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By Dr Tim Evans, on 29 July 11
I usually become unsettled when I read most business magazines on the basis that they are rarely about business. Instead, their articles, interviews and commentaries are all too often interwoven with all kinds of corporatist and mercantilist thinking more akin to politics than robust enterprise in its true and voluntaristic sense. But this is not Business First Magazine under the very sound and able leadership of Nick Peters. Here, for real, is a serious and genuine Business publication.
I first met Nick earlier this year and very quickly realised that he was a man of sound vision and principle. It also happens that he gets it. He understands that business is best when it is in and of the market – to the exclusion of legislative favour and crony capitalism. Indeed, a sign of the man and his venture is the fact that the current edition of Business First Magazine contains this superb interview with TCC’s Chairman, Toby Baxendale. To get an idea of just how good Business First really is click here and go to page eight.
By John Phelan, on 29 July 11
There is a story from the Cold War era about a Soviet official who travelled to London. As he was shown around he couldn’t believe how full the shops were of all sorts of produce. Amazed by this bounty, he eagerly seized his guide and asked “Who is in charge of the bread supply to London?” The baffled reply came – “No one”.
I was reminded of this story and how, from the Austrian viewpoint, economics is about coordination, at an excellent talk I heard in east London last Thursday night by Steven Baker, MP and Cobden Centre board member.
He made the point that this was one of the issues we fought the Cold War over. Unlike the communist east, the capitalist west believed that economies were better organised by the millions of individual decisions taken in a free market on a second-by-second basis than they were by planners ensconced in offices pouring over reports.
The outcome was that Mises, Hayek and others were proved right. Communism collapsed and socialism was rejected. Free markets were reaffirmed under Margaret Thatcher and Ronald Reagan and the planners were pensioned off.
Except, that is, in one vitally important area. In the Monetary Policy Committee of the Bank of England, the Federal Reserve, and the Executive Board of the European Central Bank, the planners still cling on, fixing the price of credit: the interest rate [1].
It is crucial for people to understand that what central banks with boards of price setters represent is not a free market but what Baker called “monetary socialism”. And the central planners have proved no better at setting the price of money then they ever were at setting any other price.
It was the driving down of interest rates by these planners which flooded the financial system with liquidity after the twin shocks of the bursting of the internet bubble and 9/11. It was this liquidity, hosed about by the planners, upon which the housing market floated to ever giddier heights. And it was when the planners acted to raise interest rates to counter the inevitable inflation they had caused that the bubble burst. It was not capitalism but monetary socialism which failed.
Economists of the Austrian School are highly sceptical of the possibility that this central planning of money will produce optimum results. They are cognisant of the long and dismal history of such central planning in other spheres, and their theories have been borne out by recent experience. The Austrians were right about socialism not working. And they have been right about monetary socialism not working.
[1] was “price of money”; thanks to David Friedman for the correction
By Sean Corrigan, on 29 July 11
In recent weeks, we have argued strongly against any relapse into Malthusianism or any of the other, fashionable Green neuroses which readily afflict those dealing with the more tangible examples of Man’s ongoing fight against scarcity.
Neither the Gaian prophets, fulminating about planetary exploitation, nor the vacationing engineers, misapplying the narrow rigour of their own profession to a wholly different, open-ended problem of ends, not means, are to be paid heed if we are to think at all clearly about such matters.
In propounding this viewpoint—something we might, after Matt Ridley, term Rational Optimism—we have been mocked in some Peak Oil quarters for believing the world can power itself on ‘green unicorn dust’.
Not that such committed exhaustionists ever look up from their jeremiads to pay attention to the daily drumbeat of discoveries and technical breakthroughs, dismissing these as only amounting to so many hours or days of world use, while forgetting that such bottom-up, piecemeal satisfaction of needs is how we meet all of our material requirements.
Nobody would ever argue that we will one day run out of footwear simply because the latest expansion of output announced by Jimmy Choo will only serve to satiate the fashionistas’ appetite for three-and-a-half shopping days, now would they?
Take but two recent examples of why the boundary conditions of the calculus of depletionism can never be determined accurately enough to serve.
Firstly, BHP has just declared that as a result of (a) a successful drilling programme and (b) the improved economics which go with a higher copper price, it has been able to increase its reported mineral resource estimates in the area surrounding the well-known Escondida mining complex by no less than 129%. At the same time it upped its reckoning at the Antamina mine by a still-impressive 32%.
Assuming that this can in fact be profitably extracted, this would mean that 107 million tonnes of copper are available (a metal, which you should note is also now some 80% recyclable as scrap), where only last year the total was thought to extend to 52.3 Mt. With the caveat that this is not yet definitively an ore body which it would make any economic sense to mine, this one, single announcement has the potential to meet more than six years’ global uptake of primary refined metal.
Not that the market yet cares, of course. It would prefer to bull up the disruption associated with the ongoing labour dispute at the same mine. Who cares about another 50 million tonnes to come when we can focus on the short-term loss of 10 thousand of them instead?
Secondly, take the case of BG Group’s exploration of the Santos basin off the coast of Brazil. Last year, the company estimated it was sitting on 3-4 billion barrels of oil equivalent in reserves and resources. A year on and the size of the pot has been doubled to 6-8 bln boe, adding—potentially, at least—as much and more than the entire proven reserve base of the UK, in one fell swoop.
So, even the experts—the real boots-on-the-ground experts, not the self-appointed global book-keepers pontificating from their ivied groves—were wildly out in an estimate which they were the best placed to make and which it was very much in their financial interest to bid up. How many more of these revisions would it take to restore a little balance to the debate, do you suppose?
In this regard, it was with some amusement that we read the following offering from our favourite Archimandrite of the cult of the Earth Mother, legendary investor-turned-Ecomillennialist, Jeremy Grantham:-
“With hindsight, there are a few additions and qualifications I would like to make regarding my letter on resources of last quarter. I will start with an overview of the prospects for our collective well-being: there is nothing about the resource limitation problem that we cannot resolve. We have the brain power and, especially, the inventiveness. We have some nearly infinite resources: the sun’s energy and the water in the oceans. We have some critically finite resources, but they can be rationed and stretched by sensible, far-sighted behavior (sic) to fill the gap between today, when we live far beyond a sustainable level, and, say, 200 years from now, when we may have achieved true, long-term sustainability. Such sustainability would require improved energy and agricultural technologies and, probably, a substantially reduced population. With intelligent planning, all of this could be reasonably expected. A population reduction could be arrived at by a slow and voluntary decline…”
So, apart from the usual, deplorable hint of Eugenics which is shared by so many privileged members of the global nomenklatura (who are rarely found to have limited their own procreative efforts) and the heavy reliance on that insidious shibboleth of ’sustainability’, one might almost think that Mr. Grantham, too, has been at the unicorn dust and that he might just be confessing that he and the rest of the Exponentialists have been wrong all this time!
