If half the world were sterile...

I came across this interesting article by David Brooks in the New York Times. It talks about a scenario where one half of the entire population of the Earth, is rendered sterile due to some hypothetical, freak Solar 'incident'. What would happen in such a situation? I tend to agree with the author that the fabric of society would disintegrate - majority of the human race lives on the premise that "I am living today, to make my tomorrow better". In a situation where entire populations of a continent does not have a tomorrow, there will not be any shards of moral fabric left in them, to help them distinguish between right and wrong.

I found this particular excerpt very powerful -

Instead there would be brutal division between those with the power to possess the future and those without. If millions of immigrants were brought over, they would populate the buildings but not perpetuate the culture. They wouldn’t be like current immigrants because they wouldn’t be joining a common project, but displacing it. There would be no sense of peoplehood, none of the untaught affections of those who are part of an organic social unit that shares the same destiny.

.....

But, of course, that’s the beauty of this odd question. There are no sterilizing sunspots. Instead, we are blessed with the disciplining power of our posterity. We rely on this strong, invisible and unacknowledged force — these millions of unborn people we will never meet but who give us the gift of our way of life.

It is in this context that we should view crackpot schemes which are usually proposed by crazy, dictator wannabes. It has been said rightly that "Power corrupts; And absolute power corrupts, absolutely". Those who are power hungry, even for the sake of the 'common good' (the main raison d'etre of most governments around the world) are easily corrupted by this very same 'common good'.

Distrust those who claim to offer these global panacea. There is a rot of corruption behind them.

Hat Tip: Marginal Revolution - where the discussion first started!

"Ceteris Paribus & in Hindsight, we were right!"

Mint has an article today about an American journalist's perspective on how Indian banks avoided the global economic crisis.

The basic premise of the article is the author's 'mea culpa' reaction which Americans, the US Feds and specifically Alan Greenspan should have. The 'No regulation in the banking sector stand' which the above mentioned "culprits" had maintained, in comparison to the "prudent and timely controls" by the State (read RBI's ex-governor YV Reddy) in India, is the main reason why Indian banks are safe, while American and Eurpoean ones aren't.

The author interviews India's top bankers who are partayed as being very 'perplexed' about how the Americans could have been so 'greedy'. They compete with one another in having a 'our garbage don't stink' smugness when they gesticulate about how Indian banks are more regulated and hence - 'safe from greed'. They all seem to accept that had they been shown the carrot of deregulation, they would most probably have gone ahead and 'sinned' just like the American banks. They all seem to agree, that while they opposed RBI's stringent measures at the time they were being introduced, in hindsight they thank RBI that they did not have the 'temptation to sin'. One of them even goes on to say that the RBI governor saved them!

There you have it folks - India's top bankers agree that they are children who need to be 'shown the right way' at every step, lest they should fall prey to the evil, greedy temptations that are by the wayside!

I find this attitude revolting - but who is to blame for our apparent lack of morals and self regulation in the absence of a grand regulator? Well, the answer is simple - the regulator.

While the article gives due credit to YV Reddy's foresight of 'applying brakes too early than too late', I find the complete lack of comparing the two situations in the right context, apalling! One needs to compare oranges with oranges, after all.

The crux of the problem in the US economy is the government sponsored push towards increased home ownership. This push by the US state to over-promote homeownership has been the 'prodigal push to the stack of dominoes' which eventually lead to Fannie and Freddie becoming over aggresive mortgage lenders, to the over exposure to subprime borrowers, development of CDOs and all those other weapons of financial mass destruction. The important fact one needs to observe here is that the crux of the issue starts with government interferring in the working of the market. By artificially trying to boost homeownership, the government essentially lets loose excessive corporate risk taking - this is essentially what happened.

Robert Shiller in the book "The Subprime Solution" analyses this very problem and rightly points out that -

"Overly aggressive mortgage lenders, compliant appraisers, and complacent borrowers proliferated to feed on the housing boom. Mortgage originators, who planned to sell off the mortgage to securitizers, stopped worrying about the repayment risk. They typically made only perfunctory efforts to assess borrower's ability to repay their loans - often failing to verify borrower's income with the Internal Revenue Service, even if they possessed signed authorization forms permitting them to do so."

