyperinflation affects only
economies in decline or those economies which are badly managed. This isn’t the complete truth. The
first real known case of hyperinflation was observed in the Roman Empire and it began when the empire
was at its helm bringing the whole system down. There have been many more cases in recorded history
wherein major empires have been brought down by hyperinflation.

If we look at the current scenario, almost all world currencies i.e. the dollar, the pound, the yen and the
Swiss franc are dangerously close to a hyperinflationary spiral. It would not be farfetched to think that one
or all of these currencies could soon face a major crisis.

Famous Cases of Hyperinflation

The common perception amongst lay people is that hyperinflation is the economic equivalent of a
doomsday. True, that the consequences are dire and the threats are real. But this sort of stuff almost
never happens, does it? This is the opinion that the common public holds when they are confronted with
the issue of hyperinflation.

However, if we consider facts, nothing could be further from the truth. In fact, hyperinflation has
occurred over 50 times since the 1900’s. There has been a rapid rise in the incidence of
hyperinflation in the past few decades. It is extremely likely that all of us may have heard about
hyperinflation in the news. Here are some commonly mentioned cases of hyperinflation. The objective is
to convince the reader that hyperinflation is far more common than it is believed to be!

French Revolution
One of the earliest examples of hyperinflation in modern history was seen in colonial France. In fact, it is
believed to be one of the leading causes of the French revolution. The monarchy of France had run up a
huge debt because of fighting multiple wars. Paying down this debt was next to impossible until some
assets were sold. The French therefore created a land backed currency which they used to pay off the
debt holders. The problem was that the French ended up creating far too many currency notes as
compared to the land that they had on hand, therefore creating runaway hyperinflation as well as the
French revolution in the process!

Pre-World War 2 Germany

The most notable example of hyperinflation is the pre World War 2 Germany. Germany was asked to pay
heavy damages to its neighbors for the loss of World War-1. Since Germany did not have enough money
in taxes to pay off these debt obligations, the German government started printing money to pay off the
debt, resulting in hyperinflation. People lost the value of their savings and wages had to be paid daily, in
gold!

The hyperinflation resulted in a complete breakdown of the monetary system as the German currency lost
its value. There was rioting and break down of law and order. Adolf Hitler took advantage of the chaos
caused and promised a stable monetary system to the people of Germany. This was one of the major
reasons that he ended up in power. The pre World War-2 hyperinflation is perhaps the most famous
example of hyperinflation. It is famous because it ended up propelling Adolf Hitler to power.

Zimbabwe

The Zimbabwean hyperinflation which happened in 2008 is also extremely famous and also a grim
reminder of the havoc that hyperinflation can wreck on an unsuspecting population. In 2008, Robert
Mungabe came to power in Zimbabwe. The international community was wary of his policies and refused
to offer him more credit, while simultaneously calling in the old loans made! This created a situation
where in the Zimbabwe government immediately required funds several time more than they had
collected in taxes. Robert Mungabe decided to print the money and pay off the debts.

Also, since there was widespread discontent against Mungabe, he decided to double the wages of
military officers in order to protect himself and have a strong hold on the military. Once again, the
government did not have the money and the increased wages were paid by printing more money. All this
newly created money rushed into the marketplace and ended up creating one of the worst known
hyperinflations.

At its peak, Zimbabwe was suffering from a billion percent per year inflation! There was a complete
breakdown of the law and order as well as the monetary system. The government was printing hundred
trillion dollar currency notes! Finally wages had to be paid several times every day. In the short run, the
system came back to the gold standard. However, at the present moment, the British pound sterling is
being used as the medium of exchange post the hyperinflation.

South America

During the 1990’s multiple South American countries faces hyperinflation. This was caused because of
the debt created by enacting populist policies. The IMF tried to impose austerity measures on the
governments which many of them did not agree to. As a result they continued with their own monetary
policies and were effectively shut out from the world debt markets. With no one to borrow the money from
and populist policies which require huge payouts, many of these governments had to print the money
required to pay off the obligations. This ended up causing massive hyperinflation.

Therefore hyperinflation has been quietly present all through the ages. The world is facing an even larger
threat right now. This threat is being caused by the fact that for the first time in the history of the world, the
entire world is on a fiat money system!
Relationship Between Inflation and
Government
The relationship between inflation and the government’s stance on the issue is filled with
obscurity and confusion. There have been many conjectures which state that the government is the
people’s ally against inflation and wants to prevent it at any cost. At the same time, there have been
numerous economic conjectures stating the exact opposite i.e. that the government is not the people’s
ally. Rather the government benefits off the inflation that the common man suffers from.

These opposing viewpoints may confuse a new person who is trying to study the subject. Hence, it is
important that the debate be addressed and the points for and against the issue be considered before
arriving at a conclusion. This article will make an attempt to do the same.

The Myth: Government as Trying to Control Inflation

If newspapers, prescribed economic textbooks and the popular media are to be believed then the
government is indeed trying extremely hard to control inflation. It appears as if this is the government’s
number one priority and an enormous amount of resources are being spent on taming the inflation
problem. Theory has us believe that the government, in co-ordination with the central bank, makes
monetary policy decisions i.e. increasing and lowering the interest rates with the intent of providing
maximum benefit to the masses.

However, one also needs to consider the result of all these efforts. Countries all over the world have
experienced unprecedented inflation in the past century. The United States dollar has lost 94% of its
purchasing power in the past century. The other major currencies like Pound Sterling, Euro, Japanese
Yen etc. are all reeling under the effect of massive inflation.

Whereas earlier it was possible for one working adult to make enough income to sustain an entire family,
nowadays working couples are also finding it extremely difficult to make ends meet!

If the government is indeed spending all these resources on controlling inflation, it is doing a very poor job
since the results have been dismal. Inflation has been increasing year on year and the common man
finds himself becoming increasingly poor through the ages despite working increasingly harder.

The Reality: Government as the Cause of Inflation

The opposing theory states that the government is actually the cause of inflation. The study is not
accepted by the mainstream economists however it provides accurate empirical evidence to prove its
point. Studies have shown that inflation was nonexistent or very less in ancient societies wherein the
government did not have the exclusive right to coin money and regulate its value. As and when
government interference in the monetary system increased, so did the inflation. To have a better
understanding of this point, let’s consider the following case:

Inflation: Impossibility Without Government Involvement

Let’s say that there were only $100 present in the economy and this $100 was spent equally on
purchasing four types of goods viz. A, B, C and D. That would make $25 available for the consumption of
each good.

Now, if there was inflation in the price of good A, let’s say the economy has to spend $30 on good A but
the total amount of money in the system remains at $100, people would be forced to cut back the
consumption of B, C or D goods to compensate for the rise in A.
This means that good A will experience inflation. However, the other goods will experience deflation of
the same magnitude and the economy as a whole would remain unaffected.

The point being made here is that the prices of all the goods in the economy can rise simultaneously only
and only under one circumstance i.e. the creation of more money. If the money available in the system
increases from $100 to $120, the prices of all the goods will increase simultaneously. This is the situation
today and this is what we commonly refer to as inflation.

The Real Cause: Increase in Quantity of Money

Now, since we have ascertained that increase in the quantity of money is the root cause of inflation, the
next question obviously arises, who controls this quantity of money creation? The answer to this question
is that the government does!

Hence, while in the newspapers and magazines, you may read that the government is trying to control
inflation the reality is that they are the only ones who have the power to create it in the first place! Hence
it would be apt to say that the government itself is creating the inflation and later creating the illusion that
it is trying to fight it.

Obviously, this is an oversimplification. There are other factors at play too, like the concept of velocity of
money as propounded by eminent economist Dr Milton Friedman which is not exactly in government
control. But for the most part, the government does have a massive role to play in creating inflation.

Definition of Inflation
The definition of inflation has undergone a subtle change across the ages. Economists earlier used to
define inflation in a certain way, now they define it in a slightly different way. Although the change in
definition may seem to be innocuous and trivial, in reality that is not the case. The changing definition has
completely changed the paradigm through which we address the problem on inflation and has therefore
changed the measures that we usually adopt to control it. In this article, we will look at the old definition
and the new definition, understand why the difference is not trivial and why it matters.

The Old Definition

Old economists defined inflation as an artificial increase in the money supply within an economy. In fact
the term inflation has been borrowed from the metaphor of an inflated balloon which looks big but lacks
any substance in it. Inflation was therefore purely a monetary phenomenon. Old economists did mention
that rising prices was a symptom and an effect of inflation. Notice the difference, rising prices was the
effect and not the way in which inflation was defined.

The New Definition

New age economists define inflation as the “sustained rise in prices of goods and commodities” across
the economy. To the average person, this might seem to be stating exactly what is written above.
However, there is a huge difference.

Notice the change from. artificial increase in money supply to state of rising prices. New age economists
refer to the increase in monetary supply by a different term called monetary inflation whereas when they
use the word inflation in common parlance, they are usually using it to mean price inflation.

The change in definition is therefore no where subtle or inconsequential. Instead, the ramifications of this
definition change on inflation theory are massive.
Purpose of a Definition

The purpose of a definition is to help the reader unmistakably identify a given condition. The changed
definition of inflation fails to meet this purpose. If we define inflation as rising prices, prices could actually
rise because of a number of factors. Some of these factors may be legitimate whereas the others may not
be. For instance, if rise in prices if because of supply side blockages and other logistical issues, there is
very little that a central bank could do to bring down this price rise.

Cause vs. Effect

Also, the definition has to be clear about the cause and the effect of the phenomenon being observed.

 An effect or symptom is what helps the user identify the existence of the phenomenon i.e. it helps
in defining the problem
 A cause on the other hand is what needs to be corrected to eradicate the problem i.e. it helps in
creating a solution. The stability of the solution depends upon how permanently the disturbing
cause has been removed.

The definition of inflation mixes up the two. Under the new definition, rising prices is a cause as well as
the effect of inflation. Defining inflation in this manner obfuscates the real cause. It is for this reason that
any study of modern day inflation must first begin by clearing up this confusion caused by this definition.

Historical Example

Inflation as a phenomenon has always been around. Earlier it was also referred to as debasement. It
simply meant that the government would dilute the value of coins by removing pure gold and adding
cheaper metals like bronze and copper in its place. Since gold content of the coins was reduced, more
and more such coins came to be required to make purchases in later days.

Here too, artificial inflation of the money supply was the cause and rise in prices was a mere effect of the
policy. Therefore in this case if we define the cause as debasement by government, we can come up with
a relevant plan of action to prevent the cause and therefore prevent the problem completely.

On the other hand, if we define rising prices as a cause, we are stuck in a dead end loop. The cause
seems like the effect and the effect seems like the cause. In the end it appears to be a complex self
fulfilling prophecy when in reality it is just a simple cause effect relationship.

The dangers of inflation are looming over the world more than they ever did. This is because for the first
time in the history of the world, all the countries have fiat currency. This means that they have the power
to inflate simultaneously unchecked until the whole system comes crashing down.

Why Does the Definition of Inflation

Matter?
We discussed the definition of inflation in a lot of detail in the previous article. The previous article was
meant to bring to the readers notice that the current definition of inflation is flawed. Instead a previously
used definition was capable of defining the concept in a much better manner. This brings up the question,
“why does the definition even matter so much?”
We will dedicate this article towards answering this question. In the remainder of this article, we will
discuss the negative effects that have taken place because of the failure to define inflation correctly. In
this article, we will state why the definition of inflation matters!

✓ Problem Not Defined Correctly:

A well defined problem is a problem half-solved. Similarly, a badly defined problem is a problem further
away from resolution. The wrong definition of inflation leads to confusion. The underlying causes that are
bringing about the inflation are never discussed. Instead, the effect of inflation is assumed to be its cause.
There are many economists in the world that can solve the problem of excess debt, excess government
spending and so on. However, if instead of the problem, they are given its effect to work with i.e.rise in
prices, there is very little that they can do to control the situation.

✓ Wrong Measures of The Situation:

Also, since inflation is defined as rise in prices, it is also measured as rise in prices. Now, this creates
some very big problems.Firstly, it is extremely difficult to find out on average, how the prices of all the
goods in the world have changed over the past year or so and come with an accurate figure. This creates
other problems like indexing and what should be included in the index and what weight should be
assigned to it? Also, it creates other issues like updating the index over and over again as time
progresses.All these lead to incorrect measures of the gravity of the situation. Wrong data becomes the
basis for wrong decision making!

✓ Wrong Causes Identified:

Defining inflation as a rise in price obfuscates the data relating to the true cause. For instance, prices
could rise as a result of shortage or because of logistical errors. This creates confusion. The primary tool
of the government to fight inflation is monetary policy. Now, there is very little the government can do by
increasing and decreasing interest rates as far as supply side issues are concerned. Hence, defining the
problem incorrectly leads us to the wrong causes.

✓ Wrong People Are Held Accountable:

If inflation is caused by inflating the monetary medium i.e. by printing more currency, then we know for a
fact that should be held accountable for a rise in inflation. The currency of any country is usually in the
hands of its government. Hence, a rising inflation should be blamed on the government and its operations
rather than supply side shortages and other such excuses used to deflect the attention from the root
cause.

As customers, it makes no sense for us to argue with the shopkeepers or other counterparties. They may
be charging us the higher price, but they too are affected by inflation caused by government policies.
Almost all inflation is exclusively caused by government’s bad monetary policy.

✓ Wrong Corrective Measures:

Now, since the problem has been defined incorrectly in the first place, it is not shocking to see that almost
everyone approaches the problem of inflation with the wrong mindset. Economists that have defined
inflation as rising prices have implicitly suggested the use of regressive policies like rationing, price fixing
and quota systems to hold the system in place. However, empirical evidence is 100% clear in its record.
These measures have never proven effective over any time period and end up creating more problems
than they intended to solve.

Hence, this wrong definition has caused decades of lost time and opportunities as well as billions of
taxpayer dollars have been spent on dead-end programs.

✓ Self- Defeating Pursuit:

The wrong definition of inflation has completely changed the nature of the study of inflation. What was
once a simple cause and effect science is now being considered extremely complex and confusing.
Myths and misconceptions about inflation are common. It is this muddled thinking that is causing the
problem of inflation to perpetuate even further. The solution therefore begins by first clarifying the myths
and misconceptions and starting new.

So, what’s in a definition? It seems like a lot is dependent on this definition. Hopefully you as readers will
be able to point out the exact flaws in this modern definition, the next time you are exposed to it!

Price Fixing: A Flawed Approach

The wrong definition of inflation has caused a lot of harm to modern day nations as well as their
economies. However, one of the biggest problems created by this misinformation is the price fixing policy.
Price fixing is a flawed and failed policy which has caused taxpayers to lose billions of dollars and suffer
immense turmoil as many governments all over the world repeatedly tried to implement this policy.
Absolutely all implementations have been dismal failures. The reason behind this is fairly simple i.e. the
policy has unsound economic fundamentals. This article makes an attempt to discuss this policy in detail:

What Is Price Fixing?

Since inflation is defined in terms of rising prices, many governments all over the world came around with
an ingenious idea. The simply wanted to outlaw inflation! These governments were of the opinion that
they can decide the realities of the marketplace from the parliament. Hence, let’s say if for a given year,
the government fixed the price of a certain commodity at $100, it would be illegal to sell the goods at any
price over $100.

Theoretically this should have ensured that the prices of the products will never rise and therefore the
government can claim to have inflation under control. These policies have been widely implemented in
many Communist countries. The post World War-2 Soviet Union was believed to have used this price
fixing policy widely.

The Problem with Price Fixing: Free Markets:

Price fixing may in theory, solve the problem of inflation. However, in reality countries like the Soviet
Union experienced runaway inflation when price fixing was being implemented. To the contrary, price
fixing created disruption of the normal supply chain. It created black markets, artificial scarcity and
corruption. Hence, most companies that implemented price fixing ended up with more problems than they
had in the first place.

The reason behind this is fairly simple. Theoretically a person may not buy $100 rice for $102 if price
controls are imposed. However, in real life a hungry person will decide to break the $100 price control law
and buy the goods at whatever rates they feel are fair. Since these transactions happen in the black
market, it is said that price fixing creates a lot of black markets. Also, sellers under the assumption that
they may receive a higher price at a later date will try and siphon off maximum produce to the black
market creating shortages in the normal market where price control laws are applicable.

Example:

The famous example given to illustrate the effect of price fixing pertains to a tank full of water. The intent
is to stop the water from overflowing. The normal approach would be to switch off the tap which is
supplying water to the tank. Since no more water will accumulate there will be no spilling over. This is the
common sense approach and is usually used.

However, price fixing works in a different way. Price fixing does not turn off the tap. Instead under this
policy you use an iron cap to cover the tank. You believe that since the cover is made up of iron, it will
stop the water from flowing through.
This assumption obviously is faulty. The reason is that once the tank is full and the water still continues to
flow it will cause the iron cover to burst and flow out anyway!

The Cause Has To Be Rectified:

Similarly, inflation, at its root is caused by an increase in money supply. As long as the money supply of
the country keeps on increasing, price controls will not work. It will be like putting all the money in the
pockets of people and then asking them not to spend it. Instead of solving the mere symptoms of inflation,
a true solution can only be reached if the problem is considered from its root cause and the cause is
disabled.