As a correspondent of ours (whose otherwise consistent practice of solid good sense we find sadly inoperative in this particular field) responded when your author gleefully pointed out this partial renunciation, the three critical words in the text are ’with intelligent planning’, implying that this is the last thing we should expect. (Here, too, we beg to differ, because such Platonic vanities about ‘planning’ are what have visited many of history’s greater evils on the poor, Planned-Upon masses)
More to the point, the grim irony is that ‘fashionable declinists’ like Grantham—with their substitution of the ‘precautionary principle’ for the pioneering spirit; with their insistence on preferring enormities like tax-grubbing wind-mills to the development of clean, efficient shale gas; or their imposition of capital-destructive carbon taxes instead of enlarging business depreciation allowances—are themselves the biggest impediment to ‘intelligent planning’, at whatever level it is supposed to be undertaken.
In the markets themselves, we are still at something of an impasse, ranging widely in what has been for the DCI total return index (abstracting US dollar weakness) a stationary trend stretching back to the beginning of the year.
In price terms, Emerging Markets (multiplied by the USD TWI) have been essentially static since September, with the BRICS basically unchanged since October-09. The S&P itself, in these terms, is penned in, tight in the apex between two converging trend lines drawn from either extreme of the GFC and meeting right at the mid-point of that span.
For all the hype engendered by the forces of money illusion and shameless salesmanship, that is not a lot to show for three years of hard grind and countless trillions in market interventions, one might think.
As for the outlook, we have to balance several interacting parts, each of which can influence the other, sometimes being driven and sometimes doing the driving.
An increased supply of money and credit can stimulate real business activity (Austrian Business Cycle Theory) and this can obviously engender a demand for commodities. Conversely, an endogenous expansion of business can itself induce the supply of financial means (the ‘real bills’) with which to carry this forward (technology and resource booms are a key case in point).
Money can also flow into resources as an end in themselves (especially if they have been rediscovered as an ‘asset class’) and so can distort both apparent demand and the efforts to meet this, while—as we have frequently pointed out over the past 7-8 years—a hunger for resources is both directly resource-intensive (Roepke’s ‘chicken farm’ analogy) and has income spill-over effects to other areas which, in their turn, may then require more resources.
Finally, given the vicissitudes of the international monetary system (Rueff’s ‘childish game of marbles’), higher resource prices (and quintessentially, higher oil prices) can give rise, not only to pressures to economise, but to greater quantities of debt issuance, and—via FX reserve (mis)management—inflationary emissions of new money, each serving to cushion the impact upon oil’s direct consumers—possibly via the agency of government transfer payments—and to refill the pockets of those who count the oil producers as their clients.
If we accept this broad schema, it then remains for us to determine how fast and in which sense the gears are rotating. All we can say at this point is that the dominant mechanism of the past two years—monetized budget deficits and ‘quantitative easing’ programmes—has been moved to a lower setting, with the Fed seemingly on hold and the Chinese authorities making some efforts (however dubious their efficiency) at checking the runaway horses earlier unleashed to rampage through their vast fiefdom.
Any endogenous upsurge in industrial demand does not seem easy to identify, not least because the fight against the inflationary consequences of easy money have assumed a greater priority in many of the go-go nations of the New World, while the still unsterilised, toxic legacy of the credit boom is poisoning the wellsprings of growth in much of the Old. As for any New Era emerging, well, those same fiscal restraints are partly hampering the anti-technology boondoggle of wind and solar which was fondly supposed to be the medium for such a movement, in happier times.
Flows into commodities have their role to play, of course, but the evidence of the past few months is that these have become much less committed—as have flows into most speculative markets—being ready to chase the trends in either direction and so giving rise to the whipsaw behaviour with which we have been contending since the bloom started to come off the Bernanke Bubble.
In light of the foregoing, the inescapable conclusion is that the engine has wound down from its high-rev operation of the past two or so years and is now perilously close to the point at which it will either stall out, or crash the gears and begin to rotate in the opposite sense once more, the one where each element pulls the other down, not up, the slope of price against time.
The one thing we can say is that, according to the empirical precedents of the past cycle or two, commodities are already expensive with regard to that faltering pace of output and international trade, meaning that, whatever their short term experience (and a break-out higher in terms of a sickly dollar is still eminently possible on the charts), they offer less and less margin of safety, and hence, less and less value by virtue of that divergence.
Given that the Political Bureau of the CPC Central Committee agreed, last Friday, that China would stick to its ‘proactive fiscal policies in the second half of this year, with stabilizing prices as its main priority’, and that the Indians, Koreans, Brazilians, and others are not yet ready to go back on the accelerator, the longs must hope that they can make out during the brief euphoria which will be unleashed if either a US default is finally avoided, or if they witness a rerun of last year’s plunge protection approach from Chairman Bernanke at Jackson Hole.
Be that as it may, we think the motor is in need of a serious refit: that the faster it runs in the interim, the greater the chance that it drops a rod and shudders to a halt in a cloud of blue smoke.
Play a break higher by all means, but don’t get wedded to those elevated prices along the way. There is nothing which we can presently discern on the horizon which appears to justify the idea that their occurrence will be anything other than a brief, last spasm of misplaced hope crossed with frustrated short-covering.
By Sean Corrigan, on 28 July 11
So, the European elite have temporarily managed to contain the submerging market contagion which was threatening to blow apart their beloved superstate and have even managed ‘not to waste a good crisis’ by moving closer to the theoretically illicit fiscal transfer union which many feel must be the inevitable next step if the empire of Charlemagne (or of one of his equally arbitrary later emulators) is to be re-established in all its dubious glory
Of course, many questions remain unanswered, despite the remarkably convoluted attempt to lower the interest bill and to back away from the redemption cliff faced by Greece and its fellow strugglers.
Not the least of these is the legal issue of whether the announced programme will satisfy the Solons of the German Constitutional Court and, even if so, whether it will then require a lengthy and possibly fractious ratification by each of the member state parliaments before it can come into force.
Just how widespread will the private sector’s ‘voluntary’ participation in the accord turn out to be? Certainly, we can not afford to be too sanguine about the 90% acceptance rate assumed in last week’s proclamation. If enthusiasm is lacking, does this imperil the CDS trigger? Will it lead to hold-outs seeking to frustrate the bond exchange, or suing for better terms? Can the EU’s insistence this is for Greece and Greece only—a condition already partially breached in the funding rate adjustments—really be made good if, say, the Irish decide they would like to loosen the nails attaching them to the self-imposed cross of Anglo-Irish, et al?
Next, we must wonder whether those nations granted what is no more than a breathing space by this grand financial prestidigitation will still manage to summon up the will to enact the requisite degree of fiscal consolidation—complete with its demanding schedule of supposed privatisations—or whether the removal of the guillotine from the public square will encourage yet more damaging opportunism among the ruling classes who are improbably meant to incur lasting public wrath by diminishing the public trough.