The reader, here would kindly note that a regulatory enviroment existed. The borrowers were essentially required to authorize the lender rights - to verify the borrower's ability to repay the loan. But in an environment where checking if a borrower can repay, would have hindered the mortage lender's chances of 'closing a deal', a lot was let slip between cup and lip. Afterall, there was the Big Brother State standing behind mortgage lenders like Fannie and Freddie waiting to write-off bad assets, you see.

Does my arguement here then mean that in India there is no government sponsored boost for home ownership? The answer is, partly yes. As one CEO-designate of one of the largest banks in India tells the author -

"Indian banks are not levered like American banks. Capital ratios are 12 and 13%, instead of 7 or 8%. All those exotic structures like CDO and securtization are a very tiny part of our banking system. So a lot of the temptations didn't exist"

Luckily, it seems that the Indian State has not got behind the 'increasing home ownership' bandwagon. While HDFC has been a private player (majority stake) in the Indian mortgage market it has not come under pressure from the government to boost home ownership and therefore no apparent need to take excessive risks by creating money out of thin air using CDOs and other weapons of mass financial destruction.

The housing real estate market in India has to a large extent grown due to growth in Indian economy, not due to subsidies given by the government. Therefore it has not been a 'government generated boom'. As Murray Rothbard elucidates - the 'bust' in the business cycle is usually causally linked to the earlier government generated 'boom'. The market economy is self correcting and will quickly eliminate the earlier government generated errors in investment, unless the process of adjustment is interfered with by government policies. (Source)

Also, one needs to evaluate the relative sizes and trend of the two economies being compared. I am currently involved in an assignment which is trying to study how Indian consumers are responding to the global recession - and the main problem I face, is ascertaining whether Indian consumers are in fact, facing a pinch like their western counterparts. The growth in the Indian economy and the new affluence which many Indians have witnessed as a result, is making the Indian consumer somewhat of a contrarian.

Considering many such differernt nuances about the nature of the Indian and American economies, I think it would incorrect to heap all the praise on the strict regulatory environment of the Indian banking regulators as the main reason why Indian banks are safe vis-a-vis American banks. That would be assuming that Ceteris Paribus all other conditions are the same between the two economies. Unfortunately, with the case of central macro economic planning, the only way to prove something would be based on what has, by luck, turned out to be a better strategy, in hindsight.

God forbid, if the same Indian bankers were asked by the government to start lending money to people wanting to increase home ownership, the same incentives which drove the 'greedy' American banker might tempt our bankers too. Would not happen in India you say? Read this.

"The government, on its part, also infused Rs 4,000 crore into the housing sector through National Housing Bank (one of the reasons for LIC Housing Finance cutting its rates) and forced PSU banks to slash home loan rates for new loans of up to Rs 20 lakh.

The steps taken by the government and the RBI were also aimed at reviving the housing sector which is struggling because of the slowing economy"

So it begins...

Three articles that are worth reading.

Here are three articles I find very interesting.

1. 'Macroeconomics is Complete Bunkum' - by Bill Frezza: For a free market supporter and a strong follower of the Austrian School of Economics like me, this article rings as being very true. As the author mentions, it is only Hayek, Rothbard and other Austrian School economists like Menger who advocated the futility of the use macroeconomic statistics and its direct result - central planning. I say down with this macroeconomic, central planning nonsense! Viva Liberty!

MACRO-ECONOMIST: Voodoo Indeed!

(Hat Tip to Mr. Sadowski in the RCM comments)

2. 'Our Friends in Bombay' - by Christopher Hitchens: Staying true to my earlier call that people around the world need to be continually sensitized about the regular nature of terrorist attacks in India - the most by any standard, outside of a war zone - I find this article as a superb piece of straight talk by Mr. Hitchens.