The marketplace is run by economic laws. Economic laws are based on the best course of action that a
person can take under given circumstances. It is impossible to outlaw certain modes of behavior and
make them illegal. Doing so will only lead to more government machinery for enforcing the ban and other
market disruptions which will not add to the welfare of the economy in any way.

How Inflation Is Currently Measured?

There is a general saying in the business world, “What cannot be measured cannot be managed!” This is
true of inflation as well. Hence, governments are supposed to constantly measure the amount of inflation
in the economy. The idea is to have a control chart approach to keep inflation in check. This means that
the government may expect inflation to remain at 3%, let’s say they decide the range is 2% to 4%. So
now the government will take measures at regular intervals.

If the result falls within the range, no action will be taken. If the result is less than 2% or more than 4%,
then immediate corrective action will be taken. Now, this may seem surprising but less than a certain
amount of inflation is also considered dangerous in the present economic system. It is considered as the
leading indicator of deflation, which must be avoided at all costs.

The argument we are trying to make in this article is that the current system of measuring inflation is not
appropriate. Let’s understand how inflation is measured.

Representative Basket of Goods:

The first step in the process is to choose what is called the representative basket of goods. Now, this in
itself is a problem for obvious reasons. There are many people out there belonging to different age, race,
sex and income groups. Their consumption patterns are totally different from one another. Trying to find a
basket of goods which are common to all the participants is a difficult process. The results arrived at are
not validated by any scientific data. It is purely a judgment call made by the people collecting the data.

Prices Measured across Goods Periodically:

Now, once the goods are chosen, the next step is to keep a tab on the prices of these goods.
Representative sample usually includes a few hundred goods and for each type of good there are several
types of qualities available. Hence, measuring the change in prices becomes a very difficult exercise
indeed.

Stage of Measuring Prices Needs To Be Chosen:

When we say that prices of goods need to be measured and recorded on a regular basis, we are making
an incomplete statement. There is no single price of a good. The prices differ based on whether we are
considering the prices at the manufacturer’s premises, the wholesaler’s premises, the retailer’s premises
or the final price that the consumer has to pay for it. Each of these prices may also differ based on the
geographical location, the nature of good and so on.

Hence, for the inflation survey to be effective, it must be clearly mentioned the stage and the terms based
on which the data pertaining to prices needs to be collected and recorded.

Indexes Created Based On Assumed Usage:

Measuring inflation is largely an indexing exercise. Relevant weights have to be assigned to all the goods
that have been included in the representative sample. These weights must be assigned based on the
studies conducted which provide an estimate about the average income that a person spends on a given
category of goods. Once again, this data is difficult to obtain and a big part of this exercise is based on
the intuition of the person conducting it. The end result of this exercise is the price index which will be
used to measure the changes in price levels.

Different Indexes for Different Classes:

In most countries, there will definitely be more than one price index. This is because the consumption
patterns differ largely based on the age group as well as the extent of urbanization. Hence, different price
indexes are created to track the extent of inflation amongst the different sections of the society.

The usual procedure for the governments is to keep on conducting surveys on a monthly basis. The
interim data is reveled immediately and some policy decisions may be taken based on the data. Later, the
detailed audited report is also presented for a detailed analysis of the findings of the report. Governments
all over the world do spend a large amount of money and resources trying to obtain accurate data
regarding inflation. The money is considered well spent since this data is supposed to form the basis of
policy making. However, as we shall see in the next article, the whole process is riddled with flaws and
collecting this data turns out to be a futile exercise instead.

Problems: Measurement of Inflation

There is a general saying in the business world, “What cannot be measured cannot be managed!” This is
true of inflation as well. Hence, governments are supposed to constantly measure the amount of inflation
in the economy. The idea is to have a control chart approach to keep inflation in check. This means that
the government may expect inflation to remain at 3%, let’s say they decide the range is 2% to 4%. So
now the government will take measures at regular intervals.

If the result falls within the range, no action will be taken. If the result is less than 2% or more than 4%,
then immediate corrective action will be taken. Now, this may seem surprising but less than a certain
amount of inflation is also considered dangerous in the present economic system. It is considered as the
leading indicator of deflation, which must be avoided at all costs.

In the previous article, a step by step explanation was provided regarding the process of calculating
inflation. The process being followed is what is believed to be the best alternative we have if the
knowledge present in the mainstream media are to be believed. However, there are a whole lot of
problems associated with calculating inflation the way it is being done now. Some of these problems
cripple policy making as well. In this article, we will critically analyze the procedure that we had mentioned
in the previous article and bring out some of its shortcomings.

Expensive and Time Consuming:

The basic and most obvious problem is that the current process of measurement of inflation is both
expensive as well as time consuming. A lot of resources need to be deployed to track down the prices of
goods across the length and breadth of any country. Not to mention that for every type of good, there are
several qualities. Hence, procedure needs to be defined as to how exactly the prices need to averaged to
get a fair picture.

But even apart from that, the problem with this procedure is apparent. The problem of inflation is a top
priority and needs immediate action. The governments cannot afford a huge time lag between finding out
the extent of inflation problem and the time taken to initiate corrective measures. Ideally all governments
need a process which consumes relatively less resources and is quick. However, the current belief is that
this is the best alternative that we have.

Goods Need To Be Updated:

The second issue faced while using price indexes as a barometer for inflation is that fact that there are a
certain number of goods called the representative goods that are included in them. Now, we may recall
that due to technological advancements a lot of products have become obsolete and a lot of new
products have indeed come into existence. Consider the fact that the Walkman, Video Cassette Player
etc are all gone. Instead we have MP3 players and computers and many other goods which never existed
before.

Hence, ideally the basket of representative goods must be updated to reflect this change. However, this is
very difficult to accomplish given the extreme bureaucracy. As a result, often obsolete goods are left on
the list and the inflation numbers calculated as a result end up being skewed.

Weights Need To Be Updated:

Also, each good has been assigned weights. Over the period of time, the relative importance of this good
as compared to others may increase or decrease. An ideal system should have a mechanism of reflecting
this increasing or decreasing importance via the weights. However, in many cases, this becomes difficult
to achieve. Once again government bureaucracies are not in favor of making any change to the price
index. Usually government employees do not have the initiative to proactively make the required
changes. Once again the result is an extremely outdated and misleading inflation index.

Which Index Is Relevant?

Also, government officials face difficulty while deciding which index should be used while policy making.
When there are separate indexes for rural and urban customers, it is likely that these indexes may not
always agree. Many times the urban index may depict a different story as compared to the one being
depicted by the rural index. In this case, it is difficult to decide which data is relevant and take a decision
accordingly.

Impossible Goal:

In the light of all these problems, using the current system of measuring inflation to enable the
policymakers to have correct data and make appropriate decisions is impossible. There is no way that the
time and money required for this exercise will be cut down in the near future. If anything at all, the costs
are likely to increase.

Also, while providing government workers with more powers to change the goods and the weights which
comprise the price index may seem like a solution, it isn’t! The government employees could also use this
flexibility to cover up bad news. For instance if the price of A rises, they could reduce the weight assigned
to A or they could omit A from the calculation altogether! Either ways manipulation could be possible.
Also, if the different years’ data is based on different years’ indices, the numbers become incomparable,
making any analysis impossible until extensive changes have been made to the data.

In short, the current system of inflation measurement is riddled with issues and is in urgent need of an
overhaul.
The Problem with Comparing Inflation
Numbers
In the previous couple of articles, we listed down the problems with the procedure used to collect
numbers related to inflation. In this article, we will go a step further. In this article, the central point being
said is that even after all the efforts are done and the numbers are collected they aren’t really useful. Let’s
understand this argument in greater detail.

The first thing that we need to understand is that numbers on their own do not mean a lot. True analysis
starts happening when comparisons are drawn between numbers. In the corporate world too, numbers
are used to find out the best practices and then benchmarking is done to develop those best practices.

For example, if we know that India has a 6% inflation there is very little we can do with this information.
On the other hand, if we know that India has a 6% inflation but US has 3% inflation, the situation
changes. We should ideally now know that the US is doing something better than India and hence US
policies should be studied.

However, unfortunately this cannot be done under the current system. Under the current system, making
any comparisons between inflation numbers of different countries is usually impossible. Surprising, isn’t it!
Yet, it is true. Let’s learn why this is the case:

Flaw # 1: WPI vs. CPI comparisons

Inflation can be measured at two different price points. As a matter of fact, inflation can be measured at
multiple price points. However, it is usually measured at two different price points. Inflation could be
measured from the price data collected at the wholesale market level. This is called the wholesale price
index or the WPI. Alternatively, it could also be calculated from the data collected at the retail market
level. This is known as Consumer Price Index (CPI) or Retail Price Index (RPI).

Now, it takes no genius to guess that WPI numbers are absolutely, under no circumstances comparable
to CPI numbers, isn’t it? However, still we have countries like India which calculate inflation based on the
WPI number while countries like US calculate their inflation based on the RPI number. Hence, any
comparison between the two numbers is null and void. The numbers are simply incomparable.

Some countries in the world follow the CPI system and others follow the WPI system. Due to lack of
coherence between these systems, the results cannot be compared. Hence despite the massive amounts
of time and money being spent, almost no analysis is possible.

Flaw # 2: CPI vs. CPI comparisons

Now, we are clear that CPI vs WPI comparisons are not possible and vice versa. However, it is surprising
to know that in most cases even CPI to CPI comparisons are not possible. This is because every CPI
number is compiled based on the consumer price index defined by that particular country. Hence, country
A will choose its own goods, choose the weights to be assigned to those goods and as a result create
their own index. This will also be the case with country B! Notice that each index is custom made. Hence
the goods chosen and the weights allocated will differ from one another. Therefore, in this case too,
comparisons cannot be made. Despite all the money and effort spent, no analysis is possible regardless
of whether comparisons are made against CPI or WPI numbers!
So what can inflation numbers be compared to?

So, if inflation figures cannot be compared to the inflation figures of any country, then what can they be
compared to and why are they even collected. Well, inflation numbers can only be compared to inflation
numbers in the past that were derived using the same index. So, unless India has made changes to its
inflation index, the population can compare the number across time periods. This obviously is a severe
handicap and a very limited use of inflation numbers.

When can’t inflation numbers be compared with the previous years?

In case the government decides to change the component goods or the weight assigned to those goods
in an index, then there can be no comparisons made. This is one of the reasons why countries are very
slow to change the components of the price index. But this really is a no-win situation.

Countries usually face the choice between:

1. Having redundant inflation numbers based on an outdated basket of goods

2. Updating the basket of goods but making it difficult to compare inflation numbers with the
previous years.

How Should Inflation Be Measured?

In the previous few articles, a series of arguments has been made as to why the current way we use to
measure inflation is not appropriate. A lot of the criticisms have received rebuttals from current
economists. However, for a lot of criticisms, they do not have an answer at all. The usual reply received in
this case is that “Yes, the current system for measuring inflation may be flawed. However, this is the best
we know? Are there any suggestions or a system which can do the job better?“

Multiple systems have been proposed as alternatives through the years. None of these have been
accepted by the mainstream economists and therefore they are only conjectures. However, no true
critical analysis of inflation would be complete unless alternative solutions are offered.

This article will therefore focus on a proposed alternate way to measure inflation. This method will
supposedly consume fewer resources and provide better results. Here is a gist of the system:

Understanding the Cause Effect:

As we have already elaborately discussed in the past articles, the rise in prices is an effect of inflation
whereas an increase in money supply is the true cause. Majority of the problems of the incumbent system
exist because attempts are made to measure the effect rather than the cause.

Measuring inflation would be a lot simpler process if changed in money supply were tracked down instead
of tracking down the changes in prices. For one reason, only a handful of institutions are authorized to
create more money. Hence obtaining data related to the quantum of new money created would be an
easier exercise as compared to measuring the change in the price of each and every good!

Measure The Money Created By Governments:

The first institution that has been authorized to create more money is the government or an agency of the
government called the Central Banks. In many nations, central banks are privately owned. However,
since these institutions are so heavily regulated, it would be a valid assumption to consider them as a
government entity.
Governments all over the world are by law required to maintain a record of the amount of new money that
they have created over a period. They are also supposed to publish this finding for the common man.
Hence, this information can be easily obtained.

Measure The Money Created By Banks:

Apart from the central bank, other private banks are also part of the monetary system. This means that
they are also allowed to create new money when they lend it. Hence, apart from central banks, private
banks are also involved in the creation of new money. However, they are not required to submit data in
any prescribed format to government agencies. Hence, at the moment, this data is not publically known
and hence cannot be used in the calculation. However, the governments can easily make it mandatory for
the banks to submit this data.

The bottom line is that data on money created is easily available at a very low cost and without any
hassles if the government wants to obtain it. Compare this with the extensive survey which consumed
massive amounts of time and money and still provided a poor approximation!

Measuring the Velocity of Money:

Now, we are aware of the quantity of money created. However, quantity is only one aspect of the money
supply, the other aspect being the “velocity of money”. The data related to velocity of money can also be
calculated based on the nominal GDP. The mathematics required for this calculation may be complex and
beyond the scope of this discussion. However, what needs to be understood is that both quantity and
velocity of the money supply can be easily obtained without even putting in even a fraction of the efforts
that are usually spent on conducting surveys.

Using the formula developed by Milton Friedman’s monetary school of economics which is MV = PQ
wherein:

M is the quantity of money available in the market

V is the velocity of money

Q is the quantity of goods produced. In this case, we can call it the nominal GDP

P is the price level of the economy.

Since we can derive M, V and Q quite easily, the formula can be solved for P and a general price level for
the economy can be obtained. If we compare this price level with the previous year’s price level, we have
our inflation numbers and we have obtained them using a much simpler and cost effective way!

Time- Series Averaging:

Lastly, techniques like time series averaging can be applied to remove any statistical bias and make the
data more reliable and fit for analysis.

Inflation: A Hidden Tax

Economists may argue on many things. However, they all agree on one thing i.e. the biggest possible
economic nemesis that the common man has is inflation. Many economists have called it dangerous.
Earlier it was not believed that inflation is a form of taxation. However, in the 20th century based on the
discussions amongst the economists, it was more or less agreed upon that inflation is a form of hidden
taxation, hidden because we do not see the outflow going from our pockets. However even though the
money may not have left our pockets, its soul i.e. the purchasing power has already left. Let’s understand
this concept in more detail through this article.

Let’s begin by a quote by an eminent economist. Nobel Prize winner Milton Friedman had once
said,“Inflation is the only form of taxation that can be levied without any legislation”

This means that if any other type of tax has to be levied on the general populace, it must be introduced in
the parliament and discussions have to take place on the validity of the tax and whether it is being levied
correctly. However, this is not the case with inflation. Inflation gives any government the power to take the
purchasing power of your money without anyone asking them even a single question. For obvious
reasons, this kind of power is not desirable in the hands of a corrupt government. Let’s understand the
mechanism with which inflation is used to siphon off money from our pockets.

Most Governments Spend More Than They Earns:

Governments collect money from us in the form of taxation. Governments also control certain businesses
such as railways and earn some money from that too. Most governments in the world are accustomed to
spending more money than they make. Most governments across the world have been running deficits for
decades now. In many countries like Japan and the ones in Europe, this deficit has blown out of
proportion.

So, if a government spends more money than it makes, how does it survive. Well, here are the common
steps that can be usually taken.

Option #1: Increase Taxation

The first option is relatively straightforward. The government has been spending more than it makes.
Now, to cover the deficit, it will have to do the exact opposite i.e. make more than it spends. This can be
done by increasing taxation. Common forms of doing so are bringing more goods and services under the
purview of taxation as well as increasing the rates of collection for goods and services currently under the
purview. This option is not very popular for obvious reasons. The general population does not like to give
taxes. Every dollar that they pay in taxes is a dollar that they do not have for personal consumption.
Needless to say, that if a government uses this alternative very often, they will not be in power for very
long.

Option #2: Austerity

The opposite of this is also true. Instead of making more money, the government could cut down the
amount of spending that it is currently doing. This is called austerity measures and this is what IMF is
trying to negotiate with the Greek government. With reduced expenditure, governments can save a part of
their income and pay the taxes.

Since a lot of government money is spent on populist schemes like social welfare, Medicaid etc, cutting
down on these expenses is also an extremely unpopular step and will cause the government to go out of
power very soon.

Now, both the common sense measures seem unviable. This is when the government invents a third
option i.e. inflation.

Option #3: Hidden Taxation via Inflation

As per the third alternative, the government temporarily borrows the money required to finance the fiscal
deficit from the bond market. Later, when the interest and principal repayments are due, the government
prints this money and pays it off. This dilutes i.e. increases the money supply decreasing the value of
money held by other people. But it pays off the government debt!
What Happens When More Money Is Created?

The new money created derives its value from the old money that was in circulation at that time. Thus
every dollar bill that is printed causes the value of other dollar bills worldwide to depreciate. The
government therefore in effect has taken the money out from the public’s pockets and has paid off its
debt. The effect is similar to that of taxation. But the procedure is hidden. There is no direct payment of
tax from the people to the government. Instead, the government has debased the value of currency held
by its citizens.

This method is not understood by the masses. Hence there is no major debate on this issue. This gives
governments’ world over the authority to continue spending unchecked and then later use inflation to pay
it off!

Inflation: A Hidden Tax (Part-2)

In the previous article, we discussed the mechanism by which governments all over the world can and do
use inflation as a hidden tax against their populations. Now, one thing needs to be understood i.e. for
inflation to occur, the government has to by definition spend more money than it makes in taxes. The
system works only if the government runs a fiscal deficit since it is the accumulated debt which can be
monetized by printing money. In the absence of a fiscal deficit there will be nothing to monetize.