The fact that, a quarter of a century on, Margaret Thatcher is still instinctively reviled by large sections of both the British labour movement and its fellow travellers among the metropolitan chattering classes should give the lie to the idea that political courage can really be expected to be its own reward.
More fundamentally, can we really suppose that the PIGS can now find a way to re-orient their human and physical capital on a sufficiently broad scale to enjoy a modicum of genuine material progress in place of their disastrous Rake’s progress and easy credit over-indulgence of recent years?
Beyond this, we must also keep a careful eye on the new powers of intervention granted to the EFSF—even if their exercise is supposed to be subject to the approval of the austere priesthood of the ECB—lest this prove to be a Pandora’s Box of budgetary indiscipline, monetary mission creep, national champion corporate welfarism, and Asian-style ‘price keeping operations’.
Until such matters are resolved, all we can safely say is that a near-term financial dislocation may well have been averted, but that it is far, far too premature to pack away the sackcloth and ashes and break out the bubbly.
With the super-troupers being extinguished, the elephants and trick ponies being led off to the grooming pens, and the roustabouts taking down the gaudy poles supporting the billowing Big Top in Brussels, lovers of political circus have begun to switch their attention instead to the no less heated arguments raging over the US debt ceiling.
This, too, has taken place in an atmosphere of increasing acrimony and to the accompaniment of some ludicrously overblown rhetoric concerning the Armageddon about to be unleashed upon the world by what the ineffable Vince Cable—giving voice to a sentiment shared widely by the soggy social democratic centre of Europe—categorised over the weekend as a ’handful of right-wing nutters in Congress’.
Come on, people! This is NOT the fiat money equivalent of the Cuban Missile Crisis, for goodness’ sake! We are not going to reduce the world to cinders on the morning of August 2nd if the imperial presidency actually has to hew to the Constitution for a change!
While there would no doubt be occasion for some interim difficulty in speculative markets if the US did not get to borrow even more next week, the Federal government need not actually default on that fateful day: one should not overlook that it does still face the option of simply not writing as many uncovered cheques as has been its all-too profligate wont.
Be aware that the world’s largest economy still luxuriates in a soaring deficit of over 12% of private sector net domestic product (the wealth-creating rump out of which such debt must be serviced and redeemed) despite the ostensible recovery being enjoyed there. This gap comprises no less than forty, potentially inflationary percentage points of a vast, $3.6 trillion level of annual expenditure which is not only bigger than the output of the entire Geman economy, but which amounts to an initiative– and responsibility-crippling 30%+ of PNDP—a proportion heretofore unprecedented in peacetime.
Post-crisis, the Obama administration currently doles out three times as much as did the hardly-parsimonious first Bush one, as recently as 1990, burning through as much in a year as its predecessors in office managed cumulatively to consign to the flames in the entire first three decades of the post-WWII experience.
To imagine that one could not make a meaningful attempt at good housekeeping within such broad confines—without having to confiscate more private means or to penalise more individual endeavour along the way—is, frankly, risible: a fact of which the erudite, considered, and entirely sane Ron Paul (a man we would back over the likes of that elder statesman-manqué, Vince Cable, in almost any field of endeavour) is just as fully cognisant as he is aware that this game of brinkmanship is one of the few methods possessed by a no longer supine legislature to bring an arrogant executive to heel.
But what, we are constantly warned, if the US loses its AAA rating? Well, first of all, if this game of chicken ends up lowering the trajectory of future indebtedness, much less actually reducing it, this would presumably enhance, rather than impair the nation’s creditworthiness. If it does so by shrinking the deadening footprint of the state and so ‘crowding out’ less of the nimble, pitter-patter of the private sector, the effect would theoretically be redoubled as the prospects for growth glowed accordingly brighter.
Even if such a benign outcome were not to be achieved, would the possession or otherwise of this three-letter talisman do anything material to alter the dynamics of the country’s debt, or to raise the likelihood of its better management of its finances? Of course not!
For all the talk of eligibility triggers and violations of investment policy guidelines, it hardly seems conceivable that American buyers will decide en masse to eschew forever the obligations of their own sovereign in favour of Canadian paper, or Austrian, or that coming from Singapore, even if we might expect some interesting trading opportunities to arise—especially in smaller markets—from any marginal shift in attractiveness as the initial adjustments were being made.
Circumstances do differ between the two, but those tempted to take the government’s alarmism to heart might console themselves with the observation that Japan has sold 10-year debt at an average nominal 1.5% since it lost its first AAA rating in 1998, as compared to 4.5% in the prior period when it was thought to be on the verge of taking over the world (for real yields, we can compare 3.1% pre-98 to 1.6% after that watershed).
Absent the expectations of a renewed policy of monetization from the Fed, US Treasury rates are therefore likely to back up far more from the simple return of a modicum of free market pricing, regardless of their attached rating, than they are from a belated recognition by the zero-credibility agencies that no amount of politically-convenient pretence to the contrary can seem to put cloth on the back of a thoroughly naked emperor.
The fewer free rides the global hegemon enjoys—either in the debt or currency markets (and the two are, naturally interlinked) – the more responsible his behaviour might become toward both us and his own oft-afflicted citizenry. This battle could just conceivably bring about exactly such a curtailment of his ‘exorbitant privilege’.
Can this be entirely a bad thing of which to dream?
Whatever the upshot, market participants should not lose sight of the fact that, far beyond the twin, transatlantic farces, a rather darker drama is beginning to play out in terms of world economic activity.
The first warning signs come from the freight industry, where US West Coast container traffic has slowed appreciably. Imports, indeed, have decelerated to an extent only exceeded—and then by the smallest of margins—a handful of times in the past 15 years, sending the growth rate plunging from August 2010’s chart-topping 26.4% to a 17-month low of 2.2%.
More broadly, while US intermodal rail traffic is still setting records, its tally now stands a bare 2.5% above the reading recorded at the same juncture in 2010—a sharp deceleration from that earlier period’s 26% YOY increase.
Matching this, across the Pacific, Shenzhen port numbers are also barely in the plus column, as of May-June, while Shanghai has dropped from 18% yoy in the whole of 2010, to a 16-month low over the quarter, touching 7.4% in June itself.
Then we have the IATA air freight numbers, recording their first global decline since the crisis, paced by a swingeing 9.8% YOY drop in the crucial Asia-Pacific region—a drop only exceeded during the worldwide export slump between Sep-08 & Mar-09.
Adding to series of cautious statements emanating from the shipping industry, several key machinery makers have also struck a less optimistic note, among them Atlas Copco, Caterpillar, Sandvik, Alstom, Terex, and Siemens. For an Austrian, signs of stress among these higher-order goods manufacturers are a clear warning of the chance of stormy weather ahead.