3. 'Eye Spy' - by Priya Ganapati: Finally! Here is something I have always hoped would happen. A camera in the eye! As a photography enthusiast, one of my regular complaints is the fact that in the presence of a camera, people being photographed, stop being 'themselves' and pose. While I accept that it is a mark of a great photographer who can prevent his subject from doing this, I have hoped many times that the camera become invisible. Like an extension to ones' eye. Well, a camera in one's eye socket is the closest to this dream as can be!

Ten suggestions to get out of this rut

How to prevent this incident in Mumbai over the past two days from being forgotten in a couple of days time; when for instance, some starlet wears a blouse which displays her cleavage. Here are my suggestions,

1. Online Activism: Many journalists are net savvy and have large readership amongst net users. There should be blogs, twitter pages, Facebook communites which keeps the readers updated and provide opportunity to contribute to change
2. Media Persistence: I sincerely believe that people do not forget such things, unless a more atracting carrot is dangled in front of them. There should be a regular section on every primetime news production to update, everyday on the developments on the investigation of the case
3. Seek Foreign Interest: I saw a reporter on TV this morning saying that this will have a significant impact on the international opinion because foreigners have been targeted. Call me opportunist and biased, but we Indians have an affection when we are discussed by westerners and we should use tis opportunity to get the international community to see that there is no other place in the world, where there is a terrorist attack every week, and there is hardly a hue and cry. Apart from condolence messages and overtures about how two nations are united in their efforts to fight terror, nothing ever happens. Atleast the public does not know about it. It is time we know, because believe me when I say this, its not the government which is under trouble, its the common man.
   
4. Canvas to Think Tanks: Around the world and in India, the politician always has his political party and the idealogical party. The change in attitude needs to come from the idealogues. The idealogical party is the 'school' for politicos. These breed the new generation and they need to come sensitized to these issues. Both in India and abroad
5. Remove Economic Barriers to Trade: Terrorism is a symptom of the terrorist weighing his and his extended communities, opportunity cost. Humans are inherently self loving people. If we have an opportunity to positively influence our own lives through economic activity and trade we will choose it. It is only because of restrictive trade practices that some people don't see a profit motive and hence resort to other things. All the notions of freedom fighting is not relevant if it does not pertain to individual liberty. One man's freedom fight may be another's terrorism, but in fact it is each man's fight for individual liberty that matters in the long run
6. Be Apathetic to certian things: When the controversy over Da Vinci Code's blow to Christianity was being discussed, the author Dan Brown made a great observation. It was only since the publication of his book that religious groups started recognizing that their beliefs were under threat. He said that it was not his book that will kill religion, but apathy towards it. We spend time being apathetic towards the terrorists until they cause a commotion. We should be apathetic to irrationality and kill it, not apathetic towards the terror attacks.
7. Educate the Children: About the principles of Liberty. Every child should know that he can do anything he wants to; as long as he does not cause harm to another. "Your Right to Swing Ends Where My Nose Begins"
8. Educate the Children: About responsibility. Every man is the cause of all that he experiences. Most people have issues with others, with groups, with idealogies. But in the end it is how one individually responds and reacts to things that makes the difference. Teach them to adapt a constructive approach.
9. Educate the Children: That government is an abstraction for delegating responsibility of actions which individuals cannot influence. And it has been grossly overused. Each person can individually decide what is good for him in the market, about trade and commerce. The government should not have this responsibility, nor can it have a positive influence in the true sense. Governments should restrict themselves to their prime function - protecting its citizens from physical harm by others and protecting property rights. My actions cannot influence (in a big way, individually) when it comes to preventing terrorists from comadeering police vans and shooting at me. This I appoint a government to help me against. I can however decide how much money I need to save and how much I consume and how I price the intellectual capabilities I have, in free trade. I know what perception of value is, in an exchange.
10. Have Active Minds: We are told from the days we are born that we should have an open mind towards everything. Objectivist thought neatly points out that an open mind to everything is an open mind to even a bad idealogy - say for instance, racism. Have an active mind. It is only man's intellect which distinguishes him from the other animate creatures and he has to make use of this mind actively and 'Reason' it out.

Viva Liberty!