In this article, we have listed down some of the programs that governments all over the world undertake.
These programs seldom meet their desired objectives. However, they end up causing massive debt
which later gets converted to inflation.

Welfare Schemes:

Welfare schemes like social security, unemployment benefits and Medicare are already bankrupt in most
countries that offer them. There isn’t a country in the world which has the money to pay for the obligations
that it has created by promising welfare schemes to its own citizens. Hence, now whenever the benefits
of these welfare schemes become due, many governments simply borrow this money in the short term
and in the long term they monetize this debt i.e. the pay it off by creating more money. Given the fact that
welfare schemes in most developed countries have massive budgets, it is easy to see why this could be
the cause of a massive inflationary run in the near future!

Unproductive Jobs:

Unproductive jobs, like welfare schemes are a drain on the public resources. In countries like Greece, half
the working age population was involved in government jobs and many of these jobs were simply outright
unproductive. The reason that these jobs existed were because the government had promised the
existence of these jobs in pre-election days in exchange for votes. Needless to say that since these jobs
do not add value, but wages have to be paid, sooner or later they will lead to a massive build up of debt
and sooner or later, they will also contribute to inflation.

Bailouts:

Bailouts are a fairly recent phenomenon. They were brought into the limelight when the United States
government paid the bankers and other companies $700 billion to protect their businesses. This money
was given out as a loan by the government and was expected to be repaid.

Now, from this news it may appear like the US government is flush with excess cash and paid out $700
billion to these corporations. That is not the case in reality! In reality, the US government itself needs to
borrow $2 billion per day failing which it will not exist. Hence all the money paid to corporations has
further added to the fiscal deficit and when monetized will lead to inflation.

Infrastructure Projects:

In many countries, excessive borrowing is justified in the name of infrastructure projects. Consider the
case of Greece once again. The metro rail line built in the Greek capital of Athens was an economically
unviable infrastructure project. However, money was still borrowed and pumped into the project. A few
years later, the project could not pay off its debt by the earnings generated from the project itself. This
caused a buildup of debt which experts say will sooner or later be paid off by the monetization of these
debts. The reason that this monetization is taking so long is that Greece does not have complete control
over the monetary policy of the Euro.

The bottom line therefore is that, while some infrastructure projects may be good for the economy, this
isn’t always the case. Countries should refrain from taking on massive debt unless they are certain about
the economic viability of any given project.

National Events:

Lastly, national events like World Cups, Olympics and Commonwealth games lead to massive
overspending in these economies. Countries often borrow immense amount of money to fund building of
sports infrastructure which may not be a priority for the development of the country. In the name of pride
and promoting tourism, large amounts of money are spent without consideration as to how it will be
repaid.

The above list shows the common causes which can be traced down behind the inflation that is being
borne by most countries today. Under ideal circumstances the voters should be wary of the
announcement of any such project by the government. However, in reality that is not the case. Most of
the times, these projects are welcome despite repeated evidence that some of these projects have
directly led to inflationary circumstances in the economy.

The idea is to promote a government with a balanced budget. A government that does not spend more
than it makes is a government that will not feel the need to create more currency. Therefore, it is the
government which will not cause inflation.

Myth: Inflation and Scarcity

The change in the definition of inflation has caused a lot of confusion. A prime example of this confusion
is when modern day economic students tend to confuse two different economic phenomena as being the
same. These two phenomena are inflation and scarcity and according to traditional economists they are
not the same.

✓Consider the case of inflation. Inflation is caused by an increased quantity of money in the system.
Inflation does not have anything to do with the physical goods themselves, it is concerned with excessive
money. The effect of inflation is rising prices

✓Shortage, on the other hand, is a different economic phenomenon. Shortage is caused by issues
pertaining to real goods and services. Shortage has no connection with an increased money supply.
However, shortage also exhibits the same effect i.e. rising prices.

Now, since both inflation as well as scarcity end up creating the same effect, people tend to get them
confused as being the same thing. As we can see from the definitions, they are not caused by the same
cause. However, they have the same effect.
Deflection:

To a large extent, the creation of this confusion has been willful. It helps the people who caused the
inflation to deflect attention from themselves. For instance, a government that has monetized too much
debt and created too much of the currency can deflect the matter of itself and say that the rise in prices is
being caused by the supplier’s hoarding. This has been happening at a lot of places across the world.
Let’s look at an example from India.

Scarcity, By Itself Cannot Cause Inflation:

Food inflation has been on a high path in India for decades. The government usually blames the corrupt
middlemen for having caused this inflation. But this argument is completely baseless. As we have
discussed in an earlier article, the middlemen do not have control over the money supply which is why
they cannot cause inflation on their own.

Even if the created artificial shortages in the market and raised the prices, the consumers would run out
of money to actually make the purchase. There simply would not be enough money in the system. The
price of one commodity may increase. However, the prices of all commodities cannot simultaneously
increase without the government issuing more money to facilitate the transaction.

Case: Cartels and Not Scarcity

Quite clearly, the work done by cartels is being passed off as inflation. India has laws which prohibit
famers from dealing directly with the consumers or retailers. These laws are called Agricultural Marketing
Produce Committee Act and are decided at a state level. In many states in India, till date this act
necessitates that the farmers sell their produce only and only to a government authorized middleman
(cartel). Selling their produce to anybody apart from the middlemen would be considered illegal and there
can be arrests as a result!

Now, clearly the produce of an entire nation is controlled by the hands of a few middlemen. This cartel
increases prices as and when they feel like with no consideration as to how it will affect the quality of life
of the common man.

This is clearly the case of an artificial shortage and cartelization, the argument of scarcity is a fake
argument constructed by the beneficiaries to deflect attention away from themselves.

Scarcity Implies Fall In Output:

Another fact that contradicts with the scarcity argument is that scarcity would imply that the stock of goods
is getting smaller over the period of time. However, if we consider the case of farming in India, the
productivity has gone up several times as a result of the green revolution. The per capita production of
grains in India is higher today than it has probably ever been. Despite the increase in productivity all
these years, there has been a steep increase in the prices as well. The facts state for themselves, this
does not seem to be a case of scarcity!

The point being made here is very simple. Scarcity and inflation both have the same effect. Hence it is
easy to get confused amongst them. However, it is important that we do not get confused since the
nature of underlying problems in each of these cases is very different. There is very little an increase in
the interest rate can do to break a cartel. Also, there is very little abolishing APMC act can do to prevent
the government from monetizing more debt. These problems need to be considered separately and a
befitting solution must be created for each of them. Both the problems are extremely important. However,
they are different!
Inflation and Wealth Redistribution
We have already ascertained that inflation is a hidden tax. It is a discretionary power that governments
have at their disposal to tax the people without their consent. However, that is not what makes inflation
public enemy number 1 as far as economics is concerned. Not only is inflation an unjustly applied tax but
when you consider whom it affects the most, the true gruesome picture begins to emerge.

Taxes are usually progressive i.e. the higher ones income, the more tax they have to pay. People on the
lower end of the income are expected to contribute more. However, the nature of inflation is such that it
becomes a regressive tax. Now, this is a slightly complex concept involving multiple stages. This article
will make an attempt to explain how inflation causes redistribution of wealth.

Money and Resources:

To begin with, we need to have some perspective as to what money i.e. currency note really is. In simple
words it is a claim on a resource. Let’s say if we somehow managed to accumulate all the money in the
world that would mean that we have ownership of all the resources in the world.

Time Taken To Adjust:

Now, the key point here is that both the amount of money and the resources that are available in the
world for use are not static. This means that their amounts keep changing. Let’s say because of a
technological development, we can now produce 10% more with the same amount of input, the resources
just went up by 10%, and however the amount of money remains unchanged.

According to the principle of the free market, sooner or later this adjustment will indeed take place and the
prices will change to reflect the amount of money available in the system. However, the change is not
immediate. It takes a while for the newly created money to start circulating in the system. Only once the
money is circulating, do the prices start to rise.

Hence there is a time lag from the time period when money was created to the time period where prices
will rise. The difference between these time periods can be called window of opportunity. If anyone gets
their hands on the newly created money at this time, they would have the excess money but the prices
would not have risen.

Simply put, the purchasing power would be transferred to whoever obtains the money first. As and when
more transactions take place with that money, the purchasing power is constantly lost.

The First Layer:

To consider the example, let’s consider the case of the government. Now, the government is the one that
is creating the money. They then use this money to pay off their debts. Till the time the government hasn’t
actually paid off its debts, this money is technically not in the system at all! Hence, this money has not
caused inflation till that point in time. However, once the government does make the payment, the money
enters the money supply and some of the value is indeed lost. Therefore the government is usually the
one who gets to spend the money at its full purchasing power.

The Second Layer:

The second layer of people is comprised of people that the government has made these payments to.
They are now in possession of this newly created money which has not got fully circulated in the
economy. As a result, there is a time lag in the rising of prices. At this stage, the prices must have risen a
little, however not to a great extent. It is for this reason that the people who spend the money at this stage
have a lesser purchasing power than the government but still have a higher purchasing power as
compared to lower layers.

The Last Layer:

Finally, the newly created money is used in several transactions. It is rolled over and over in the economy
and its value has been largely absorbed. As a result of the newly created money, the prices have now
increased and people in the last layer are getting the worst deal as far as purchasing power is concerned.
This is because they have to make their purchase after the prices have risen.

This is when the poorest get paid. The last layer usually comprises of daily wage earners, salaried people
and others. These people find that by the time, the money has reached them, the prices have already
risen. Thus inflation is a method of systematically transferring purchasing power from the poor to the rich.
The higher ups in the hierarchy barely feel the effects of inflation. The effects are borne by the poor
masses!

The Disturbing Wealth Gap and Why it

Matters ?
If economist Karl Marx were alive today, he would have famously proclaimed that his assertion was
correct. He once famously remarked that things like religion and race do not matter. The world is
essentially facing one battle i.e. the battle between the haves and the have nots. Everything else is just
meant to obscure the have nots and distract their attention from the only issues that matter.

The entire world including developed nations like the United States are facing a disturbing wealth
gap! This has lead to controversial political movements like the “Occupy” movement wherein protestors
were forcibly occupying places like Wall Street, which they perceive to be symbolic of this inequality.

While the occupy movement may have been largely misdirected, but there is indeed some essence to the
underlying argument. The wealth of the world is indeed concentrated in the hands of a few people. In this
article, we will understand in detail what the wealth gap is and why it matters.

What is the Wealth Gap ?

The Wealth Gap is a situation where in a small minority of the people control or own vast majority of the
world’s wealth. This wealth gap is reflected both in the distribution of assets as well as the distribution of
income. In this case assets include both movable assets like automobiles and immovable assets like
estates.

The laws of nature do not support equal distribution of wealth. Some people are naturally more talented
and hard working as compared to others and therefore will have more wealth. That is just an accepted
norm. However, the wealth gap refers to systematic corruption which stacks the odds in the favor of rich
people. This means that the same rules do not apply to everybody. The rich play by a different set of rules
than the poor and as a result it is highly unlikely that people born rich will become poor and vice versa.

It is true that quite a lot of people are self made millionaires and billionaires. However, the odds are really
dismal. Probability states that most of the people will die in the same economic class that they were born
into.
The Twisted Pareto Principle

A famous Italian economist called Pareto once coined the 80/20 rule. He said that the rule applied to a lot
of things and one of those things was income inequality. He stated that 80% of the world’s wealth has
always resided in the hands of 20% of its population. This left the common man flabbergasted and fuming
as they thought that such a distribution was unfair.

If those people were to see the statistics of today, they would certainly resort to rioting. Consider the fact
that that top 1% of the world’s population owns more than 50% of the resources! It is like Pareto’s
principle but on steroids. Also, this same 1% make close to 25% of the world’s income. The figures are
simply astounding.

If the top 10% percent are considered, they make 16 times more in the form of income as the bottom
10%. These statistics belong to countries like the United States which have an extremely developed legal
system. In third world countries the wealth distribution is much worse. In such countries, a handful of
people control everything and everyone else works for them.

The Class Warfare Allegation

Politicians have been reluctant to discuss the wealth gap issue since they are usually accused of
indulging in class warfare. The accusation made is that politicians are making the rich people fight with
the poor people. This is not rooted in the fundamental economic principles of capitalism and politicians
are enacting such populist measures to please the majority. These actions are sometimes claimed to be
infringing on the right of the rich.

For instance, Donald Trump proposes that a onetime tax be levied on everyone with a net worth of over
250 million dollars. He wants to tax these people out of one third of their wealth! Such a tax would
eliminate the national debt of United States. However, such an allegation is ludicrous if you consider the
issue. Why should the rich pay for debt that was amassed largely for populist policies like Medicare and
Social Security that were aimed at the poor?

Controversial Tax Policies

The poor however believe that the odds are stacked against them. They believe that the government
does not follow progressive taxation and that the rich are not taxed as much as they should be. This topic
became even more apparent when Warren Buffet, who was formerly the second richest man in the world,
famously remarked that his maid pays a higher rate of tax than he does!

 Income Tax: The income tax that is applicable to the rich has been cut into half over the past few
years. The capital gains tax, where rich make most of their money, has also been cut into half!
Moreover there are so many loopholes in these tax laws that they are sometimes referred to as
Swiss cheese laws! The rich basically pay taxes in the 10%-20% range whereas the poor are
taxed at a much higher rate.
 Estate Tax: Politicians do not argue to impose more taxes on the rich. Instead they argue to
abolish taxes which are already in place. For instance, the political movement to establish the
estate tax has already gained momentum. Even though this tax is applicable only to 0.6% of the
population, politicians are strongly arguing in favor of abolishing this act. Such enthusiasm for an
issue that affects so few people makes the larger population suspicious to say the least.

Is A World Without Inflation Possible

In the previous many articles, we have been discussing a lot about the various concepts of inflation. We
have understood in great detail, the way things are. However, when it comes to inflation, the ideal way
that things must be is also extremely important. The only way to reach an amicable solution is to have a
crystal clear goal. While formulating goals related to inflation, one often comes across the question as to
whether a world without inflation is even a possibility.

The remainder of this article is meant to study the facts available with us and come up with an answer to
the aforementioned question.

Stable Monetary Systems in the Past:

Contrary to popular belief, a world without inflation is not at all a ludicrous assumption. It is our modern
day media which has led us to believe that inflation can only be controlled not eradicated and this is not
the truth. A tertiary look at monetary history is enough to reveal the truth. For many centuries prior to the
current monetary system, the world had never experienced such runaway inflation. The gold standard
was a solid base to build a monetary system on and as a result the value of major currencies like the
dollar and the pound sterling barely fluctuated during this period. Hence, to go back to this ideal world
without inflation, it is essential that we know what has changed since.

 Fiat Money:The most important change that has happened post Word War-2 is that the entire
world is off the gold standard. All countries in the world now have their system of fiat money
wherein governments can create money using the power vested in them. This is an
unprecedented development and has never happened earlier. This is of vital importance because
fiat currency systems allow governments to increase their money supply overnight unchecked!
This system has been prone to debasement through the annals of time. A world without inflation
is a world where government meddling with the monetary system is minimized.
 While it may seem like the government works for the general population’s best interest. However,
empirical evidence has shown otherwise. For further details, please refer to the book “What has
the government done to our money?” published by the Austrian school of economics.
 Fractional Reserve Banking:The second most important development for an inflation free world
is an abolition of the system of fractional reserve banking. Fractional reserve banking is a process
wherein bankers lend out the money that they do not have! Like governments, these banks too
create money when they lend it! Hence, fractional reserve banking leads to dilution of money
supply and a rapidly growing money supply as we all know is the root cause of inflation.

The above suggested measures are radical and almost impossible to achieve given the current
geopolitical climate. However, if economic history is studied, any period of sustained prosperity has never
been possible with either fiat currency or fractional reserve banking present.

Money Supply Must Grow At The Same Rate As Output:

For prices to be stable, the growth in the physical output of the world must be matched with the growth of
money in the world. For instance if the world GDP grows by 5% and money supply grows by 5% in the
same period, there will be no inflation.

The gold standard was a period without runaway inflation because empirically the stock of new gold being
discovered and added to the money supply almost rises and falls at along the same rate as the economy.
Thus, like paper currency, it cannot be easily debased or printed overnight in massive quantities to cause
hyperinflation. In fact hyperinflation is a bizarre and impossible scenario under the gold standard.

Changing Expectations Regarding Salaries:

Another important point to consider is that our expectations regarding the future growth or decline of our
wages are conditioned as per the needs of the fiat money system. Consider the gold standard for
instance. A 10% wage hike for everybody would be impossible given that the entire stock of money grows
by 3% to 5% only. However, since prices remain stable or in some cases decrease, the money does not
lose its purchasing power and spenders can enjoy a better standard of living. No salary growth for years
may seem extremely awkward. However, this was always the case under the gold standard.

Changing Expectations Regarding Prices:

The good part is that expenses will not increase. In fact in a world without inflation, prices tend to go
down. Technological advances lead to growth in productivity. Productivity leads to a decline in prices
since it is now cheaper to manufacture. Falling prices combined with stable incomes provide a better
standard of living.