All of these micro-trends have again been borne out with the decline seen in various regional PMIs—notably in China and Germany—in the last month, as well as in the slowing of Taiwanese export orders and industrial production.
We have not yet tipped unequivocally into a renewed slump, but it is undeniable that the stimulus-fuelled rebound from the slump has more or less run its course and caution is the watchword.
A central tenet of Austrian Business Cycle Theory is that the first users’ advantage, conferred when an inflationary impulse is preferentially delivered within an economy, will eventually dissipate as relative prices adjust across the board. This implies that, to sustain their activity above the levels which would naturally prevail in the absence of that initial inflation, progressively larger (nominal) injections will be needed in what effectively becomes a Red Queen race to keep the productive structure extended beyond the length which voluntary saving alone would dictate.
In such circumstances, any slowdown—whether caused by an outright withdrawal of stimulus or simply a more rapid adaptation to its ongoing application—tends to a degenerative condition in which margins are first squeezed, before revenues themselves begin to decline in the previously favoured sectors and those of their immediate suppliers.
This sink-or-swim attribute of a modern, vertically-segmented economic system is one of the cardinal reasons why the fabled ’Soft Landing’ has historically proven so very hard to deliver. Given the unusual degree of structural elongation brought about by Asia’s investment-driven boom, it is all the more likely to prove to be beyond the capacity of the central planners this time around, too.
By John Phelan, on 27 July 11
July 26th saw one of the most eagerly anticipated economic events of recent years. At the London School of Economics (former employer of Friedrich von Hayek), Professor George Selgin and Dr. Jamie Whyte for the Hayekians and Professor Lord Skidelsky and Duncan Weldon for the Keynesians gathered in front of a packed lecture hall to debate Keynes vs. Hayek. Two other lecture halls were required for the overspill. The debate will be broadcast on BBC Radio Four on August 3rd.
In front of a boisterous crowd, Hayek won fairly easily. Skidelsky’s haughty style contrasted with Selgin’s bullishness and the perennial Keynesian failure to look at the origins of the bust won over nobody in an admittedly partisan crowd. But even an hour of discussion left a few things hanging.
China
One questioner asked whether the Chinese stimulus package had been so much more successful than America’s because the totalitarianism of China allowed the government to direct the spending more effectively than in the US with its dispersed government.
To my great surprise this question was largely ignored by the Hayekians and waved through by the Keynesians, Skidelsky murmuring his approval for the proposition. I was surprised this question generated so little comment because it proves one of Hayek’s key propositions, namely that economic control goes hand in hand with political and social control.
To Hayek there was no such thing as ‘the economy’, as some separate area of human activity which can be tweaked and tinkered with. The economy is, instead, the whole arena of what Hayek’s mentor called Human Action. Or as Ronald Reagan put it, “a government can’t control the economy without controlling people”
We see this with Mussolini’s declaration that “Fascism entirely agrees with Mr. Maynard Keynes” or with the fascistic Blue Eagle which represented the National Industrial Recovery Act of Roosevelt’s New Deal. The effectiveness of China’s Keynesian stimulus came at the price of Tiananmen Square.
Keynesian diagnosis
One of Skidelsky’s repeated attacks on Hayek was that while he had plenty to say about how we got into the bust he had nothing to say about how we get out of it. Selgin dealt with this very well, but there is another point: if a doctor has no idea why your foot is hurting, would you blithely accept his prescription that it needs to be sawn off?
Whereas Austrian economics is famous for its theory of business cycles, with unsustainable booms leading to busts in which bad investments are liquidated, Keynesian theory is silent about the business cycle. All we get is the concept of “animal spirits”, which simply states that at some point for some reason business people suddenly decide en masse to stop investing, and boom turns to bust. As an explanation for why an economy hits the skids, animal spirits is up there with “in the long run we are all dead” — a typical Keynesian shrug of the shoulders.
And it doesn’t even fit the current slump. The economy hit the skids, as Austrian theory always suggested it would, when the Federal Reserve raised interest rates to stifle the inflation caused by the unsustainable credit expansion of the boom period. Many investments that were viable in an environment of easy credit were sustainable no longer. Animal spirits played no part in this. If Keynes was wrong about the diagnosis, why should we place any faith in his prescription?
Mellon and liquidation
This led inevitably to the introduction of a quote attributed to Andrew Mellon, Secretary of the Treasury under President Hoover when the Wall Street Crash hit:
liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…it will purge the rottenness out of the system
There are two grounds on which to question this. First, this quote comes from Hoover’s memoirs and Hoover was the original executor of Keynesian stimulus.
Second, what actually is wrong with it? Look back at the recent boom. In Britain, the US, Ireland, Spain and elsewhere, we had rocketing house prices based on low interest rates. Lots of house building got under way to cash in, and lots of people were drawn into the construction industry.
Now, if we have too many houses as a result of the boom’s over-investment, we do not need new houses built. It follows that we also need fewer people building them. Elements of the construction industry, in other words, will be liquidated just as Mellon said.
They have to be. Consider the alternative: construction workers are laid off in large numbers and a movement begins to ‘do something’. All that can be done is either monetary or fiscal action directed to keeping these workers building houses we do not need. Anything else is Mellon’s liquidation.
Keynes famously said that unemployment could be solved
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again
His modern day disciples, it seems, think that we can build a prosperous economy around the building of houses no one will ever live in.
Larry Summers
I have to give Weldon some credit. For anyone even vaguely involved in the economic policy making of the last government to show his face in public takes real nerve. He was rewarded with a titter from the smattering of Keynesians when he quoted with approval the words of Larry Summers, who described the coalition’s belief that spending cuts are necessary for recovery as “oxymoronic”. Weldon suggested that Summers could have dispensed with the ‘oxy’.
This is, of course, the same Larry Summers who said of the recent Japanese tsunami
It may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength
Perhaps Weldon could find an adjective for this?
It is quite a bizarre argument that a man can destroy his house in year one, rebuild it in year two, and at the end of that second year pat himself on the back for increasing his GDP by the cost of his new house. But then you are through the looking glass with Keynesianism. The doctrine holds, after all, that the more you spend the richer you get. Predictably it wasn’t an argument which impressed the tough crowd at the LSE.
By John Phelan, on 26 July 11
With his history in the transfer market there is no guarantee that Carlos Tevez won’t still end up at Brazilian side Corinthians. But even if he doesn’t, some are saying that the bid itself represents a shift in power away from the European clubs, which have traditionally benefited from the players produced in Brazil, and towards Brazilian clubs themselves.
Brazil’s new found wealth is being flaunted elsewhere. Last month Bloomberg reported on a growing number of Brazilians buying property in Florida. According to the report:
“As many as half of the downtown Miami condos that have been sold to foreigners for more than $500,000 since January were purchased by Brazilians, said Craig Studnicky, president of International Sales Group LLC, an Aventura, Florida, property-marketing firm. Buyers from Brazil also accounted for about half of sales of more than $1 million in Miami Beach”.