"Government Spending to Save Businesses"

Owing to the financial meltdown many businesses are affected. Due to the fall in sales figures, many business are cutting down spending. Some are in such a bad state that they are going with a begging bowl to their governments for 'bailout' money. Automobile companies, banks, airlines - most industries have been hit badly and are pandering for major bailouts by the government.

In such a time of crisis, fearing a sharp decline in their sales and revenue streams, and fearing that they may be left out of the 'bailout money' handouts, the Mistresses and Extra-Marital Lovers Union (MEMLU) has approached the government asking for a bailout. Armed with a study by Prince and Assoc, the general secretary of MEMLU demanded that the bailout is necessary to keep the industry afloat.

Cost cutting by their consumers has been quoted as the major reason behind the industries woes. According to the survey,

"More than 80% of multimillionaires who had extra-marital lovers planned to cut back on their gifts and allowances. Still, only 12% of the multimillionaire cheaters said they plan to give up on their lovers altogether for financial reasons "

Experts from the government on the subject, however rejected MEMLU's demand citing improper estimates in the survey. "The survey has all its calculations wrong", said one government official, "We at the government are in touch with the consumers and the fall in demand is untrue; in fact my colleagues and I are confident that we can stimulate this market ourselves".

In response to a question about how the government is going to boost the souring demand in the business he said, "Government spending. Our government firmly beleives in Keynesian theories of spending by the state during a downturn and it is no different in this case." He also added that goverment officials will "personally ensure and step-in to help the industry not see the bad times".

Hat Tip to Greg Mankiw

The Valedictorian Administration

As Obama assembles his cabinet and his administration team an interesting observation has come to light. The new administration is going to be one which has a large number of very highly educated members. David Brooks, an op-ed columnist from the New York Times writes,

"Jan. 20, 2009, will be a historic day. Barack Obama (Columbia, Harvard Law) will take the oath of office as his wife, Michelle (Princeton, Harvard Law), looks on proudly. Nearby, his foreign policy advisers will stand beaming, including perhaps Hillary Clinton (Wellesley, Yale Law), Jim Steinberg (Harvard, Yale Law) and Susan Rice (Stanford, Oxford D. Phil.).

The domestic policy team will be there, too, including Jason Furman (Harvard, Harvard Ph.D.), Austan Goolsbee (Yale, M.I.T. Ph.D.), Blair Levin (Yale, Yale Law), Peter Orszag (Princeton, London School of Economics Ph.D.) and, of course, the White House Counsel Greg Craig (Harvard, Yale Law)."

For people like me who wanted Obama to lose the election, because of his left leaning, 'Socialistic' policies, this news of the centrist (atleast!) intelligentsia being at the helm of the administration is appealing. But for the sake of it, I can't resist poking fun at the new administration which looks like a reunion or alumni meet of the very best from the top Ivy League colleges in the World. In fact the same columnist also has this to say.

"If a foreign enemy attacks the United States during the Harvard-Yale game any time over the next four years, we’re screwed"

I should give more credit though to these 'Achieveatrons', after all, closer to home here in India we have some very well qualified people leading us - Dr. Manmohan Singh (Cambridge, Oxford. PH.d) and P. Chidambaram (University of Madras, Harvard MBA) - and we are not doing so bad! Right?

But, one more thing that comes to my mind is this - did you notice the number of lawyers who are there in the administration? Including the president-elect and the first lady, the count is 5 out of 9 members listed above. The actual numbers may be more. This reminds of this famous scene in the movie "The Devil's Advocate" with Al Pacino, the Devil Incarnate rants that he chose the profession of a lawyer becuase "The law puts us into everything." He goes on to say that there are more lawyers in law school than practising lawyers in the US and that "We are coming out. Guns blazing!"

Hmmm. I wonder if this is the actual second coming of you know who!

The Messiah or... ahem...

On a serious note, it is heartening to note that president elect is not veering so much to the left as many had feared/hoped he would. But still, there are some shortfalls in his selection of candidates. According to Mark Cuban, there is a lack of entreprenuers advicing Obama on his team. He writes,

"There are a lot of great minds on the list.