What is Meant by Inclusive Growth

and Why it is Important ?
We often hear the term inclusive growth in the papers and in various media where experts pronounce that
while growth is good, there must be what is known as inclusive growth as well. So, what does the term
inclusive growth mean and why is it so important? To start with, inclusive growth refers to the
phenomenon where the benefits of a country’s growth are shared equally by all sections or at least in a
fair and just manner.

Nature of Capitalism

Indeed, while economic growth always leads to some sections and people prospering more since
capitalism by its very nature tends to concentrate profits in the owners of capital rather than the workers,
it would be fair to say that as long as those in the middle and especially the bottom benefit, then inclusive
growth is said to have been actualized.

As mentioned when a country grows, the benefits are likely to be more for those who own the
means of production like industrialists, owners of companies that are doing well, and
entrepreneurs who have succeeded in their venture. Indeed, one cannot expect the employees or the
rank and file workers to earn as much as the owners make profits since the latter own the companies and
hence, hold a major stake whereas the former even with stock options and bonuses would always make
lesser money.

What is Inclusive Growth ?

Having said that, it must also be noted that if those at the top make hundred or more times what
those at the bottom make, then essentially we have a situation where there is mismatch between
the incomes of the top 1% and the bottom 50%. Similarly, when countries grow and a tiny elite benefits
more than those at the lower income levels, then a similar situation manifests where there is gross
disparity and inequality between the classes that can lead to resentment and bitterness from the lower
income levels which can also result in social unrest and chaos.

Why is Inclusive Growth Important ?

Indeed, this is the reason why many experts talk about inclusive growth wherein they mean that unless all
sections of society benefit from faster and more economic growth, the social conditions in such countries
can deteriorate and lead to violence and chaos. This was what happened in the years following the 2008
global economic crisis wherein the people at the bottom realized that before the crisis and especially after
the crisis, they were the ones who were the worst affected while those at the top continued to be
comfortable and secure.
Perils of Inequality

This led to mass uprisings like the Arab Spring and the Occupy Movements where the inequalities and
the inequities of the capitalist system were out in full glare and hence, the bottom half decided to take
matters into their own hands and express their resentment at the injustice of the top 1%. Slogans such as
we are the 99% were in display which were meant to symbolize the non-inclusive nature of growth across
the world.

Inclusive Growth is the Answer

So, if there is growth that is exclusive in the sense that it benefits only a few, then inclusive growth is the
answer as ultimately, the purpose of growth must be for the overall benefit of society. Indeed, while this
might sound radical and veering too much to the Left, the fact remains that unless there is inclusive
growth, the voters tend to punish those parties that they perceive as being exclusive growth oriented.

This happened in places as diverse as Greece and Iceland and in India as well where the recent elections
in the states were supposed to have been a vote against the prevailing economic model where only a few
benefit at the expense of the many. Indeed, this is a reminder about the power of democracy wherein the
voters have a chance to elect those parties whom they believe would deliver the goods for them and not
only for tiny elite.

Resist Populism as well as Inequality

Having said that, the temptation to be populist must also is avoided wherein parties with a view to include
more sections distribute largesse in the form of subsidies and free power as well as goodies that the
people do not have to pay for. Indeed, this is the reason why many countries including India adopted
market reforms as the perception was that socialism with its emphasis on distributing goods and services
for free resulted in inefficiencies and wastage of public money leading to bankruptcy.

Challenges for Inclusive Growth

Therefore, the challenge is to find the middle ground between growth that benefits only a few and the
temptation to throw money after subsidies and giveaways. This is the realization that many erstwhile
socialist as well as current capitalist countries are having in the present context where the competing
interests of the owners of production and those who work for a wage have to be balanced so that
everyone is better off in the end.

To conclude the discussion, it is important to note that a middle ground must be found wherein the
owners of the means of production do not walk away with the benefits and at the same time, the
workers are also not pampered. Similarly, countries must also ensure that investors and industrialists
have incentives to invest and at the same time, growth benefits those at the bottom as well. This can be
done through carefully designed social security and social safety nets as well as encouraging
industrialists and owners of capital to do more for society.

Importance of Infrastructure in a
Nation’s Development
Why are Some Countries more advanced than the others ?

Why are the Western countries more advanced than many Asian countries? Why even China and South
Korea have raced ahead of India and other Asian countries in the recent times? Or for that matter, why is
India lagging behind many countries in terms of economic growth and poverty? There are many reasons
and answers to these questions and one of them is the fact that all these nations have very good physical
infrastructure. Indeed, the fact that they have better roads, ports, highways, airports, and other elements
of infrastructure is one of the reasons why they have clocked faster economic growth.

The Importance of Physical Infrastructure

Why is physical infrastructure so important to a nation’s development? The answer is that once goods are
produced, they need to be transported to the ports and airports for transportation to other states and
countries. This means that excellent roads are needed to transport the goods or otherwise, they
would be delayed leading to economic and reputational losses. Indeed, if a manufacturer produces
goods quickly but is unable to transport them to the destination as fast as they can, then there is no point
in making the goods in an efficient manner in the first place.

Roads, Ports, and Airports

Moreover, good roads are also needed for manufacturers to obtain raw materials and other components.
In addition, ports that are well functioning and where ships do not need to wait for longer periods of time
or in other words, are not congested are very crucial for economic growth as otherwise, the loading, and
unloading of goods from the ships would cause losses to the exporters and importers. Similarly, there is a
need to develop airports that are modern and efficient for freer and easier movement of people in and out
of the countries. For all these reasons, it is vital that the physical infrastructure needs to be as efficient
and as productive as possible.

Other Elements of Infrastructure

There are other elements of infrastructure and they are the power and water situation apart from the
development of a city’s infrastructure. Indeed, if there is power outages and blackouts or what are known
as “power holidays” or “industry holidays” wherein the manufacturers cease production on certain days,
then these timeouts would lead to losses for them. Moreover, if a city is unable to cope with the influx of
migrants and absorb the growing numbers of people, then the people working in the plants and factories
would be unable to function effectively and work productively.

Need for Massive Investments in Infrastructure as a Route to Faster Economic Growth

No nation develops without investing in infrastructure and indeed, this is the reason why in the aftermath
of the Second World War, the Western countries massively invested in infrastructure. It is also the reason
why Japan and South Korea and later China undertook a drastic improvement in their infrastructure so as
to ensure that it “enables” faster economic growth and development. Indeed, as we would discuss next, it
is the enabling aspect which is important since infrastructure is supposed to facilitate and spur
economic growth by providing better connectivity and enhancing productivity and efficiency.

The Hardware and Software of Enabling Infrastructure

Moreover, investments in infrastructure work as a force multiplier wherein the monies invested in building
highways and ports and airports not only creates the “hardware” for a nation’s development but also
results in more growth because the huge amounts of money are spent on construction materials, wages,
and production of other raw materials which help those industries to grow faster. Therefore, it is indeed
the case that massive investments in infrastructure enable the nation’s economic development by
ensuring that the hardware is in place and the software wherein the people needed to staff the plants and
factories are also capable and work productively.
Human Capital

Indeed, while many experts talk about physical infrastructure, they forget to talk about another crucial
element and that is the software or the skills of the employees and their productivity and productive
capacities. This aspect which is developed through investments in healthcare and education enables a
healthy and well educated workforce who would then lead to faster economic growth by ensuring that the
necessary human resources are there for the industries and the technology companies to take advantage
of.

Urban Planning

Another important element in a nation’s infrastructure is the way in which the urban areas are managed
and planned. For instance, most Indian cities are groaning under the weight of their residents and the
creaking infrastructure results in poor planning and haphazard growth which would derail any chances of
faster economic growth. Indeed, if there is anything holding back countries such as India, it is the sheer
lack of planning as far as cities and the other components of infrastructure are concerned.

Conclusion: There are no Shortcuts to Success

Which brings us to the final point and that is that there are no substitutes for infrastructure development
and there are no shortcuts for faster economic growth. It is only when these aspects are taken care of
that nations develop and there are lessons for India and other Asian countries that are trying to grow and
leapfrog into the elite club of developed nations. Therefore, unless developing countries invest in all
elements of the infrastructure component, their development would be slow and retarded and they would
miss the bus again and lose out in the race for economic competitiveness. This is the hard truth and the
bitter reality which should hopefully spur them to invest in their infrastructure.

Evaluating the Pros and Cons of

Supply Side Economics
What is Supply Side economics ?

Supply side economics is that branch of economics that deals with production of goods and
services by providing incentives to the producers to produce more and hence ensure a steady
stream of goods to the marketplace. This paradigm of economic growth assumes that lowering the tax
rates provides incentives for the producers to produce more leading to a situation where there is an
increase in incomes and hence the increase in tax revenues to the point where the shortfall due to the
lower tax rates is more than made up due to the increase in the tax collections.

Supply side economics came into prominence with the Reagan administration in the US and the Thatcher
stint in the UK. This lead to an unprecedented boom in the economies of these countries that was touted
as the example of “trickle down” economics that posited that wealth generated at the top of the pyramid
trickles down to the members at the bottom.

Alternative Approaches to Supply Side Economics

The alternative approaches to supply side economics is the one that has been espoused in the US after
Ronald Reagan demitted office. This is the method of stimulating demand by cutting interest rates. The
other methods that are often touted as alternatives is the Keynesian method that holds that only
increased governmental spending can stimulate demand make the economy grow.
This dichotomy between encouraging the producers as opposed to encouraging the consumers lies at the
heart of the debate between supply side economics and other approaches. While proponents of supply
side economics argue that increasing governmental spending leads to higher inflation, the Keynesians
point to the growing income disparities between the rich and the poor as a sign of failure of supply side
economics.

Effectiveness of Supply Side Economics

In this section, we look at the ways in which supply side economics work and the perceived benefits of
the same. The pillars on which supply side economics rests are privatization, deregulation, and reduction
of taxes. As we shall discuss later, some of these foundations of supply side economics have been called
into question in the wake of the current economic crisis. In the succeeding paragraphs, we look at each of
the components of the supply side policies and the ways in which they bring about the desired benefits to
the economy.

There has been much speculation on the role of supply side economics in stimulating demand and
causing overall economic activity to pick up. The main criticism against supply side economics is that
merely cutting taxes alone would not do the trick and other measures like controlling the money
supply and lowering interest rates are the necessary conditions for economic growth.

The point about lowering interest rates and stimulating demand became more relevant in the 1990’s when
the manufacturing base of the US had shrunk and what the US economy was being driven was by growth
in services. Thus, as opposed to growth in real manufacturing and production of goods and services, the
economy was clocking impressive growth due to the rise in the growth of services. This growth in services
was brought upon by the other pillar of supply side economics i.e. monetary policy.

Some Questions about the Effectiveness of Supply Side Economics

In the aftermath of the current economic meltdown, there are many who are questioning the viability of
supply side economics and the lower interest rates paradigm as an alternative for the Keynesian
paradigm. Considering the fact that the economy now had to be revived using massive stimulus packages
in a throwback to the years of the great depression, it is worthwhile to note the return of classical
economic paradigm in the US.

As pointed out in a previous section, the method of reducing taxes would lead to a situation where the
people who benefit from this would be in a minority as opposed to the people who have lost out. This is
the main criticism against supply side economics, namely that of the widening income gap between the
rich and the poor. This approach has been criticized by many as contributing to increased alienation of
the poor who have not benefited from the trickledown theory propounded by the proponents of the supply
side economics.

Supply side economics grew in response to the Oil crises and shocks of the 1970’s when it was
apparent that higher oil prices would have deflationary effects on the US economy. Hence, the
government resorted to cutting down taxes and making products more affordable to the people by
practicing the supply side equation of the curve. However, this did not lead to an overall increase in
prosperity and has been called by many as “making magic” and “peddling prosperity”. It is to the credit of
the paradigm that many developing countries hitched themselves to this model of economic growth as
well.

Conclusion

The inescapable conclusion that stems from the current global economic meltdown is that supply side
economics has outlived its purpose and it is now time to go in for a new paradigm of growth that revolves
around making everyone wealthy instead of a select few.
In conclusion, it is apparent that massive governmental spending is the only way out of the current crisis.
Contrary to the claims of the supply side economists, a small government may not be the best possible
solution particularly when deregulation breeds excesses of profit taking and speculation way beyond the
acceptable levels and results in a systemic failure that threatens the entire global economy.

Pros and Cons of the Uber Economy

What is the Uber Economy ?

We all have heard if not used the services of the app based ride sharing and ride hailing taxi and car
service, Uber. Indeed, Uber has become a household name worldwide because of its innovative and
inventive approach to providing cheap and reliable taxi and car services through its mobile and
Smartphone app that “connects” the drivers with the passengers.

Further, Uber works in an entirely freelance model where the drivers need to be just registered
with the company and can pursue other occupations when they are not driving. This means that
Uber represents the cutting edge in the new and emerging economic model wherein anyone and
everyone can work multiple jobs and take up employment on a part-time basis with everyone and
everywhere.

This is the reason why this emerging freelance and gig work model has been called the Uber economy
with its attendant advantages and disadvantages.

Advantages of the Uber Economy

To start with, there are many pros or advantages of the Uber economy. For one, it offers unparalleled
flexibility and adaptability to the workers who can work multiple jobs and take up gig work during their
spare time.

In addition, it offers workers the chance to partake in the exciting and promising reward and benefit
system which because of the simplicity of the model means that they would be compensated more than
what they would get when working for a traditional full time or part time job.

Of course, some might argue that full time jobs do have benefits that the Uber economy cannot provide
and we would be taking that up subsequently. It would suffice to state here that the Uber economy
represents the future of the work model wherein anyone and everyone can become gig workers and
freelancers without having to give up their day jobs.

Indeed, research and surveys have shown that there are many full time workers who drive for Uber and
other gig work companies during their spare time to supplement their incomes and make hay while the
sun shines.

Disadvantages of the Uber Economy

However, is it the case that the Uber economy is a new dawn rising or is it the case that it represents
another opportunity by the capitalists to fleece workers and make them work in a model where the only
winners are the owners and not the employees? The answer to this depends on whom you talk to and
whom you interview.

For instance, there are many who swear by the freelance model of work since they can masters of their
time and pursue other occupations as well as decide to set the working hours themselves instead of
being dictated and ordered by the straightjacket of the traditional work model.
Moreover, these people reckon that freelance work and gig work represent the future and hence, it is
better to get in there early and reap the rewards of the emerging economic model where employment
does not mean the earlier generation emphasis of a company that hires and keeps workers for life and
instead, represents the brave new world of work where one is paid by the hour or for each parcel of work
done.

Having said that, there are others who point to the fact that the freelance economy or the Uber economy
is a model where the workers do not receive health, social security, and 401(k) or pension benefits, in
addition to not receiving any paid leave or time off for medical reasons.

Indeed, there is a growing chorus of opposition to the emerging freelance and gig economy or the Uber
economy since many believe that this is no different from the colonial model of exploitation of workers
where hourly wages and per task payment is the norm with no longer term benefits, no annual bonuses,
and above all no medical and pension benefits.

Further, when one is performing freelance work, there is no guarantee that such gig work or the Uber
model would let them continue even if they fail once or twice.

In other words, unlike traditional occupations where the employers tend to take a longer term view and
reward and take action on the workers depending on their performance over a broader time frame, the
emerging world of work is a ruthless and Uber competitive place (literally as well as metaphorically) where
one is as good as the last work or the gig done and there are virtually no laws or regulations that would
protect the workers and their rights.

The Emerging Debate on the Uber Economy

Considering the pros and cons of the Uber economy, there are many who are filing for lawsuits and
petitioning the government to regulate the emerging model of work so that the workers are not at the
receiving end.

Indeed, there are some class action lawsuits pending in the United States and upcoming to be heard in
the next few months that seek more governmental oversight over the industry that specializes in freelance
work.

While the petitioners are not asking for a complete overhaul of the freelance or the gig model of work,
nonetheless, they want the government to ensure that the workers are not shortchanged and that
companies such as Uber follow some work practices where the workers are not always at the receiving
end.

Having said that, it must also be noted that the emerging Uber economy is something that no one can
stop or slow down since the future of work would indeed be a model where there would be more sharing
economic practices and companies such as Uber would be the go to employers for many.

Ubernomics: The Questionable

Business Model of a Unicorn
Uber is the most valuable startup in the world today. It is valued at $51 billion which is more than what
Facebook was valued when it was a private limited company. The company has done so well that it has
become a sort of an adjective. A really innovative solution is now being referred to as an Uber. The Uber
of healthcare or the Uber of packaging industry etc. are common phrases being used to describe newer
companies. In this article, we will understand why Uber is not nearly as brilliant as it claims to be.
Uber’s business model is based on some very questionable business practices. In fact, some
insiders call Uber half a technology company and half a company that was created to avoid regulation.
Let’s understand some more details in this article.

Avoiding the following three key pieces of legislation has given a simple technology like Uber the edge it
needs to become the most valuable startup in the world!

Regulation #1: Jumping the Licenses

The business of taxis and cabs has always been tightly regulated throughout the world. There were only a
few cabs in existence in cities like New York because the number of permits being given out was
restricted. There were only so many permits to go around and hence there was a cartel which was
created by the government and derived its powers from the government as well. Cab fares were set
relatively high because there were only a few cabs in existence and hence the supply was severely
constrained.