The reason for this, according to Bloomberg, is “The Brazilian real’s 45 percent increase against the dollar from the end of 2008”
This has come about despite an increasingly difficult situation for the Brazilian central bank. Without reinstating the hard peg to the dollar which shattered amid devaluation in 1999, the Banco Central has tried to maintain an exchange rate with the dollar of about 2:1. However, to maintain this the inflationary policy of the Federal Reserve’s quantitative easing programs has had to be mirrored in Brazil. But, without the reserve currency status of the dollar to tempt a China or United Arab Emirates to stack up Brazilian currency claims, the Brazilians, like any country following the dollar, have had headline inflation.
As a result Brazil has been a noisy participant in the ‘currency wars’ triggered by US devaluation. Brazil’s finance minister Guido Mantega recently said that “struggles between countries” were “absolutely not over”.
But Brazil hasn’t just relied on words. In the face of rising inflation imported from the US via the soft currency peg, the Banco Central has moved aggressively to raise interest rates. This has pushed the real to a near 12 year high and made it possible for Brazilians to go shopping for assets abroad.
But what does this mean for the rest of us? In defending quantitative easing Ben Bernanke says “the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability”. In fact, for all the Fed’s money printing, unemployment remains stubbornly stuck at 9.2% and even the Fed’s diddled measure of ‘core’ inflation which doesn’t include food and energy prices (which have been skyrocketing) is beginning to tick up.
The inflationist policies of the Federal Reserve aren’t doing much for the US economy and they aren’t helping the average American. But Brazilians are benefitting from this shift in wealth and with the Fed preparing the ground for another round of quantitative easing Brazilians will be in the market for more assets, be they condos or centre forwards. When Miami hosts its first carnival for wealthy Brazilian expats Ben Bernanke should be the guest of honour.
By Dr Frank Shostak, on 25 July 11
By fulfilling the role of an intermediary, banks are an important factor in the process of real wealth formation. Banks facilitate the flow of real funding by introducing ‘suppliers’ of real funding to ‘demanders’. When a saver lends money, what he in fact lends to borrowers is final consumer goods he has not consumed. Credit then means that unconsumed goods are loaned by one productive individual to another, to be repaid out of future production.
For instance, a farmer Joe produced 2kg of seeds. For his own consumption he requires 1kg, and the rest he decides to lend for one year to a farmer Bob. The unconsumed 1kg of seeds that he agrees to lend is his savings. In short, the precondition of lending is that there must be savings first. This means that lending must be fully backed up by savings.
By lending 1kg of seeds to Bob, Joe agrees to give up for one year the ownership of this quantity of seeds. In return, Bob provides Joe with a written promise that after one year he will repay 1.1kg of seeds. The 0.1kg constitutes an interest.
What we have here is an exchange of 1kg of present seeds for 1.1kg of seeds in a one year’s time. Is there anything wrong with this type of transaction? Not at all, both Joe and Bob have entered into this transaction voluntarily because they both have reached the conclusion that it would serve their objectives.
The introduction of money will not alter the essence of what lending is all about. Instead of lending 1kg of seeds Joe will first (sell) exchange his 1kg of seeds for money, let us say for $100. Joe may now decide to lend his money to another farmer John for one year at the going interest rate of 10%. John the farmer in turn buys a piece of equipment, which lifts his production to 200 seeds in one year’s time. Observe that the introduction of money didn’t change the fact that real savings precede the act of lending.
Now, when credit is fully backed up by saving and in turn is employed in the production of real wealth, then everything is ok. However, when real savings do not back up credit then it means that no real savings have been exchanged in this mirage transaction. The borrower that holds the empty money, so to speak, exchanges them for goods and services. In short, what emerges is an exchange of nothing for something, or consumption of goods that is not backed up by a corresponding production. This leads to the diversion of real wealth from wealth-generating activities towards the holders of credit, which was generated out of “thin air”.
Obviously such types of credit lead to the depletion, i.e. consumption, of real savings, which undermines the production of real wealth – what we then have here is an increase in money debt and a money supply and the weakening in the real wealth generation process. (Needless to say, the weakening of the production of real wealth diminishes the borrowers’ ability to repay their debts).
Fractional reserve banking as the source of money out of “thin air”
How is it possible that lenders can generate credit out “of thin air”? As we have already seen, ordinary lenders cannot lend something that they do not have. However, things are different once we introduce the central bank and fractional reserve banking into our analysis.
The existence of the central bank and the system of fractional reserve banking permits commercial banks to generate credit which is not backed up by real funding, i.e. the production of credit out of “thin air.” For instance, a farmer Joe sells his saved 1kg of seeds for $100. He then deposits this $100 with the Bank A. Note that the $100 is fully backed up by the saved 1kg of seeds. Also, observe that Joe is exercising his demand for money by holding them in the demand deposits of the bank A. (Joe could have also exercised his demand for money by holding the money at home in a jar, or under his mattress).
Whenever a bank takes a portion of Joe’s deposited money and lends it out it sets in motion serious trouble. Let us say that bank A lends $50 to Bob by taking $50 out of Joe’s deposit. Remember that Joe still exercises his demand for $100. No additional real savings back up these $50. Once Bob uses the money he in fact engages in an exchange of nothing for something. This amounts to non-productive consumption of real wealth. What we have here is $150 that only backed by $100. (Remember, that $100 is fully backed up by 1kg of seeds – real savings).
Now, when loaned money is fully backed up by savings, on the day of the loan’s maturity it is returned to the original lender. Thus, Bob – the borrower of $100 – will pay back on the maturity date the borrowed sum plus interest. The bank in turn will pass to Joe the lender his $100 plus interest adjusted for bank fees. To put it briefly, the money makes a full circle and goes back to the original lender.
In contrast, when credit is created out of “thin air” and returned to the bank on the maturity day this amounts to a withdrawal of money from the economy, i.e a decline in the money stock. The reason for this being that there wasn’t any original saver/lender because this type of credit was created out of “thin air”.
As long as banks continue to expand credit out of “thin air” various non-productive activities continue to prosper. Once however the extensive creation of credit out of “thin air” lifts the pace of real-wealth consumption above the pace of real-wealth production the positive flow of real savings is arrested and a decline in the pool of real funding is set in motion. Consequently, the performance of various activities starts to deteriorate and banks’ bad loans start to rise. In response to this, banks curtail their lending activities and this in turn sets in motion a decline in the money stock. (Remember, the money stock declines once the loan that was generated out of “thin air” is repaid and not renewed). The fall in the money stock begins to undermine various non-productive bubble activities, i.e. an economic depression emerges.