“Robert Rubin, Larry Summers, Laura Tyson, who served as Clinton’s top economic adviser; former Fed Vice Chairman Roger Ferguson; Time Warner Inc. Chairman Richard Parsons; former Securities and Exchange Commission chairman William Donaldson and Xerox Corp. Chief Executive Officer Anne Mulcahy.

Google Inc. CEO Eric Schmidt, Michigan Governor Jennifer Granholm and Roel Campos, an ex-SEC commissioner, and Warren Buffett are also on the advisory board.”

Notice anything missing ?

Not a single entrepreneur. Yes Warren Buffett started a business, but he will be the first to tell you that he “doesn’t do start ups”. Which means there isn’t a single person advising PE Obama that we know of that knows that its like to start and run a business in this or any economic climate. That’s a huge problem."

This is absolutely true. It is only thruough entreprenuerial vigor that one can see this battered economy regain its past glory and such calculated risk takers need to be fairly represented in the administration.

But then again, will entreprenuers want to get into politics and waste their time? They might be more interested in taking the 'worthwhile risks' in the Market rather than in the political arena!

Up in smoke!

India's beedi makers are in trouble because of the smoking ban imposed by the Government. Mint reports that beedi makers have forecasted a job loss of 1 million in the industry because of the ban on smoking. The situation they find themselves in is funny.

“Things are looking quite bad. At one point, we even wanted to close down [production facilites] but that is impossible on account of the tough laws pertaining to closure. This (smoking) ban has made life quite difficult,” said [Ramesh] Patel

Thanks to the smoke and mirrors law which prevents smoking in 'public' places, the beedi industry is experiencing a fall in sales. But wait, thanks to the communists whom they pandered to before the smoking ban to help them 'compete' against the big tobacco companies, they are now not even able to cut their losses and bail out! The 'tough' laws preventing industries from retrenching its workers when experiencing the 'downturn' is a pet project of the CITU [Centre of Indian Trade Unions].

What makes their situation hilarious is that even their erstwhile supporters seem to have also ditched them. Mint reports,

"Pandhe, also the president of Centre of Indian Trade Unions (Citu), however, said the trade union will, however, not lend its support to beedimanufacturers. “People will smoke indoors if they want to and this will not impact their sales,” he noted "

There you have it. The very idealogical banner of protectionism has now come back and bit the beedi industry's behind!

I am not a smoker, but I think the ban on smoking is nonsense, simply because there is no way it can be implemented in a country such as ours. I daily see innumerable number of people 'flouting' the rule on the streets.

But, if you think this arguement is contradictory to the 'falling sales' arguement of the beedi manufacturers, think again. The market unfortunately runs on cues from the government. While the ban may not be effective because of it cannot be easily implemented, it has an impact on the industry value chain. The industry works because on various interconnected cogs. Farmers grow the tobacco, the beedi maker rolls the beedi, the distributor channels it and the retailer sells it. Due to the ban, while the consumer may not stop purchasing (the government argues that smokers will smoke at home and hence sales will not fall, although this may not be entirely true) the cost of making a beedi will rise. The farmer may not want to harvest tobacco fearing a fall in demand, the distributor may not channel it fearing fall in demand and the retailer may not stock it fearing that people may not buy it. This will eventually cause a fall in sales. Hence an entire industry value chain will fail.

I think the ban on smoking should be repealed. Instead a Pigouvian solution should be sought. It will make the industry either abandon a product which causes negative externalities, but still make it available for those who can 'afford' the negatives and pay for offsetting them. A market solution to the negative externality of smoking can be the only true solution.

Open Source Code

I came across this wonderful statement on the ideology behind the Open Source revolution from an interview, in Mint, with Bob Young - one of the founders of Red Hat:

"Only in the software industry, the vendor had control over the way the consumers use the product. Imagine you buy a car, and the dealer who sold you the car had the key to the hood of the car. If your engine starts making a noise, he can say that it is not a bug, but a feature."

Brilliant! Read the whole article here. I particularly like the way he says that he is not a free software exponent, but a free market exponent!