Uber jumped the gun on this regulation. It came into the market as a ride sharing app. As such it was not
necessary for Uber to have any permits. However, it could still perform pretty much the same services
that cab drivers could. Uber had therefore successfully broken the cartel which can be viewed as a
positive thing since it provides customers with more choices and hence a more rational fare structure.
However, Uber has also jeopardized the livelihoods of several thousand cab drivers all over the world.
The first stroke of genius was in avoiding all the possible regulation and costs associated with it and
passing the savings on to the customers.

Regulation #2: Employing Drivers as Contractors

All over the world, Uber now employs millions of people. However, it does not call them employees. They
are not officially on the payrolls of Uber Inc. but instead, they are independent contractors. So, legally
Uber is subcontracting the cab service to a third party i.e. a different legal entity. Uber claims that this
model allows the contractors to work freely and independently. The spokesperson often claims that
drivers can choose their working hours and times. While this is true to some extent, the real reason that
Uber does not want employees on its payroll is because of the regulation that is associated with it. Hiring
people in the western nations is an expensive affair, and Uber wants to avoid expenses at all costs. Hiring
people means providing money for their retirement, providing them healthcare and other benefits, paying
for social security, unemployment insurance, etc.

These expenses are not trivial by any means. Uber is a private limited company and does not disclose its
finances. However, it has been estimated that if Uber had to provide these benefits to their workforce, it
would cost them an additional $4 billion per year. $4 billion is a huge amount to be paid on an annual
basis, and it would leave a huge hole in the current $49 billion valuation that the company has. Also, it
would have an enormous negative impact on the cash flow. As of now, Uber has about $1.5 billion in
cash in its vaults and is not generating any profits. Hence, if Uber has to pay benefits to employees, it
would run out of cash very soon. The huge valuation that Uber regularly gets from investors is partly
because of its ability to undercut employees and government and spend less money on regulatory
hurdles.

Regulation #3: Bait and Switch

Uber helps its contractors join the company by paying a small amount upfront. It has agreements with
financing partners that will lease the car to Uber’s contractors or hypothecate the car. Initially, when Uber
enters a market, they offer lots of money to the drivers. Since the money being made is huge, a lot of
small businessmen stop doing other businesses and start driving for Uber. However, once a certain
threshold is reached, Uber starts cutting down the payouts. This means that Uber is enticing small
entrepreneurs to join its business. Then it is cutting out the exit options. This essentially leaves the
associates trapped with Uber. A lot of drivers are struggling to make even close to the same amount of
money that they once made despite putting in almost double the efforts. Using the carrot and stick model,
Uber has established its dominance in almost every market it has entered.

To sum it up, there is nothing inherently path-breaking about a ride-sharing app! The technology is pretty
simple and can be easily copied by several competitors. However, what those competitors would not be
able to emulate is circumventing of regulations that Uber does with absolute precision.

Companies Need to Create Long Term

Value to Survive the Uber Competitive
Market
The 24/7 Real Time Global Marketplace Makes Firms Live for the Moment

The present global marketplace as well as regional and nations marketplaces are uber competitive and in
addition, dominated and driven by rapidly changing market conditions where short term thinking triumphs
and the scenario is complicated with the incessant buzz of 24/7 news cycles which add to the “noise”
instead of creating value.

While such distractions and disturbances need to be addressed especially when consumers and
customers themselves seem to be susceptible to short term trends, the fact remains that the age old
principles that govern capitalism and which can be found in any textbook on the topic as well as
management related topics, all emphasize longer term value creation as the basis for building truly
sustainable and long lasting businesses.

Indeed, in times when it is easy for both businesses and consumers to be “lost” in the constant buzz of
the Smartphones bringing alerts and breaking news almost on a real time basis, it becomes difficult for
management experts and authors such as we to emphasize the fact that longer term value creation
should be the norm rather than the exception if you want your business to last generations instead of you
outliving the company.

What is Longer Term Value Creation?

Having said that, one must also clarify what longer term value creation means especially when
startups and just launched businesses become Billion Dollar “Unicorns” in no time.

This is especially the case with technology firms that ride the crest of the waves of exponentially
accelerating technology and land with “eye popping” market shares leaving even established businesses
envious of their success.

Longer term Value Creation means that businesses and companies can consistently, reliably, and
sustainably deliver returns to all stakeholders and not just the shareholders over decades instead of years
or months.

We have used the term stakeholders to emphasize the fact that businesses and companies are
accountable not only to their shareholders (who are anyway the primary stakeholder) but also to their
consumers (who are the reason for their existence) as well as to society at large in terms of their social
and environmental responsibilities.

Further, delivering stellar returns one quarter or a year and then tapering off is certainly not the way to
longer term value creation. In addition, polluting the environment or disturbing the social fabric is again
not a good way to create longer term value and instead, reeks of irresponsibility.
Characteristics of Longer Term Value Creators

Now that we have defined what longer term value creation means, we can look at what the characteristics
of such firms are.

To start with, longer term value creators have a strong inbuilt mechanism to survive and weather the
“storms” that are so common to capitalism in terms of market turbulence, passing or retiring of the key
personnel, ethical misconduct, and general atrophy.

Indeed, firms that create longer term value also need to be conscious of the fact that they must
build institutions instead of mere shallow firms that are glorified versions of “fly by night”
operators.

Moreover, longer term value creators must also have enough cash reserves for years instead of months,
have adequate assets and asset bases wherein the assets need not always be physical since the Digital
Economy firms are mostly owners of Intangible Assets though they tend to have physical assets as well.

In addition, longer term value creators must invest in building human capital in terms of investing in their
human resources so that they become as prized as their other assets and resources and indeed, more
important than the latter in terms of their contributions to their bottom line.

Longer Term Vision vs. the Reality of Being Profitable

Having said that, as mentioned earlier, these days we hardly find companies and businesses who can
justifiably and proudly say that they have lasted decades without compromising on any of the aspects
discussed until now.

Barring a few exceptions, most firms and corporations have been found wanting on some aspect or the
other though some of them have been venerable and respected in their heyday.

Indeed, when scandals strike even firms such as Infosys that were always seen as beacons for corporate
value creation, then one starts to wonder whether the basic principles of market economics and
capitalism are wrong.

However, it is our view that the uber competitive contemporary marketplace makes even bellwether firms
susceptible to losing sight of the Big Picture.

Thus, the central challenge of the Emerging Generation of Business Leaders is to ensure that the firms
and businesses they run return to the basics and start focusing on creating longer term value for all
stakeholders.

Creative Destruction

On the other hand, there are some management experts who believe that firms must exist to make profits
and as long as they are profitable, it does not matter if they are profitable for a few years or a decade and
then atrophy. Indeed, their contention is that capitalism works by Creative Destruction wherein
periodically, the firms that innovate and are inventive survive and those that are stodgy get left behind.

While this is indeed true, it is our contention that longer term value is also created by what we described
as human capital and hence, the fact remains that this is again a characteristic of longer term value
creating firms. Thus, we want to emphasize that sustainable profitability is possible whichever view one
prefers and hence, to conclude, we would ask our readers who are the business leaders of tomorrow to
focus on the longer term instead of being “blindsided” by the short term.
Why Savers are Losers in the 21st
Century ?
Saving money has historically been considered to be a virtue. Perhaps, it was the most important one
with the most far reaching consequences in one’s life. However, the world changed in 1971. Saving
money is no longer an act of virtue. Rather it is act of foolishness and ignorance. Saving in its crude form
does more harm than good to the person indulging in it.

In this article, we hope to provide a breakthrough revelation to the readers. We hope to educate them
about the nuances of the new global financial order.

The World Has a Fiat Money System

Not all money is the same. The basic nature of money has undergone a change. The rules that were
passed down by your grandparents are relevant to what we can colloquially refer to as “old money”.
Modern societies have “new money”. The technically correct terms for old and new money would be
“commodity money” and “fiat money” respectively.

Commodity money is money made up of commodities like gold, silver or other metals. This money
has value in of itself. It can therefore be exchanged for other things of value. For most of recorded history
making has been using commodity money. All the rules passed down from generation to generation are
fit for commodity money.

Fiat money, on the other hand, is paper money. It derives its power and value from the government
that backs it. On its own, the paper money has no value at all. Therefore if the US government were to
collapse the US dollar would have no value at all. This has happened several times across the globe.

Historical Precedents

History is rife with instances wherein fiat money systems collapsed. In fact historical analysis will show
that fiat money has a 100% record of going to its original value i.e. zero.

Prehistoric cases include the Chinese empire and the Roman empire, both of which fell because of the
excessive greed of their governments which led these governments to debase their money and steal from
their own citizens.

Modern precedents include the hyperinflation in Germany in 1933 which caused Hitler’s rapid rise to
power. Also, the Zimbabwean hyperinflation is a wonderful case in point.

In each of the above mentioned cases, savers were the ones who lost the most. All the money kept in a
bank account was simply wiped out of existence!

Printed Money is Losing Value

Printed money does not lose value only in doomsday scenarios. Instead, printed money loses value,
almost on an everyday basis. Most governments that issue fiat money are in debt. They finance the
excessive spending simply by printing more money. Hence, when more money is printed, each unit
becomes less valuable due to the inflation that is being caused. Steadily mounting inflation causes savers
to lose value. Even though it may appear that banks are compensating savers for their loss by paying
them interest, the real rate of inflation in the economy is far greater than the meager interest that if offered
by these banks.
Hence, if a person buys stuff today, they get to pay the money back with cheaper dollars tomorrow! The
savers therefore end up losing value whereas prodigality is rewarded. This is one of the many bizarre
outcomes of the modern monetary system.

The Alternative

Saving is rewarded only when one saves in commodity money or old money. The government cannot
print more gold and cannot debase its value. This is evident from the fact that the United States dollar has
lost close to 94% of its value in the past 100 years whereas the purchasing power of gold remains
unchanged. Therefore, if someone had saved their money in cash, they would have lost value despite the
fact that compound interest started accruing on the same sum of money. On the other hand, if one had
purchased real assets such as gold, silver and real estate, they would have been sheltered against this
inflation and would have preserved their value.

The Problems with the Alternative

Investing in gold and silver is a good idea in general. However, like other markets, gold and silver tend
to get inflated too! The rise of gold has been steady but not at all linear. Like every other commodity,
gold too has got its share of booms and busts. Hence, entering the gold market is not a straight forward
decision that will always pay off.

In finance, the key to success is doing the opposite of what the crowd does. Hence, investors
should save cash and convert them into gold and silver when the stock markets are booming. A booming
stock market sucks the money out of other markets and gold and silver are no exception. It is during this
phase that the market plummets and investors find a good bargain.

To sum it up, traditional saving i.e. saving money in bank accounts is doomed for failure. The government
is printing and will continue to print more notes and will steal the value from you. Instead, real
commodities like gold, silver and real estate provide a hedge. The objective therefore is to convert cash
into commodities at regular intervals.

Top Five Factors That Spur Economic

Growth
The world has witnesses the rise and fall of many great economic empires. It is safe to say that we have
enough empirical data that we can analyze what spurs economic growth. In this article, we will look at
some of the important factors that lead to economic growth.

1. Natural Resources:

Natural resources are the number one factor that spurs economic growth. It makes economic
growth considerably easier. Consider the case of countries like Dubai or other Middle East
nations. The fact that they are rich in oil resources has literally been the defining factor of their
economies. There are other countries like Singapore which have a good natural harbor and
therefore have become a major transit point. Other countries also have resources like coal
deposits, iron ore deposits or even arable land.

In an era when shipping was strategic, locations with harbors experienced exponential growth.
Nowadays, since energy literally controls the world, any deposits of fossil fuel or other energy
sources drastically increases the economic prowess of any nation.

2. Deregulation:
 People were meant to trade with each other. That is simply the natural order i.e. how things are
supposed to be. Some repressive governments try to take this freedom away. Rules and
limitations are imposed and trading becomes limited. This could benefit a small group of people at
the expense of others. However, it could almost never benefit the entire nation.

Economic superpowers have traditionally been known to be trade allies of the entire world. They
gain their power because they are indispensible in trade and not because they are isolated. The
record of history is absolutely clear. Superpowers have always been following free trade policies
and will always be.

Notice that countries like United States and United Kingdom only developed when they
implemented a policy of free trade. As and when protectionism became rampant, the economic
prowess steadily deteriorated.

3. Technology:

Technology has always played a pivotal role in economic growth. The industrial revolution was
started because of technological advances. Mankind has never looked behind since. Only the
applications of technology changed over the years. From manufacturing to services and then to
social media, technology still drives employment and business growth. It is for this reason that
countries that build technological prowess develop much faster than others.

Consider the case of Germany. The country has been destroyed twice in both the World Wars
and also has been under communist occupation for decades. Yet its economy is much more
developed compared to its European counterparts who have not nearly faced as much turmoil.
Analysts have concluded that this success is because of the German emphasis on the
development of technology.

4. Human Resources:

Human resources of a nation can be either a boon or a bane depending on how they are utilized.
For instance, consider the case of a country like India. The population is simply astounding. A
large proportion of the population is in the working age. Also, most of them have good education
and job skills.

This is what has led an otherwise poor country like India to quickly become one of the fastest
growing economies in the world. These human resources which have made India an IT
superpower could also have resulted in large scale crime if the people weren’t educated!

Any nation that wants to progress economically must ensure that its citizens have access to high
quality education at affordable prices.

5. Infrastructure:

Last but not the least is the Chinese model of development. The state of China has heavily
invested in huge infrastructure projects. These projects created employment and spurred the
economy once they were underway. Also, since they were infrastructure projects, they literally
paid for themselves later.

China now has one of the lowest manufacturing costs in the world. This has been enabled by the
large scale infrastructure. Electricity is cheaper in China than anywhere else in the world. Also,
Chinese carriers can transport goods across continents cheaply. This has made China the largest
exporter and the second largest economy in the world.
Why are Countries Unable to Grow ?

The factors that lead to growth are relatively straightforward. Therefore countries can chart a well defined
path to growth if they want to. However, most are unable to do so!

This is because economic growth is an inside job. In most countries people want to grow at the expense
of one another. Therefore, economic policies are not based on what’s good for the economy but rather on
what is good for a certain group of people that have the capability to influence this policy.

In most countries it is the infighting between the haves and the have nots that prevents a synergistic
solution that would make life better for everybody involved.

Overview of the Sharing Economy and

the Emerging World of Work
How the Sharing Economy Looks Like ?

Anybody who has hired an Uber cab or a cab from any other ride-hailing and app-based company would
know something about how this new paradigm of capitalism works. For instance, when you book an Uber,
you do so in the knowledge that you need it do through an app which then “connects” you with the driver
who in all probability is a freelancer who owns his cab and where Uber does not have any ownership of
the cab or the driver.

Further, if you have stayed in one of the premises that are offered for short stays or vacant rooms in
houses that are put up on the websites or apps of companies such as AirBnB, you would be aware that
the company neither owns the premises in the manner in which a traditional hotel or motel would nor that
the hosts of the premises that you have chosen for your stays can at any point pause letting out their
rooms or even drop out of the listings for sharing.

Lastly, if you have ever hired a freelancer for your writing, web design, and assorted tasks through
Upwork or hired a temporary plumber or lawn mower through Task Rabbit, you would be aware that these
companies are just platforms that bring together potential customers and freelancers who can bid and set
rates accordingly and in the process charge a fee from both for the convenience and the ease of
operations that they provide on their platforms.

How the Sharing Economy Works ?

This in short is how the sharing economy works wherein hosts on AirBnB “share” their premises, drivers
on Uber use their spare time to drive and ferry passengers for money, and where freelancers make use of
such platforms to earn money.

The sharing economy works by collaboration and cooperation between a legion of freelancers on
one side and the army of customers on the other side who theoretically at least stand to gain (both
sides) from this emerging model of collaborative capitalism wherein the mediation is done by companies
using the power of platforms and the operation of digital networks. Considering the fact that most of these
companies are now valued in excess of a Billion Dollars, this new platform based economy or the sharing
economy or sometimes called the gig economy since the freelancers are primarily performing gigs on a
part-time basis seems to be booming.
What does the Sharing Economy Mean for Customers ?

So, what does the new model of the sharing economy hold for the clients, the freelancers, and the
companies themselves? To start with, the clients or people like you and me stand to gain from
competition between the freelancers’ results in each of them bidding in a competitive manner thereby
driving down prices and rates.

This is especially the case with sites such as Upwork and Task Rabbit wherein one can find bids at rock
bottom rates from the many or some would say too many freelancers competing for the same task.

Of course, this is not always the case for all companies where competition is a good thing. For instance,
Uber is known for practices such as Surge Pricing wherein during times of peak demand; they are known
to jack up the rates even when the drivers are willing to settle for lower rates. Having said that, it is also
the case that the customers do benefit though the fact that who is answerable for any sloppy work or who
is accountable for any mishaps or incidents of harassments by the freelancers has led to a vigorous
debate among the policymakers and the activists.

What Does the Sharing Economy Mean for the Freelancers ?

As for the freelancers, the results of the new world of work are somewhat mixed. While this new paradigm
means that theoretically anyone can participate in the sharing economy, the fact remains that this
type of employment is purely temporary or on a freelance basis which means that the freelancers
neither receive medical benefits nor have access to social security and other pension and longer term
benefits.

Having said that, it is also the case that given the economic downturn and the gloomy outlook for the
economies in the West, the Sharing Economy provides good opportunities to “ride the recession” (literally
as well as metaphorically) in addition to providing them with the means to work at their own pace as well
as choose the tasks or the customers that they would serve.