Note that a depression is not caused by a collapse in the money stockas such, but comes in response to a shrinking pool of real funding on account of previous loose money. It is the shrinking pool of real funding that leads to the decline in the money stock. Subsequently, even if the central bank were to be successful in preventing a fall of the money stock, this cannot prevent a depression if the pool of real funding is declining.
By Prof Philipp Bagus, on 23 July 11
There are basically three scenarios for the future of the European Monetary Union as I argue in my book The Tragedy of the Euro.
First, the Stability and Growth Pact (SGP) is reformed and enforced with automatic sanctions for countries not complying with its conditions. This requires harsh austerity measures, privatizations, labor market reforms and reduction of living standards in the periphery. The case of Greece shows that this option may just not be viable considering political structures and socialist voters resisting a reduction of the state’s size. Indeed, for 2011 the Greek deficit is expected to be at 9.5% of GDP, far above of the 3% limit established by the SGP and the 7.4% target established by the European Commission.
The second scenario is a break-up of the monetary union. The periphery has no interest in exiting the Eurozone. Periphery governments are benefitting from guarantees by the core and from monetary redistribution. An exit would imply a substantial reduction of living standards in the periphery. But why are core countries not leaving the Euro? While a euro exit would be in the interest of the common population, the political elite and their financiers from the banking sector want to continue the Euro project. As we have seen in the summit on the second Greek bailout, German Chancellor Merkel not only defied the “no-bailout clause” of the Maastricht Treaty but also a resolution of the German parliament against purchasing commonly-guaranteed bonds from February 2011. This leads us to the third scenario, which we are approaching fast: a transfer union and a European superstate. The EU summit of Thursday, 21st of July 2011 marks a big step in this direction.
The Greek government will get an additional €109 bn. bailout loan until 2014. Maturities for Greek bonds from the first bailout were raised from 7.5 to 15 years (originally it was 3 years). Interest rates were reduced from 4.2 % (originally at 5.2 %) to 3.5 %. Likewise, interest rates on loans to Portugal and Ireland were reduced.
The day brought also another bailout of banks. Banks, insurance companies and other private investors can swap their old Greek government bonds against new ones with a longer maturity. Joseph Ackermann, CEO of Deutsche Bank, estimates write-downs for banks around 21%. Politicians sell the so-called “participation of private investors” in the bailout as a great success. However, it is just another bailout for the banking system, limiting losses to 21% and putting taxpayers’ money on the hook. Old bonds are swapped into new bonds that are guaranteed by the EFSF and such by European taxpayers. Without the second bailout the Greek government would have had to default. Banks would have had to take much higher losses in a restructuring. Estimates of losses range between 50-70%. After the swap, banks are effectively protected. The financial industry, the governments’ main financier, can be very happy about this covert bailout.
The most important consequence of 21st of July was the official establishment of a transfer union by granting more powers to the EFSF (the European bailout fund). In the Eurozone, there have always been transfers through monetary redistribution: The ECB accepts bonds from the periphery as collateral thereby monetizing deficits indirectly. Last year, the ECB even started to buy government bonds from the periphery outright, spreading the burden of the bailout to all users of the currency. Yet, from now on, direct purchases by the ECB may become unnecessary. The burden of the bailouts will be more concentrated. Not all currency users will pay in form of a dilution of the Euro but rather taxpayers in countries that effectively guarantee the EFSF.
The EFSF now can give credit lines to countries that are expected to have financing problems. In addition, the EFSF may purchase government bonds on the secondary market. The role of the ECB is thereby partially taken over by the EFSF.
The possibility of financing through the EFSF reduces the pressure for countries to eliminate deficits and reduce government debts. Why introduce harsh austerity measures, reform labor markets and privatize the public sector if there are loans available from the EFSF at ridiculously low interest rates? If you want to win elections, you should not reform but spend. Only through deficit spending one can maintain the artificially high living standards in the periphery. Indeed, debts are still on the rise. Deficits are huge and far from being eliminated. Most probably, Greece, Ireland, Portugal and soon Spain, Italy and even Belgium will borrow exclusively from the EFSF. To be effective, the size of the EFSF will have to be extended. The main guarantor will be Germany. Considering peripheral funding needs, a report from Bernstein calculates:
As the guarantees of the periphery including Italy are worthless, the guarantee Germany would have to provide rises to €790bn or 32% of GDP.
If France is downgraded, the German share increases to €1.385 trillion — 56% of GDP.
The transfer union implies a transfer of power to the European Commission. We get ever closer to a European superstate. Incentives to reduce deficits will be reduced both in the periphery and in the core. Germans will start to resist cuts in public spending. Why save if the savings flow to the periphery? Instead of reducing German pensions to guarantee Greek pensions, German voters will push for more public spending. To pay for welfare states and transfers, more taxes (maybe a European tax) and money production will become necessary. The centralization of power allows for harmonization of regulations and taxes. Once tax competition ends, there will be a tendency towards ever higher taxes. With the transfers, the power of Brussels will continue to rise. There seems to be only one bold, albeit costly way, to stop the process towards a EUSSR: withdrawal from the transfer union. With an exit from the Euro, Germany could bring down the whole Euro project and save Europe.
By Detlev Schlichter, on 22 July 11
The world financial system is skating on thin ice, and that ice can crack at any moment.
The instabilities of the global paper money economy are evident everywhere. In Europe, the debt crisis is picking off one euro-member after another like the protagonists of a teenage horror movie, leaving us in no doubt what the final destination for the core is going to be. Yet – bizarrely and inexplicably – German Bundesanleihen still play the role of safe haven. In the U.S. of A., years of near-zero interest rates and two rounds of unprecedented “quantitative easing” have engineered a suspicious-looking rebound in equity markets and other financial assets, yet the victory of the interventionists over market forces looks hollow. Three years into the recovery, the economy is still sick. Manipulating financial markets seems one thing, generating prosperity quite another – only on Wall Street are the two the same. But according to the central bank’s chairman, if a policy fails it means you simply have to do more of it.
Only the intellectual and institutional inertia of the bloated financial industry, overfed on a rich forty-year diet of cheap money and ever-rising asset prices, is – for now at least – preventing a widespread rush for the exit. The industry is sitting on such a massive pile of inflated paper assets that there seem to be few alternatives to further feeding gluttonous governments and their clueless politicians. Additionally, things have gone from pretty bad to mind-blowingly worse too fast for most portfolio managers to comprehend – leading many to cling to the straws of time-worn investment routines and established asset allocation patterns. Did they not all learn back in money-manger school that government bonds were “safe assets”?
Smart ‘private money’ – nimbler, less consensus-oriented and, importantly, eager to sustain real spending power for the long run rather than beat some nominal index over the short run– is already running for the exit. Just look at the gold price and the prices of certain other real assets.
The tunnel vision of macroeconomics
My prediction is that things will get much worse very rapidly, and one of the reasons why I think this is inevitable is the inability of large sections of the political and financial establishment to even grasp what is going on. Of course, the reason for this is not any lack of intelligence. These are smart people. The reason is the oppressive dominance of an economic belief system that only provides a very narrow perspective on the full effects of an expanding supply of money.
And you want to know what really scares me? That the money-printer-in-chief, the man in charge of the printing press for the world’s dominant paper currency, the chairman of the U.S. Fed, not only shares this limited view of the effects of easy money, he is so completely beholden to the mainstream macro consensus that he is entirely incapable of even comprehending that his policy could do more harm than good.
Just look at this video of last week’s congressional hearings. The exchange between Congressman Ron Paul from Texas – the libertarian, Austrian-schooled Republican who is the only politician who ‘gets it’ – and the Fed chairman has been making the rounds on the web, and provoked already a lot of commentary. But what strikes me is not so much Bernanke’s struggle with explaining the monetary function of gold but something else. Something that indeed scares the living bejeesus out of me whenever I hear a Bernanke testimony.
Before I tell you what it is, let me stress that I don’t much like the widespread demonization of the Fed chairman. I have never met him but I cannot say that he comes across as an unpleasant individual. To the contrary, he seems to be a smart and decent person. Call me naïve, but I do not think that he is part of some conspiracy or any backroom dealing, or that he is in the pockets of the big Wall Street banks. I think he was sincere when he said that he never particularly cared about the management or the shareholders of the Wall Street firms he invariably bailed out and is still generously subsidizing with super-low funding rates and periodic debt monetization. He really believes that what he is doing is helping the U.S. economy and the U.S. people.
The problem is not that he is evil or dumb – I think he is neither – the problem is much bigger. Evil and dumb people can be dealt with. The deeply-convinced do-gooders in positions of almost unchecked power, those are the ones we should worry about, those who are full of good intentions but suffer from tunnel-vision, incurably in awe of their own theories and incapable of even beginning to grasp how what they are doing could make things worse. For keeping rates artificially low and bank reserves generously expanding is a form of constant market manipulation, and it is creating momentous dislocations and vast problems with as yet incalculable consequences – even if it does not presently generate instant hyperinflation or an intolerable expansion of the wider monetary aggregates, and thus looks deceptively harmless through Mr. Bernanke’s narrow prism of national account statistics.
Mr. Bernanke suffers from a blind side – there is an area of monetary phenomena, real and powerful phenomena, that are simply outside of his vision. It is the monetary blind side that all modern macroeconomists suffer from. For them two effects of an expanding money supply are visible, and only two:
1) The growth effect. Injecting more money lowers interest rates (temporarily) thus stimulates lending and borrowing, and leads to a (temporary) growth spurt. This effect is deemed unquestionably positive.
2) The inflation effect. More money means – all else being equal – that the purchasing power of the monetary unit drops. Prices tend to rise. Is this good or bad? Well, according to Bernanke and the mainstream consensus that he belongs to, the answer is, it depends. If there is a risk of that dreadful and debilitating deflation taking hold in the U.S. economy that seems to keep the chairman awake at night, then rising inflation is a good thing. But too much of it can be a bad thing.
So the two effects of the Fed’s money printing are higher growth and higher inflation. But here is the problem. This view is too narrow. It leaves out a very important, maybe the most important and potentially most damaging effect of money printing: the distortion of relative prices and the disruption of resource allocation and capital formation.
The Fed makes things worse
As I explain in detail in my upcoming book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown, ‘elastic’ money is always destabilizing. Any expansion of the money supply (including bank reserves) must distort relative prices. Always and everywhere. Even if some fortuitous rise in money demand helps cushion the inflationary impact of expanding money and if inflation measures therefore remain contained. Even if the economy is weak and money printing is supposed to be a ‘stimulus’.
Specifically, every money injection must disrupt the market’s setting of interest rates and thus disorient the process of coordination between true savings and investment and capital formation.
Interest rates are market prices, and you interfere with them at your peril!
Continue reading at Paper Money Collapse
By B. Chandrasekaran, on 22 July 11
Mohandas Karamchand Gandhi is now in the headlines once again, this time for an alleged ‘bisexual’ affair. Provocatively-titled biographies such as ‘Gandhi: Naked Ambition’ (Jad Adam) and ‘Let’s Kill Gandhi!’ (Tushar A.Gandhi) are now fashionable, but it is the beautifully-titled ‘Great Soul: Mahatma Gandhi And His Struggle With India’ by Joseph Lelyveld that has stirred the latest controversy. The book has already been banned by in the state where M.K Gandhi was born 149 years ago. Expressing his displeasure on the ban, Lelyveld has said that “In a country (India) that calls itself a democracy, it is shameful to ban a book that no one has read, including the people who are doing the banning”. However, this article does not deal in any way with the question of censorship. Instead, it attempts to recount the almost forgotten free market ideas of M.K. Gandhi.
I was one of the participants in the Colloquium on “the Indian Liberal Tradition” organised by the Centre for Civil Society (New Delhi) on June 13-15, 2010 in Bangalore, to deliberate on the liberal, free market ideas of B. R. Ambedkar, Prof. B. R. Shenoy, C. Rajagopalachari, Minoo Masani, Mahatma Gandhi, Rabindranath Tagore, Swami Vivekananda and others. The focal question was: “Is there a unique brand of Indian liberalism?” According to the organiser,
the Indian liberal space, with its long history, old defenders and emerging advocates is as diverse and wide ranging as the liberal political spectrum. While the space includes thinkers and scholars with the conscious liberal tag, there are countless others whose writings without the tag could find resonance with the liberal ethos.
More interestingly, one of the participants, after reading a national political party’s Facebook account claiming that “the party advocates conservative social policies, self reliance, free markets” had asked “Last time, during recession, didn’t they talk about Gandhian economic policies?”. His implication was that Gandhian economic policies are incompatible with free market economics.
Is this true? This is a crucial question for the present generation of Indians. Any well-informed scholar knows that Gandhi invariably advocated limited government intervention, unfettered individual liberty and freedom, and higher education in private hands. On these aspects there is no sign of deep discussion in the Gandhian literature, nor any public discussion.
On Moral Sentiments
Gandhi’s views on economics and ethics have strong relevance at this juncture. After the recent global financial crisis, the fabric of moral sentiments has become a key talking point in academia and among policy makers all over the world. Moral sentiments matter to an economy, but the tragedy is that governments typically ignore these and focus instead on political sentiments, such as vote winning.
Writing in ‘Young India’, Gandhi said (1921),
I do not draw a sharp or any distinction between economics and ethics. Economics that hurt the moral well-being of an individual or a nation are immoral … The economics that disregard moral and sentimental considerations are like wax works that, being life-like, still lack the life of the living flesh. At every crucial moment thus new-fangled economic laws have broken down in practice. And nations or individuals who accept them as guiding maxims must perish.