On the other hand, there are concerns in some quarters that the freelancers are being short changed in
this business model as more the number of them, the more that they bid lower and get even lower
earnings. Thus, the sharing economy can indeed do better where freelancers are concerned.

What Does the Sharing Economy Mean for the Companies Themselves ?

Lastly, for the companies themselves, the good times just keep coming in since for an initial investment to
set up a bare bones infrastructure and some investment into the app though the marketing and
administrative costs are substantial, the fact remains that the returns are indeed way above all these
costs and this is the reason why many investors are flocking to this sector.

This has reached a point where angel investors and venture capitalists are ready to fund just about any
start-up that seems to have a decent business model based on this emerging paradigm of the sharing
economy.

However, there is some disquiet among the thoughtful investors about the longer term sustainability of
this business model. Some feel that just like the dotcom boom and subsequent bust that similarly raised
expectations about eCommerce and eventually went bust, this new model would also meet the same fate.

Whatever be the eventual outcome, it is undeniable that the Sharing Economy is indeed a new paradigm
and a new world of work with implications for not only business but also for the wider society.
The 10 Trillion Dollar Sovereign Wealth
Fund Game!
Imagine a fund with so much money that it held 1% of all the equity from all the stock exchanges of the
world and still had money left over to buy huge quantities of other assets as well! Now, imagine that most
people in the world were not even aware of the existence of such a fund or the enormous financial power
it holds. Also, imagine that the money under the control of this fund was not strictly regulated.

This fund isn’t an illusion. The fund described above is the sovereign wealth fund of Norway. In fact, it
isn’t even the largest sovereign wealth fund. It just happens to provide slightly more information than the
others. That is the reason why we are discussing the sovereign wealth fund of Norway while not
discussing bigger funds like the sovereign fund of the Abu Dhabi government.

In this article, we will have a closer look at the concept of sovereign wealth funds and the power
they hold in the financial world.

Definition of Sovereign Wealth Fund

There isn’t one single definition of sovereign wealth funds. This is because the activities that these funds
perform are secretive as well as different from one another. Therefore, coming up with a comprehensive
definition is difficult.

However, sovereign wealth funds can be considered to be investment vehicles which receive their
funding from the government. Therefore, to begin with, sovereign wealth funds save on marketing
expenses that have to be incurred by other funds to raise investments. Also, the flow of funds for
investments works like clockwork, and there is absolutely no uncertainty.

Also, the investments being made by these funds are actively controlled by governments. These
investments, by and large, involve foreign assets. Sovereign wealth funds invest very rarely in domestic
assets. The secrecy which surrounds the investments made by these funds, as well as the opacity of the
information regarding their investments, can also be considered to be the defining characteristics of such
funds. Governments often state that sovereign funds are created to buy strategically important foreign
assets.

Just How Much Money Do Sovereign Wealth Funds Have ?

Sovereign wealth funds have more cash than many governments in the world do. The estimated total
amount of cash invested in such funds is over $10 trillion. To give some idea of how large that amount
really is, a comparison can be drawn with the Chinese GDP. China is the second biggest economy in the
world. Yet, The monetary value of all the goods and services produced by it is less than the money
sovereign funds hold in reserves.

The largest sovereign wealth fund i.e. the Abu Dhabi fund is known to have more than $800 billion in its
coffers. Most of the countries which are rich in natural resources such as oil have allocated huge amounts
of money to their sovereign funds. Another case in point would be the Russian sovereign fund.

Help During Subprime Crisis

The massive amounts of money possessed by the sovereign wealth funds as well as the power that they
have can be understood from the facts that the American government was requesting these funds to
intervene and save the economy from total collapse. Sovereign wealth funds were said to have so much
money that even if they purchased every toxic asset in the system, they still wouldn’t lose more than 20%
of their total value.

Needless to say that these funds are very prudent with their investments and as a result did not pick up
any stake in the toxic assets despite requests from the American government to do so.

Where Do Sovereign Wealth Funds Get Their Money From ?

Sovereign wealth funds are considered to be strategic assets for the nation. Therefore, the governments
that create such funds also create mechanisms to ensure that these funds are always flush with cash.
Some of the ways that sovereign wealth funds obtain cash are as follows:

 Natural resources: Countries like Dubai and Abu Dhabi are largely dependent on natural
resources for economic prosperity. However, once the oil runs out, these countries are likely to
witness a massive fall in their economic activity. It is for this reason that these countries allocate a
certain portion of the profits they make from oil towards a fund which buys assets in foreign
countries. The idea is to ensure that even after these countries run out of oil, their governments
should not run out of money.
 Trade Surplus: Some countries like China fund their sovereign funds with trade surpluses that
they generate from foreign trade. Hence if the exports of a country are greater than its imports,
the balance sum can be transferred to a
 Budget Surplus: Many countries collect more money in taxes than they need to spend. As a
result, these countries are left with surplus money. A lot of countries prefer to use the sovereign
fund vehicle to invest these funds. The idea is to acquire assets which will prove useful when the
supply of natural resources run out!

The bottom line is that sovereign funds have vast sums of money at their disposal. This, along with the
fact that their operations are shrouded in secrecy makes these funds incredibly powerful entities that can
change the course of markets if they so wish to.

The Great Chinese Debt Binge

The global financial system is in the middle of a manufactured boom. Earlier, the economies would boom
on their own based on the underlying fundamentals. However, in the present scenario, the boom is 100%
manufactured by central bankers that are using every trick in the book and some more to create the
perception that the sales are rising!

This availability of easy credit has led to a credit binge worldwide. Nowhere is this credit binge more
pronounced than in the world’s fastest growing economy. Also, the heavy influence that the Chinese state
has on their media has made this topic somewhat of a secret. Fudged numbers, that China reports to the
world, have also led to these facts being shrouded in mystery.

The global financial system is ignoring the great Chinese debt binge at its own peril! If critics are to be
believed the debt bubble is about to burst and in less than a year, the world will see the catastrophic
consequences of letting its fastest growing economy unmonitored.

Unprecedented Levels of Lending

China saw an unprecedented credit expansion in the past 5 years since the 2008 crisis. China now has a
debt which stands at 250% of its gross domestic product. Now consider the fact that Chinese GDP is in
trillions of dollars and let the magnitude of numbers sink in. Huge expanses of corporate credit have
literally been handed out to Chinese corporations. The most recent numbers suggest that the rate of
credit expansion is twice the rate of economic growth. This suggests an economy that is at the helm of a
massive economic bubble.

Economists have started expressing their discomfort with the Chinese binge in mild terms. Anyone who is
looking at the numbers carefully knows that this could very well be the beginning of the end.

Opacity

Public sector banks dominate Chinese banking. Hence, lending in China is more or less dominated by the
government. The government being a one party set up virtually runs the banking system unregulated. As
a result, the numbers released by them are often incomplete and have a reputation of being
untrustworthy.

The world, therefore, faces a unique challenge. Not only is the magnitude of the debt huge, but the
opacity of policies followed by Chinese banks also makes it worse. Economists have no idea and no
experience of predicting how an asset bubble burst unfolds in a complex economy like China.

Unviable Lending

Trillions of dollars have been lent out in China in the span of five years or so! The breakneck speed of this
credit expansion is mind-boggling! However, since the lending has happened so fast, there is a chance
that lenders may not have conducted due diligence. The sheer scale of the lending mandates that some
of the money has gone to cronies of Chinese government officials, sub-optimal projects and marginalized
borrowers. The existence of several unoccupied ghost towns in China is the testimony to this fact. The
single-minded focus on keeping the GDP growth rate above a certain percentage has led to this credit
binge. IMF reports have suggested that a large portion of this debt binge can be attributed to the
unregulated shadow banking system in China. Also, they have issued a warning that urges the Chinese
government to “urgently” tackle this issue.

A small percentage of the Chinese debt is also a huge amount. In many cases, it is greater than the GDP
of smaller countries! Hence, if this debt goes wrong, the results can be damaging to economies
worldwide.

Interconnectedness

We have already seen that an American crisis can become a global crisis is no time at all. The Chinese
crisis can have a similar impact. This is because a Chinese crisis is capable of triggering an American
crisis as explained below.

The interconnectedness of the Chinese economy is what makes this crisis truly global. The United States
is China’s largest partner. China is also the number one buyer of the United States Treasury bill. This
means that a Chinese crisis would force them to dump a huge amount of treasury bills and notes in the
market making it difficult for the United States to borrow more money. Since American economy cannot
survive without credit, this seems like a perfect storm!

Other developed regions like the European Union and Australia are also connected with the Chinese
economy. China being a part of the BRICS nations, changes in its economy also have an impact on
developing economies as well. The impact of Chinese debt binge will not be local.

Difficult Measures

The writing on the wall is pretty clear. Remedial measures are the only way forward. However, remedial
measures are politically unpopular even in a communist regime like China! These jobs will require
displacement of workers in numbers that the world has never seen. In fact, some of it has already begun.
Thousands of workers have been laid off in Chinese mining companies. They are finding it difficult to
adapt to this layoff culture since they were part of a communist regime before this. However, delaying the
essential measures will only make matters worse. The effects will be far more pronounced as market
imbalances will be sustained for a longer duration making them even bigger in magnitude.

Soak the Middle Class

The economic paradigm has always been defined as the battle between the haves, and the have-not’s
i.e. the “rich” and the “poor”. This has been the rhetoric since the times of Karl Marx. However, eminent
American economist Milton Friedman challenged this assumption in the 1980’s. He believes that the
biggest beneficiaries of all governmental programs are not the very rich or the very poor. Instead, it is the
middle-income group that reaps the maximum benefits whereas others have to pay the price. As far as
the rich are concerned, the price is nominal and hence doesn’t affect them much. However, from the point
of view of the poor, they have to pay a significant price for the benefits that they will not receive and this
impoverishes them further.

All this has been summarized in what Milton Friedman has called the Director’s law. In this article, we
will understand what the director’s law is and look at its manifestation in real life programs
implemented by the Congress.

Director’s Law

The director’s law states that the middle class is the biggest beneficiaries of the government programs.
They benefit at the cost of both rich and poor. This is because the American middle class plays the most
active role in selecting governments. They are educated enough to understand the impact of the
government policies. This is in contrast to the poor who are gullible and can be easily misled. Milton
Friedman, therefore, believes that it is in the best interest of the government to alienate a few rich people
as they could be taxed and also alienate the poor as they don’t matter as much! He states that every
program that has been implemented by America is actually a tax on the poor for the betterment of the
middle class.

Higher Education

The most obvious program cited by Milton Friedman is that of higher education. As per the demographics,
the people who attend school are mostly middle class. Very few of them belong to the higher class and
even fewer belong to the lower class! Even the ones belonging to the lower class are likely to end up in
the middle class once their education is completed. However, the money to fund these colleges is paid by
the taxpayers alike. In fact, the poor have to bear a disproportionately higher burden of taxes given their
lower incomes. Due to various social factors, very few poor kids make it to college even though their
parents have been funding these universities. Therefore, funding state-sponsored education is equivalent
to laying a regressive tax on the poor.

Social Security

Social Security is no exception to the director’s law. As mentioned above, the average age that poor
people start working is in their teenage years. This is because they do not pursue higher education. To
the contrary, the average age that the middle class starts working is in the late 20’s. Hence during those
years, the poor is paying heavily towards both college education and social security. On the other hand,
the middle class doesn’t have to pay for social security and are at the receiving end of college benefits!
To make matters even worse, the average life expectancy of the poor workers is considerably less as
compared to the middle-class workers. Hence, the poor have to pay for a longer duration of time and end
up receiving benefits for a shorter period of time. All this makes social security an anti-poor program
instead of a pro-poor program.
Medicare

Medicare is also a manifestation of the director’s law. The very nature of jobs held by the poor and middle
class make it so. The poor class usually holds jobs that require hard manual labor. Hence, they keep
exercising their bodies unknowingly as they perform their daily tasks. This helps them stay fit for longer
unless they are prone to some kind of addiction. On the other hand, the middle class generally holds
sedentary jobs. They eat far more calories than they burn. Most of the obese people in America are in the
middle class. This is the population that suffers from lifestyle factors such as diabetes, hypertension, etc.
Hence, the lower wage people are subsidizing the health care system for the middle class. The middle-
class people take advantage of the subsidized health care system to have a better healthcare system and
live longer.

Unemployment Benefits

The middle class tends to receive more unemployment benefits than the poor people. This is because the
middle class has higher paid jobs which are being outsourced now. As a result, a larger number of
middle-class people are without jobs. The poor on the other end have stable lower end jobs that they are
likely to retain. Even if they are fired, they may quickly find another job and are less likely to receive any
unemployment benefits.

Hence, the legislation of the future should target the middle class instead of the wealthy. Soaking the
middle class and stripping them of the excess benefits that they have received would make
perfect economic sense. However, it wouldn’t make much political sense given how American politics
works. It is, therefore, a difficult but necessary decision that needs to be taken.

Small Bribes that Lead to Big Losses

Corruption is a serious problem in many countries in the world. The world’s fastest growing economy
India has taken a series of radical measures to mitigate adverse impacts of corruption.

However, regulations do not actually guarantee compliance. In fact, anti-corruption laws are routinely
broken all over the world with impunity. This practice often begins with common people themselves who
distinguish between small bribes and large bribes. According to many people, small bribes are mere
facilitation payments. They should not really be called “bribes”.

Some countries like Australia and Canada even allow their people to make these payments legally!
However, the payments have to be made outside their country. For instance, an Australian bribing official
in Ghana is legal but the same act in Australia would be considered illegal and would call for punitive
measures. It is incredibly hypocritical and insensitive on behalf of these governments. However, at the
present moment, this is the truth.

In this article, we will have a closer look at this debate of small bribes versus big bribes. We will
ascertain how it impacts the economy in general.

The Common Man’s Viewpoint

Common people do not see anything wrong with bribing officials when it comes to small offenses. For
instance, traffic offenses in many parts of the world are almost exclusively settled via bribes. The same
holds true for anti-graft protesters in countries like India. Many of these people watch their news on
illegally obtained electricity stay in illegally built homes and at the same time advocate that the politicians
of the nation must not be corrupt. The idea that a small grease payment is somehow less harmful or
sinister than the big corporate payments is fundamentally flawed. However, this flawed opinion is still the
opinion of the masses. Hence, it influences the popular vote and is somehow ascertained to be fair and
correct!
Bribes Become Extortion

Small bribes are often paid as facilitation fees. However, if these bribes are paid too often, they stop
being facilitation fees. This means that they are no longer willingly paid. Instead, these bribes are often
demanded making it as extortion! Also, when one party is facilitating faster work, the work of the others
automatically slows down. Hence, it becomes compulsory for everyone to pay a bribe or face a possible
infinite time delay. Since time is money, most businesses will give in to the extortion and later, in turn, will
extort the money from consumers.

In many countries, it is impossible to get any task accomplished in any government office unless bribes
are paid off. This is coercion and therefore must not have any existence in a lawful society.

Slippery Slope

Small bribes are also a slippery slope. What starts as payment for preferential treatment soon morphs into
payments made for extrajudicial benefits being granted. The resources of the society as a whole are
squandered when bribes are received or paid and resources granted, or fines waived off in lieu of these
bribes. Once the rationale that it is acceptable to pay and take a bribe takes root, amounts become
immaterial. This is because amounts are always subjective. What is a big amount for one person maybe a
small amount for another? Hence, classifying bribes as big or small is futile. Such a classification will not
stop the bigger losses that are faced by organizations.

Accounting Fraud

In most countries of the world, giving and taking of any kind of bribes is illegal. However, we are aware
that most companies have to pay bribes to get their work done in many countries, particularly developing
countries. Since multinationals are operating in a wide variety of developing countries, this amount adds
up to a significant sum.

The question now arises, how this amount is displayed on the financial statements of the company. It
cannot be represented as bribe since bribery is illegal. Depicting it anything other than a bribe is a
distortion of facts and hence can be called accounting fraud! Accounting fraud is a serious economic
offence which leads to significant penalties and jail time. However, common sense dictates that
companies that engage in bribery would also have to indulge in accounting fraud to cover up their tracks!

The Terrorism Angle

Money laundering is also an intricate part of bribery. A lot of bribes are paid with laundered money.
Hence, the existence of a black market is mainly due to corruption. However, this black market
infrastructure is often used by the wrong people. Terrorist activities also require funds which cannot be
accounted for or tracked. Hence, the same infrastructure which was used for bribery can now be used to
cause violence and kill people. Bribery may look quite harmless in the beginning. However, systematic
corruption is what makes terrorism possible. In the absence of these black markets, terrorists would find it
virtually impossible to execute their agendas.

Systematically Avoiding Bribes

To sum it up, classifying between small and big bribes is meaningless. Corruption must be avoided in all
its forms. There must be an infrastructure in place to prevent the give and take of bribes. This is because
apart from the personal costs that are incurred by people, these transactions seem to have enormous
social costs.

Economics of Low Cost Airlines

Airlines are a tough cut-throat business. A large number of airlines across the world are making losses,
and others are barely profitable. The business becomes even more challenging when it comes to low-cost
airlines. There is very little margin for error. Only airlines which are extremely efficient in their operations
can turn around a profit.