This is akin to what Adam Smith emphasised in his first book, The Theory of Moral Sentiments, in which he coined the phrase ‘invisible hand’. Gandhi, as a philosopher of human action, seems to be well aware of the consequences of the moral sentiments.
Advocating individual freedom and liberty, Gandhi wrote in the ‘Harijan’ (1943 & 1942),
If individual liberty goes, then surely all is lost, for if the individual ceases to count, what is left of society? … No society can possibly be built on a denial of individual freedom. It is contrary to the very nature of man. … Every individual must have the fullest liberty to use his talents. … Individual liberty and inter-dependence are both essential for life in society.
Indeed, there is a convergence between M.K Gandhi’s views and what B.R Ambedkar had reasoned on individual and society. Ambedkar said
Unlike a drop of water which loses its identity when it joins the ocean, man does not lose his being in the society in which he lives. Man’s life is independent. He is born not for the development of the society alone, but for the development of his self.
…
the aim and object of society is the growth of the individual and the development of his personality. Society is not above the individual and if the individual has to subordinate himself to society, it is because such subordination is for his betterment and only to the extent necessary. … Man is an individual who holds himself in hand by his intelligence and his will; he exists not merely in a physical fashion. He has spiritual super-existence through knowledge and love, so that he is, in a way, a universe in himself, a microcosm, in which the great universe in its entirety can be encompassed through knowledge.
It is a paradox that not only have Gandhi’s opponents misinterpreted his argument on self-sufficiency, but so too have liberals! Gandhi wrote (1946 & 1945)
Only a Robinson Crusoe can afford to be all self-sufficient … A man cannot become self-sufficient even in respect of all the various operations from the growing of cotton to the spinning of the yarn. He has at some stage or other to take the aid of the members of his family. And if one may take help from one’s own family, why not from one’s neighbours? Or otherwise what is the significance of the great saying, ‘The world is my family’?”
Clearly this shows that Gandhi was not a believer in “self-sufficiency” in its absolute sense, as it has been often painted in the Gandhian literature.
On Violence
On the question of state intervention in public affairs, Gandhi was very much concerned about the state’s role in protecting the individual freedom and its role in promoting friendly relations with neighbours. With foreboding, he wrote (1948 & 1935)
I look upon an increase of the power of the State with the greatest fear, because although while apparently doing good by minimizing exploitation, it does the greatest harm to mankind by destroying individuality, which lies at the root of all progress.
Further, he went to say that the state
represents violence in a concentrated and organized form. The individual has a soul, but as the State is a soulless machine, it can never be weaned from violence, to which it owes its very existence … What I would personally prefer would be not a centralization of power in the hands of the State, but an extension of the sense of trusteeship; as in my opinion the violence of private ownership is less injurious than the violence of the State. However, if it is unavoidable, I would support a minimum of State-ownership
This is all too true in the contemporary India. There is no guarantee that a year will pass without organized violence in at least one Indian state. If anyone would study the violence caused by the state versus the private sector, the state violence would be found to be far greater. In 1982, speaking in public on budget analysis, the late Nani A. Palkhivala said
Millions of man-days continue to be lost as a result of strikes and lockouts, not to talk of go-slow tactics which are equally pernicious but escape punishment … if there could a tax on violence, muscle power and irresponsibility … it would give me one of the fastest growing sources of revenue.
On Population Control
Today, the government rules out “coercion completely in the efforts for population stabilization”. It is a folly which prevailed for years: that the population is a problem rather than a key resource. Interestingly, Gandhi was completely against government control of the population. He said in 1925 that
If it is contended that birth control is necessary for the nation because of over-population, I dispute the proposition. It has never been proved. In my opinion, by a proper land system, better agriculture and a supplementary industry, this country is capable of supporting twice as many people as there are in it today.
He further said, writing in the Harijan (1946), that
The bogey of increasing birth-rate is not a new thing. It has been often trotted out. Increase in population is not and ought not to be regarded as a calamity to be avoided. Its regulation or restriction by artificial methods is a calamity of the first grade, whether we know it or not.
Or take this, from 1935:
This little globe of ours is not a toy of yesterday. It has not suffered from the weight of over-population through its age of countless millions. How can it be that the truth has suddenly dawned upon some people that it is in danger of perishing of shortage of food unless the birth-rate is checked through the use of contraceptives?
To Gandhi it was clear that the State would cause great disorder whenever it tried to impose family planning and population stabilization, and that it should not interfere with the purely private life of an individual.
On Education
In this age of debate over privatization of higher education, Gandhi’s views are worth recalling. Even the Gandhian pundits have sidelined some of his radical free market ideas in this area.
Gandhi said (1937, 1938, 1947 & 1948)
I would revolutionize college education and relate it to national necessities. There would be degrees for mechanical and other engineers. They would be attached to the different industries which should pay for the training of the graduates they need. Thus the Tatas would be expected to run a college for training engineers under the supervision of the State, the mill associations would run among them a college for training graduates whom they need. Similarly for the other industries that may be named. Commerce will have its college. There remain arts, medicine and agriculture. Several private arts colleges are today self-supporting. The State would, therefore, cease to run its own. Medical colleges would be attached to certified hospitals. As they are popular among moneyed men they may be expected by voluntary contributions to support medical colleges. And agricultural colleges to be worthy of the name must be self-supporting.
Higher education should be left to private enterprise and for meeting national requirements whether in the various industries, technical arts, belles-letters or fine arts. The State Universities should be purely examining bodies, self-supporting through the fees charged for examinations. Universities will look after the whole of the field of education and will prepare and approve courses of studies in the various departments of education. … University charters should be given liberally to any body of persons of proved worth and integrity, it being always understood that the Universities will not cost the State anything except that it will bear the cost of running a Central Education Department.
I am opposed to all higher education being paid for from the general revenue … It is criminal to pay for a training which benefits neither the nation nor the individual. In my opinion there is no such thing as individual benefit which cannot be proved to be also national benefit. … Universities must be made self-supporting. The State should simply educate those whose services it would need. For all other branches of learning it should encourage private effort … In my opinion it is not for a democratic State to find money for founding universities. If the people want them they will supply the funds. Universities so founded will adorn the country which they represent.
Views like the above are not well known among members of academia, politicians, and civil society activists in India. One of the main reasons is that the government, media, and sometimes even parents have been quite dangerously misleading children through biased textbooks and skewed public opinions with meaningless political agendas, rather than teaching the actual principles that Gandhi argued for.
Moreover, people in the private sector have also completely forgotten that M.K. Gandhi was in favour of privatization as far as higher education is concerned. Even though there was a big difference of opinion between M.K. Gandhi and B.R. Ambedkar, there are instances of convergence between their arguments and ideas, which need to be remembered. Clearly, to live up to the twenty-first century, we need to revive the understanding of the founding fathers of our nation.
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