Big airline companies have failed to launch successful budget airlines. It seems to be a niche that
only a handful of enterprises have mastered. Although there are a few successful low-cost airlines in Asia
and America as well, for the most part, Europe is their home. Ryan Air and Easy Jet from Europe are the
top low-cost airlines in the world. They sell tickets for less than 100 euros on almost all their flights and
still manage to make a decent profit. In this article, we will have a closer look at the economics of low-cost
airlines.

Standardization

Low-cost airlines follow a high degree of uniformity. For instance, all the planes in Ryan Air’s fleet are
Boeing 737. They are almost the same model. This is in contrast to larger airlines like KLM and Lufthansa
which have different types of planes in their fleet. The advantage of having a single type of jet is that it is
easier to train people how to use it. Right from pilots to cleaning staff, everyone in Ryan Air is used to
working on the same type of planes. Hence, their training is easy. The employees can be used
interchangeably across locations since they do not have different skills.

Standardization helps employees move faster up the learning curve. With the passage of time, the crew
becomes increasingly efficient. Companies like Ryan Air prefer to have their jets always in the air. They
do not halt at all for anything except cleaning and servicing. Faster cleaning and servicing means the jet
stays in the air for longer and makes more money for the company

These planes also tend to have the same type of seats with minimum space. This allows the airlines to
sell maximum tickets. There are no business class or first class seats available in low cost airlines. Some
seats like aisle seats tend to have more leg room than the others. Low cost airlines sell these seats for a
slight premium.

The extent of standardization is such that budget airlines do not take connecting flights. This is because
connecting flights require a different process for ticketing and baggage transfers. Since this would
interfere with the airline's regular operations, such processes are simply avoided.

Younger Fleet and Crew

The common perception about low-cost airlines is that they use planes which are older and outdated to
lower costs. That does not seem to be the case. All major low-cost carriers have younger fleets when
compared to full-service airlines. This is because younger planes are technologically more advanced and
therefore offer better fuel efficiency and other economic advantages.

The cabin staff of the low-cost airlines also tends to be young and inexperienced. Budget airlines often
train complete newcomers to perform the tasks. This allows them to employ people for a fraction of the
cost that other airlines would. The staff is provided minimum safety training, and within a few weeks, they
are ready to learn by experience while performing on the job!

Cheaper Airports

Budget airlines almost never fly out of the main airports. Airports like Heathrow and Charles De Gaul in
Paris are expensive since they have a large number of flights coming in each day. Instead, these airlines
have developed airports in nearby towns to these mega cities. Most of these airports are 80 to 100-
minute bus ride away from the main city. However, since they are out of the city, they only receive traffic
from budget airlines like Ryan Air and Easy Jet. As a result, these airlines have tremendous bargaining
power over these airport authorities and personnel. They negotiate the cheapest possible rates and pass
on the benefits to their consumers. Even if these airlines fly to the main airports in bigger cities, they tend
to fly at unusual times. This allows them to minimize their costs under all circumstances.

Automation

Low-cost airlines rely heavily on automation to bring down the cost. They never provide physical ticket
printouts to their customer. In fact, they charge the customers heavily in case such printouts are required.
Also, the check in almost always done by machines. There is little to no ground staff that these airlines
employ. Similarly, the baggage operations are simple and often mostly mechanized with the need for
fewer workers. The rising minimum wage laws in Europe make automation an extremely viable option
allowing airlines to heavily cut costs.

Economies of Scale

Budget airlines have to operate on a large scale. A successful budget airline by definition cannot run a
smaller fleet. This is because to gain the lowest cost from suppliers, they need to have vast operations. A
small airline has little to no bargaining power and is more likely to lose money than to make some.

To sum it up, budget airlines have a very different business model. This model requires a high degree of
efficiency and precision to make money and cannot be easily emulated.

The Labor Theory of Value

The most fundamental question in economics is the determination of the price of any good or service, i.e.,
the question of value. There have been many conjectures about what is value and how is it derived. One
of those inferences, popularized by Karl Marx and his disciplines is about the labor theory of value. In this
article, we will understand the concept of the labor theory of value and how it applies to economics today.

What is Value?

The most fundamental question in economics remains unanswered. The modern economist will argue
that value is a theoretical construct. There is no such thing as the intrinsic value of a product. They will
say that the value of a product is whatever a willing buyer and seller decide it is. To prove their case, they
will usually provide the example of branded goods. Consider an average piece of clothing that may sell
for $20. The same clothing can even be sold for $150 if it has an appropriate brand label. This means that
there is no intrinsic value in the piece of clothing. Whatever the seller can convince the buyer to pay is the
intrinsic value of the product.

What is Value According to Labor Theory?

Labor theory has a very distinct and clear-cut conception of value. They believe that the value of anything
is the amount of labor that has to be put into the product to produce it. All classical economists seem to
agree on this conception of labor being the standard unit of value.

Adam Smith once famously said that “the value of anything, i.e., the real price of anything to the man
who wants to acquire it is the toil and trouble of acquiring it”. Toil and trouble were euphemisms
signifying the harsh truth of human labor. As such, the foundations of the labor theory of value were laid
down by the father of modern economics, i.e., Adam Smith himself.

The Relationship Between Capital and Labor

Karl Marx further explained the relationship between capital and labor when he propounded the labor
theory of value. He stated that the price of everything has one common denominator, i.e., the number of
working hours that were put into manufacturing it. The number of working hours can seemingly be
reduced by the use of capital, i.e., more advanced technology. Hence, he saw the production process as
being a tradeoff between labor and capital.

However, he further said that all capital is also the result of human labor. This is because like other
goods, machines and other capital equipment are also goods and they have to paid for by labor. Hence,
he used the term “dead labor” to denote capital.

This was a revolutionary idea explained by Karl Marx. The reason is that it does not matter, how
mechanized or automated a process becomes. Due to the categorization of capital as “dead labor”, any
output will strictly be the result of input of the commensurate amount of labor.

The labor theory of value, therefore, believes that human labor is the building block behind every product
and service. Hence, the intrinsic value of any good or service is the amount of labor that has gone in the
manufacture of such a product.

Can Prices be Manipulated?

The labor theory of value does not reward inefficiency in the production process. It does not mean that if a
person takes more time to create a product or service by working slowly due to negligence or inefficiency,
they can charge a higher price for it. The labor theory of value does not depend on the individual time it
takes to produce a good or service. Instead, it considers what it the average, socially acceptable time it
takes to produce a good or service. Hence, the labor theory of value does not allow prices to be
manipulated by slowing down the production process.

The Value in Use and Value in Exchange

The labor theory of value distinguishes between the value in use and value in exchange. Adam Smith has
explained that some goods like water have utmost value is use. However, since they are so abundant,
they require very little value and therefore are not priced very high.

There are other goods like gold, silver, and diamonds. These goods do not have much value in use. Their
value is dependent upon the value in exchange, i.e., what someone else is willing to pay for it.

Adam Smith stated that it is labor that is the determinant of price in both these cases. He simply
disregarded the demand-supply theory that is believed by most modern economists today.

Labor Theory and Socialism

Since Marx and his followers believed that labor was the most important factor in production, they started
viewing capitalists as parasites who extract much more than they deserve because they happen to be in
control of the means of production. The result was that socialism became a reality and in many countries,
the means of production came to be owned by the government. However, such societies started
becoming backward in the absence of entrepreneurship. Hence, it can be said that entrepreneurship is
also a form of labor.

What Happens When Countries Do

Not Pay Back Their Debt?
Sovereign debt is regularly in the news even though we may not realize it. Several poor countries keep
defaulting on their debt. This occurs more frequently with countries in Latin America and Africa. People
have a limited understanding of how sovereign debt works. This is because sovereign debt is a bit
counter-intuitive. It is true that countries borrow money just like companies and must repay them in a
similar fashion. If a company fails to repay the debt, it must face the consequences of its action. However,
when a nation defaults on its debt, the entire economy takes a hit.

In this article, we will understand how sovereign default is different from the corporate default. We
will also understand the after-effects of a sovereign default.

No International Court

Firstly, it needs to be understood that most of this debt is not subject to any jurisdiction. When a company
fails to repay its debt, creditors file bankruptcy in the court of that country. The court then presides over
the matter, and usually, the assets of the company are liquidated to pay off the creditors. However, when
a country defaults, the lenders do not have any international court to go to. Lenders usually have very
little recourse. They cannot forcibly take over a country’s assets and neither can they compel the country
to pay.

Reputation Mechanism

The next question arises that if creditors cannot compel borrowers to repay debt, why would they lend
money? The answer is that they lend based on the reputation of the borrower. Countries like the United
States have never defaulted on their debt. Hence, they have a small likelihood of default. As a result, they
receive financing at better terms as compared to a country like Venezuela or Argentina which has
defaulted in the past and is more likely to default in the future.

The entire premise of lending to sovereign nations is that if these nations default, then they will be cut off
from future access to credit from international bond markets. Since countries almost always need credit to
fund their growth, this acts as a major detriment. This is the reason why countries decide to pay up on
their debt even after defaulting.

A 100% loss to creditors is unlikely. Usually, when a default occurs, some sort of compromise is reached,
and creditors end up taking a haircut. This means that they receive at least part of the payment that was
due to them.

Effects of Sovereign Default

Some of the common effects of a sovereign default are as follows:

Interest Rates Rise

The most immediate impact is that borrowing cost rises for the nation in the international bond market. If
the government itself is borrowing at a higher rate, then the corporates also have to borrow at increased
rates. As a result, interest rates rise and the price of bonds that were issued earlier collapse even further.
Trade and commerce is negatively affected since banks are skeptical of lending money at high rates to
borrowers.

Exchange Rate

International investors become wary that the defaulting country will continue to print money till it reaches
hyperinflation. As a result, they want to exit the defaulting nation. As a result, the exchange rates in the
international market plummet as everyone tries to sell their local currency holdings and buy a more stable
foreign currency. If a country is not too dependent on international investment, then the effect of
exchange rate may be marginal. However, countries which default on their debt tend to have massive
foreign investments.

Bank Runs

Just like investors want to move their money out of the country, local people want to move their money
out of the banks. They are fearful that the government will forcibly take possession of their bank deposits
to repay the international debt. Since everybody tries to withdraw money at the same time, bank runs
become the norm. Many people are not able to recover their deposits and as a result the crisis becomes
even more severe and more bank runs follow.

Stock Market Crash

Needless to say, the above-mentioned factors negatively affect the economy. As a result of the stock
market also takes a beating. Once again the cycle of negativity feeds off itself. The stock market crash
perpetuates itself. It is not uncommon for stock markets to have 40% to 50% of their market capitalization
wiped off during a sovereign debt default.

Trade Embargo

Foreign creditors are often influential in their home country. Hence after default, they convince their
countries to impose trade embargos on the defaulting nations. These embargos block the inflow and
outflow of essential commodities into a nation thereby choking its economy. Since most countries import
oil to meet their energy needs, such trade embargos can be disastrous. In the absence of oil and energy,
the productivity of an economy takes a severe beating.

Rising Unemployment

Private firms and the government both feel the negative effects of the economic climate. The government
is not able to borrow and tax revenues are also at all-time lows. Hence, they are not able to pay salaries
to the workers on time. Also, since there is a negative sentiment in the economy, people stop consuming
products. As a result, the GDP comes down and accentuates the unemployment cycle.

The Economics of Biofuels

Fossil fuels are considered to be the biggest environmental hazards of our time. The biggest objective of
several global organizations is to reduce the use of these fossil fuels and replace them with something
more organic. This is where biofuels can help. Governments all over the world are giving subsidies to
biofuels. Many government agencies procure biofuels from vendors. They are used to meet the needs of
sectors like railways which have high energy requirements. In this article, we will look at the positive
and negative impacts of using these biofuels.

 Lower Emissions: Firstly, biofuels emit considerably lower amounts of greenhouse gases in the
environment. In the short run, the comparison between first-generation biofuels and fossil fuels
shows no difference. However, comparisons done over a thirty year period show that biofuels
emit less than 50% of greenhouse gases as compared with fossil fuels. Also, there are many
second generation biofuels which drastically cut emissions from day one. This is not only good
 from an environmental point of view but also from an economic standpoint. Higher emission
levels mean the government has to spend more money trying to control pollution. The usage of
biofuels, therefore, provides financial advantages.
 Lower Import Bills: Another huge benefit of using biofuels is that the reliance on oil exporting
countries is reduced. The oil market is like a global cartel. Oil producing nations collude to jack up
the prices of oil. As a result, importing countries have to pay a lot more. Rising oil prices have had
a severe economic impact on the current account position of many nations. If they import too
much oil, they often have to cut the import of other essential commodities. This is because they
do not have the foreign exchange to pay for all of the imports! Lower import bills would provide a
wide range of benefits to these governments. They will not be under undue pressure from oil
producing nations. Governments experience a lot of flexibility and freedom in decision making
after breaking the shackles of fossil fuel consumption.
 Terrorism Financing: The proceeds from the sale of fossil fuels are the number one source of
financing for terrorist organizations. ISIS derives a large portion of its revenue from selling its oil
in the black market. Radical elements in the governments of Saudi Arabia and Iran also send oil
money to terrorist sympathizers. If the world were to embrace the use of biofuels, the
dependence on fossil fuels would be reduced considerably. This would severely curtail the flow of
money to terrorist organizations. Several conflicts in the Middle East would be resolved only if oil
became strategically less important!
 Sustainable Model: Last but not the least biofuels are a sustainable way to meet the energy
needs of the planet. Production of biofuels does not take thousands of years. Hence, the
production of biofuels can be made faster than its consumption. This would create a sustainable
business model. The world will no longer have to live with the fear that the energy sources are
going to be depleted. This will lead to stability in the price of these fuels. Biofuels are unlikely to
be as volatile as fossil fuels. This will help the economy since it will make production planning a
lot easier.

Disadvantages of Biofuels

There are some disadvantages to the use of biofuels as well. They have been listed below.

 Higher Food Prices: Biofuels are produced from food particles. Sugar crops are the raw material
which is used to produce first generation biofuels. On the other hand, second generation biofuels
are produced from cellulose. Hence, an increase in the production of biofuels would mean an
increase in the production of these crops. If the production of these crops has to be increased
considerably, more and more land will have to be brought under agricultural usage. However, the
world is already facing a shortage of land. Hence, it would be difficult to bring more land under
cultivation. The end result will be the diversion of fertile land to the production of biofuels. This will
be an economically and environmentally beneficial solution if only the energy needs are
considered.

Even though the energy needs might be met in a better way, the production of crops will
decrease once biofuels become the main stream. This reduced production will cause higher food
prices.

These higher food prices are a concern in low-income countries. However, these are also the
countries where maximum fossil fuel-related pollution happens. Hence biofuel is not really a
viable alternative in such countries.

 Land Pollution: The production of biofuels requires the use of chemical fertilizers. This is done to
improve the yield of the cultivable land. However, in the long run, these fertilizers produce
negative economic consequences. Overuse of these fertilizers makes the land uncultivable in the
long run. Also, the chemicals tend to seep into the soil and create a wide variety of health
hazards. Hence, an increase in the production of biofuels would directly lead to a rise in the land
pollution as well.
The bottom line is that technology related to biofuels still needs to be developed even more. There are
many benefits to using biofuels. However, some of the disadvantages need to be mitigated before
biofuels completely replace fossil fuels.

The Business Case for Immigration:

How Immigration and Immigrants Help
the Economy
The Backlash against Immigration

The issue of immigration has been in the news lately for all the wrong reasons. Starting with the Brexit
Referendum and continuing with the election of President Trump and including the rise of populism and
far right nationalism in Europe, Immigration and Immigrants are being viewed negatively.

Indeed, the prevailing atmosphere against Immigration has become so vitiated that potential immigrants
from Asia and Africa as well as Latin America are thinking twice before rushing to the United States and
Europe in the manner that they used to do earlier.

However, it is not necessarily the case that Immigration and Immigrants are bad for the host
country since there is a strong business case to be made for the same.

The Business Case for Immigration

Indeed, the fact that the Western Economies are in the midst of stagnant population growth means that
immigrants can be a source of labor for those countries where the population of the natives is dwindling.

On the other hand, this is precisely the reason why many Nationalists and Populists on the Right want to
discourage immigration since they feel that their countries would be “taken over” by “hordes of
immigrants” who would not only deny jobs to the locals but would also cause severe social problems to
do with integration and assimilation.

Having said that, as mentioned earlier, there is a strong business case to be made for immigration.

To start with, immigrants contribute to the economies of the host countries by providing labor that is not
only cheap but also abundant.

Considering the fact that immigrants often work for lower wages than native workers, businesses tend to
gain and profit from immigration. In addition, immigrants can help fill crucial positions in occupations that
do not have much demand from the native workers.

Examples of How Immigration Can Help

For instance, sectors such as construction and manufacturing have many low paid positions that can be
filled by immigrants. Indeed, the fact that native workers usually balk at working in menial and low paid
jobs means that immigrants who are ready to work in these sectors can help the economy.

To take examples, all the Gulf Countries have benefited from Asian workers who were immigrants and
who literally as well as figuratively helped build the mansions and offices of the natives with their sweat
and labor.
This is also the case in Europe where there is a shortage of workers prepared to drive taxis or be
plumbers and electricians and where Eastern European immigrants can be found in large numbers.

Immigration at the Higher End

While cheap and abundant labor is one reason why there is a strong business case for immigration, there
is also a compelling reason at the higher end of the skills spectrum. To explain, the United States has
benefited immensely from highly skilled Doctors and Engineers as well as Scientists from Asia (especially
China and India) wherein the Tech and the Life Sciences as well as the Engineering field have all
benefited from the influx of such highly skilled immigrants.

Indeed, the reason why the United States encouraged massive immigration in the 1990s is mainly
because the Tech companies such as Microsoft often found that American universities were finding it
hard to churn out as many Engineers and Programmers as the Tech Industry wanted.

Thus, the solution was to encourage immigration from regions worldwide where there was a surplus of
such workers. The fact that most Silicon Valley firms now have Chinese and Indians in senior and
leadership positions is indicative of the fact that there is a strong economic case for immigration despite
the nationalists and the populists claiming otherwise.

Need for a Rational Debate

After considering these aspects, it is indeed the case that the West must first have a debate over
immigration in a rational and cool manner wherein the economic and the social costs are calculated and
weighed against the benefits.

While it would be prudent to limit immigration in some sectors such as Manufacturing where the natives
are at risk of losing their jobs, it is also the case that there must be a blanket ban on immigration.

As mentioned earlier, in countries where there are not enough workers, it makes sense to let immigrants
do the job instead of losing competitiveness due to wrongheaded policies. In addition, in sectors or
occupations where immigrants have the skills and the expertise better than the natives, it also makes
sense to let the former do the jobs.

After all, the United States is what it is and where it is due to immigrants who arrived there initially as well
as throughout the centuries to seek their fortunes there. While the case of Europe is different, it is a fact
that Germany has been encouraging immigration partly from humanitarian impulses and more so due to
the declining numbers of ethnic workers in some occupations.

Conclusion

On balance, it would seem there is a strong economic aspect of immigration that can help the host
countries more than it harms them. Therefore, it is the need of the hour for the business sector to take a
stronger stand against the growing chorus for keeping out immigrants and immigration.

In the same manner in which Tech leaders such as Bill Gates lobbied the government in the 1990s, the
present Captains of Industry too must rise to the occasion and call for a meaningful assessment of the
costs as well as the benefits of immigration.

To conclude, blanket bans on immigration do not serve anybody’s purpose and would only cause
economic pain.
The Left Wing Theory of Economic
Growth
Economics is not a natural science. Instead, it is a social science. This means that there are no perfect
and immutable laws of economics. Rather, there are opinions. Over time, these opinions have become
categorized into two dominant streams of thinking. The right wing is known as the capitalist wing. The
right wing’s view of the economy and the policies that they recommend are in favor of capitalists i.e., big
businesses. On the other hand, the left-wing is more concerned about laborers, i.e., the poor people who
form the bulk of the workforce. Their policies are supposed to uplift the poor and provide them with a
better standard of living.

The policies of both these groups are constantly opposed to each other. The right-wing groups advocate
policies such as reduction of tax rate, removal of regulations and increasing ease of business. On the
other hand, the left wing politicians advocate policies such as increasing the minimum wage,
strengthening the labor unions and so on.

Centuries of economic data have created enough empirical evidence to determine which policies work
and which do not. The record of history is quite clear. Free markets and capitalism i.e. right-wing policies
are what has led to the development and growth of every economic superpower in the history of the
world. In this article, we will have a closer look at the reasoning of the left wing economists as well as the
flaws in them.

The Left Wing Economists View on Economic Growth:

The typical chain of reasoning of a left-wing economist is as follows

1. They believe that consumers are the reasons that markets exist. More than 70% of all economic
activity in the United States can be attributed to consumers. The other 30% is driven by the
government
2. Consumers are people from the general population. Since there are more workers in the general
population than there are capitalists, it can be said that “workers are consumers”
3. Also, rich people tend to spend only a small portion of their income and stash away the majority
for future use. On the other hand, people belonging to the middle and lower income categories
tend to spend almost all of their incomes.
4. Hence, if a bigger chunk of the income goes to the poor and middle class, they will consume
more. This will lead to the demand for more goods and services and create economic growth.
5. Hence, measures like minimum wages are advocated. This is because minimum wages ensure
that the worker receives a bigger share of the produce. Also, other measures like tax credits for
lower-income people financed by tax increments for high-income earners is often recommended
by proponents of left-wing economics.
6. The left-wing economists believe that the rich will actually be better off giving higher wages. This
is because they will obtain a small share of a growing economy instead of a larger share of a
stagnant one.

The Problem with the Left Wing’s Worldview

1. These ideas are regressive and are likely to bring about a downfall in the economy. This is
because left-wing economists believe that by raising wages they will enable the transfer of a
larger share of money to the laborers. However, in reality, if wages are increased, it spurs the
capitalists to develop machines that can replace labor. Now, if left-wing economists argue that
mechanization should not be allowed, they end up advocating a regressive policy which will not
cause any economic growth. The bottom line is that laborers will only get paid what their work is
 worth. If the prices of labor i.e. wages are artificially inflated, the result will not be the welfare of
the lower and middle class. Instead, these classes will be under the grip of mass unemployment
2. The policies suggested are contrary to basic economics. If the laborers are forcefully given a
larger share and the capitalists are deprived of their share, they will slow down the production.
The law of supply suggests that suppliers produce more when they earn more profit per unit.
However, the also produce less when their profit is reduced. Hence, even though the wages of
individual workers might increase, the number of workers employed might be reduced. As a
result, the amount of money apportioned to the poor and middle class will remain the same.
3. The left-wing economists always believe that the corporations are making too much money and
paying their workers too little. However, they need to understand that profit is the main motive
which drives the marketplace. The employment that workers receive is only incidental. Hence, if
workers try to gain at the expense of profit, there would be no motivation for the entrepreneur to
undertake risk and manage a business.

To sum it up, the left wing’s policies do not even pass the test of basic economics. These policies are part
of a fake brand of economics whose real purpose is to obtain political mileage. Countries like Russia and
China have seen the failure of left wing’s economic policies. The economies of these countries have
shown signs of growth only after right-wing policies, i.e., capitalism and the free market, were
implemented.

Saving vs. Spending

John Maynard Keynes once said that saving money is an individual virtue but a societal vice. This has
been the stance of mainstream economics for a very long time. The underlying belief is that demand
stimulates all economic activity. Hence, when there is more demand, there is more economic activity.
Thus, an economy grows by increasing demand. Demand is another word for increased spending.
Hence, modern-day economists believe that incessant spending by the consumers is what drives the
economy. This is the reason why the American government requested the people to go out and spend
their money after the 9/11 attack which threatened to slow down the economy.

However, this doctrine which advocated more and more spending is somewhat recent in nature. For
many centuries, economics has actually been urging people to save money. This has created a
dichotomy of sorts in the minds of the modern student. On the one hand, they know from common sense,
that saving is indeed good for the economy. On the other hand, there are these economic gurus who
claim that spending is what keeps the economy afloat.

In this article, we will try to resolve this dichotomy.

The Logic behind Increased Spending

The justification for increased consumer spending is generally derived from the “circular flow of economy”
model. This model explains that the cash flow in the economy is circular in nature. Hence, the spending of
one person becomes the earning of another person. Similarly, the spending by the second person
becomes the earning of the first. Thus, according to this model, spending is what keeps the economy
alive. Spending is also seen as the number one reason for increased employment and job creation.
Hence, according to this model, when spending is cut down, people will lose their jobs. The overall
negative sentiment will lead to few people buying even fewer goods. Many economists like Keynes
believe that this leads to a downward spiral which is self-reinforcing. The belief is that it is this downward
spiral that causes a recession. Also, since the spiral is self-reinforcing, it is difficult to come out of
recession.
The Omission of Capital Goods

The overly simplified version of the circular flow of economy omits many relevant facts. For instance, it
overlooks the fact that all spending is not equal. For example, if a baker buys a new oven, he is actually
making an investment that will help him earn a higher income in the future. However, on the other hand, if
the same baker goes on a vacation and spends money that expense would not reap any returns in the
future.

The record of economic history explicitly states that for a country to increase production in the long run, it
needs to increase its stock of capital goods. This stock of capital goods can only be increased if money is
invested in productive activities. Hence, this philosophy is very different from the spending philosophy
since it emphasizes on the need for savings and the correct diversion of those savings to productive
activities.

The Problem with the Spending Approach

The spending approach to economic growth can be seen as of the significant reasons behind many
economic ills. Firstly, many governments have gone deep into debt in order to stimulate spending and
recover from financial setbacks. This approach will only work if the expenditure is done on capital goods.
On the other hand, if the money is used to make welfare payments, then the spending would have done
more economic harm than good. In the short run, it will help in increasing the GDP. However, in the long
term, it will only lead to more indebtedness. Similarly, the spending approach is creating several problems
with personal finances. A large number of individuals find themselves in debt because they have been
brainwashed into spending money.

Incessant spending does not create prosperity for the individual just like it does not create prosperity for
the entire nation. The fact of the matter remains that before individuals consume, they must have
produced goods of equal or more value. This is the only way real economic growth can be achieved in the
long run.

Effects of Hoarding

The difference between saving and hoarding must be clearly understood. Saving means that the money
is entrusted in the hands of people who intend to use it for productive purposes. On the other hand,
hoarding would mean storing cash under a mattress or in any other space where others can not access it.
Savings create economic growth whereas hoarding does not. The reasons are self-explanatory. Money
kept idle does not multiply or benefit anyone. However, money in the hands of industrious people is a
great resource that can spur economic growth.

Effects of Inflation

When a government prints money out of thin air, it creates inflation. This inflation is having a detrimental
impact on savings. For instance, the value of the interest generated as a result of savings is reduced by
inflation. As a result, it discourages people to save money since the purchasing power of money is
depleted in the long run. Also, when a government prints money and spends it, it diverts money from
productive activities. This ends up shrinking the production flow.

Hence, the bottom line is that incessant spending by individuals may not necessarily be good for the
economy. Instead, the focus should be on saving since it allows countries to achieve higher levels of
economic growth.
Quantitative Easing and Income
Inequality
Ever since quantitative easing has been implemented as a mainstream policy, Central banks have had to
fend off charges that it is leading to increased income inequality. The central banks have been alleging
that quantitative easing has not created more income inequality. They often cite the low inflation figures
as proof of this claim.

In this article, we will have a closer look at how quantitative easing has influenced the wealth gap.

Quantitative Easing and Inflation Figures

Firstly, it is important to understand that quantitative easing puts more money in the hands of the rich.
This is because this policy implies a massive amount of asset purchases by the government. These
assets are obviously held by the wealthy people of that state. Hence, quantitative easing is an exercise of
transferring money from the government to the wealthy. Since the government derives most of its money
from the middle class, quantitative easing essentially transfers money from the poor to the wealthy.

Now, the poor spend a higher percentage of their income on consumption. On the other hand, the rich do
not have a high marginal propensity to consume. This means that they spend a smaller percentage of
their income on consumption and a larger percentage of savings and asset creation. If we look at the
inflation patterns in the recent years, they seem to be consistent with this.

For instance, the cost of living has not gone up very high. However, on the other hand, asset prices have
skyrocketed. The logical explanation is that the rich have not spent much of their money on consumption.
However, they have created a bull run in most property markets. Since this money came into the hands of
the rich because of the government’s policy of quantitative easing, the government can and should be
held accountable for skyrocketing asset price inflation.

Also, it needs to be understood that the cost of real estate and other assets are not part of any inflation
index. Inflation indexes only measure the cost of consumables. As a result, the increasing asset prices
are not showing up in inflation indexes. This is allowing central banks to make misleading claims that
quantitative easing has not led to any income inequality.

The Old vs. the Young

The government’s policy of quantitative easing has impacted the old and young citizens in very different
manners.

 Firstly, young citizens have seen increasing salaries because of quantitative easing. This policy
prevented a slowdown which would have inevitably turned into a recession. If there was a
recession, there would have been widespread job loss. The recession has prevented job losses
and on the other hand has led to marginal increase in salaries.
 Secondly, young citizens have seen asset prices spiral out of control. Hence, even though they
have jobs which pay them decent salaries, most of the young entrants in the job market cannot
purchase a home. Hence, the negative effect has been quite profound since an entire generation
is being prevented from leading a normal financial life.
 From the old generation’s point of view, their income has been reduced because of the
implementation of quantitative easing and related policies. This is because these policies have
led to a reduction in the interest rate. The elderly derive a large portion of their income from bank
deposits, the yield of which is affected by interest rate changes. This may have had a negative
 effect on some older citizens who have healthcare conditions and therefore need cash for
treatments.
 However, the old generation has seen the highest rate of wealth building in decades. This is
because most old people are home owners and as already discussed in this article, the housing
rates have skyrocketed. Hence, their net wealth has grown at an unprecedented rate making
them the biggest beneficiaries of the quantitative easing policy.

What Should Have Been Done?

Quantitative easing has definitely affected the incomes and assets of almost every person. Some people
have faced negative effects whereas others have faced positive effects. It is important to understand that
in the absence of implementation of these policies, the world was looking at a major financial recession.
Given the dire circumstances at the time, it does not seem like the central banks had much choice.
Creating wealth inequality via quantitative easing is still a better choice than making everyone poor and
hence eliminating the inequality.

However, it seems like the interest rates are likely to rise now. This could trigger another panic like that of
2008. The government needs to learn from its mistakes. It needs to ensure that the money released via
quantitative easing does not make its way back to the asset market. Instead, it can be channeled to more
productive parts of the economy. For instance, instead of giving out money, the government should give
out infrastructure bonds to wealthy investors. The proceeds from these bonds should then be used to
create better infrastructure. This will give a boost to job creation and will also prevent unnecessary asset
price inflation.

To sum it up, quantitative easing has become a necessary evil. The governments are helpless in front of
global scenarios and are forced to use this policy. However, they need to be responsible enough to
understand its negative effects and reduce the same.

The Liquidity Trap

The liquidity trap is a concept which is believed by some economists whereas it is not believed by the
others. Many great economists like Keynes, Tobin and Schumpeter have made no mention of the liquidity
trap in their works. It was widely believed to be a discredited concept, one that had no application in the
real world. Yet, many critics vehemently argue that it is an important concept. Generally, theoretical
concepts don’t matter too much. However, the liquidity trap defines exactly the kind of financial situation
that the world is in now. It is for this reason that it becomes important to study the concept.

In this article, we will have a closer look at the liquidity trap in order to figure out if it is indeed
applicable to the general economic situation of our times.

Definition of Liquidity Trap

In economics, liquidity is defined as the state of having more cash. Hence, the liquidity trap refers to a
state where having too much cash circulating in the economy becomes a problem. Cash here does not
refer to actual physical cash. Instead, it refers to the aggregate money supply in the market.

For instance, when an economy is not performing as well, governments tend to lower interest rates. This
induces consumers to spend their money instead of saving it. This is the reason why each interest rate
decline increases the inflow of cash into the market. The lower the interest rates, the higher the money
supply.

However, if interest rate declines are successive, the end result is that interest rates reach close to zero.
This is the situation wherein the market is already full of cash. In such a situation people start hoarding
their cash. They neither want to invest their money nor want to spend it. Investment is not really an option
because they are afraid that the interest rates will rise and they will lose value. Spending is also not an
option because people are expecting a deflationary situation and hence are saving money for the same.

To put it in simpler terms, a liquidity trap is a situation wherein the central bank loses control of the
economy. Even if the central bank lowers the interest rate, people do not behave as per the central
bank’s expectations. At the moment, the problem is that the interest rates all over the world are very close
to zero. Hence, if there is some kind of recession now, there will be nothing that the central bank will be
able to do to control the situation.

Identifying Liquidity Traps

The number one sign of a liquidity trap is near zero interest rates. As mentioned above, very low interest
rates do not give the bank the wiggle room required to manage the monetary policy in times of crisis.

Also, when the interest rates are close to zero, the sellers of bonds want to get rid of them. On the other
hand, there are no buyers at all. This lack of liquidity in the bond market is another defining feature of the
liquidity trap.

Effects of Liquidity Trap

In the events of a liquidity trap, the government wants to somehow induce the people to spend or
invest their money. However, it has very few options in order to do so.

 Increased Interest Rates: The only option that the government has is to sharply increase
interest rates. These interest rates start providing better returns to the investors. Once people
observe that investing their money in bonds does provide a positive real rate of return, they start
buying bonds. This increases the liquidity in the bond market. Even though the prices of bonds
fall in the short term, the market once again becomes fully functional.
 Government Investments: Spending is required in order to stimulate the economy. The liquidity
trap threatens to reduce the aggregate demand and throw the economy into a recession. In order
to prevent this, the government has to start spending money. The government usually spends
money on infrastructure projects. Not only does this simulate the growth of the economy but it
also leads to an increase in job creation.
 Price Cuts: Finally, the government can choose not to interfere for some time. In this situation,
there will be a liquidity crunch for some time. However, in the long run, the prices will correct
drastically because of a fall in demand. This is when consumers will be forced to spend their
money because the real utility that they will derive from these purchases will be higher.

In retrospect, many economists believe that the Great Depression of the 1930’s was a liquidity trap. They
believe that the Federal Reserve did not take any action in order to control the recession because there
were no possible viable actions that could be taken. The devastating impact of a liquidity trap has,
therefore, become well known in economic circles. This is all the more reason to seriously study the
impact of this trap and to ensure that it can be avoided in the future.