What is bound to happen...

This is a simple explanation of the financial crisis and the current response towards it.

Illustration 1 shows the global financial system as it existed until very recently. The lenders deposited with retail banks which gave them back interest on the capital. The retail banks invested in the stock markets where the investment banks underwrote stock equity for the various businesses and also made loans out of the capital invested with it. The central banks and government officials had a significant say in the whole system; they dictated the interest rates (kept them low => Caused a bubble) but they also followed a misguided monetary policy based on fiat currency and fractional reserve banking. Life went on; but behind the balance sheets, the investment banks were betting on toxic assets, and the retail banks were making loans to individuals and organizations with bad credit histories.

Illustration 2 shows what has been happening in the global financial markets since early September 2008. The investment banks and retail banks are going bankrupt because of toxic assets - that they have been bundling and selling - on the stock market, not giving them any returns. The stock market has crashed. Lenders are spooked and are diminishing in confidence and are unwilling to lend money to banks hence causing a credit crunch, which is impeding the way retail banks function. Now, the government official's and central bank's role in the economy is large; they are continuing the misguided monetary policy and still 'banking' on fractional reserve banking and fiat currency systems. They are now buying assets in toxic and underperforming businessess and financial institutions, while still knowing that they are worthless assets. This is having no impact on the confidence of the retail investor who still does not trust his money with the banks, further worsening the credit crunch. His assets are also wiped out in the stock market fall denying him the ability to even lend back to the banks if they regain his confidence.

Illustration 3 shows what is expected if the increased role of the Central bank continues the way it is. The nation will become a toxic asset and this would have been caused by none other than the most toxic asset of them all, which is called 'Government Intervention'

Don't believe my prediction as depicted in illustration 3? Why not atleast listen to the scholar who knows more than any one alive about monetary history - the 92 year old Anna Schwartz! Here is an article where she has made the simple arguement,

"Everything works much better when wrong decisions are punished and good decisions make you rich."

Capitalism - Still an Unknown Ideal

While I was chatting with a friend on the phone this past weekend I was asked a question. "Has Capitalism failed? Now that everyone is questioning the lack of regulation which has led to the near collapse of the global economies, isn't it time to rethink the primacy of Capitalism?" Both of us - let me mention upfront, are laymen; salaried employees who are not experts at economics. But ,we have studied economics and its many theories as part of our MBA course. Both of us are still students of economics and are learning to appreciate the many nuances which each theory in economics poses to the interested mind. But when it comes to the debate between which solution - Free Market Capitalism, Keynesian Economics or Communism should be at the helm of the commanding heights of the economy, one of us - me, is not open for debate. The solution has to come from Laissez Faire capitalism. I may have doubts about how a free market solution can be achieved to a particular problem, even profess the need for certain degree of policy regulation, but it is irreconcilable to me that such a solution can be better than one which a free market can provide - in the long run.

The problem, I think, which leads people to end up believing that Free Market Capitalism is bound to fail, or has failed is the undue importance to human greed which people attribute to an unregulated economy. It is common to hear people say of the collapse of Lehman Brothers that "Isn't it obvious? When you let people indulge their greed unabatedly, there is bound to be such failures. We should restrict their blatant freedom!". But this is a knee jerk reaction. One which casts a doubt over a system based on the symptoms of the affliction ailing it, and not the cause. This is beautifully described in an article by Quinglian He, a chinese economist. When asked "Does The Free Markets Corrode Moral Character" she replies "No" and rightly points out -

"Ofcourse, the market economy is not a perfect system. But the market's flaws stem from the actions and motivations of its human participations rather from its design"

Free markets allow us to be what we are. It gives all of us a playing field where we compete based on merit and the rewards are directly proportional to the level of risk we are willing to take based on the merit of our judgements and capability. Free markets nurture the individual's rights and allow him to pursue his goals. It is also a test to his character and as Tyler Cowen points out,

"By placing more wealth and resources at our disposal, [free market] tends to boost and accentuate whatever character tendencies we already possess."

Ayn Rand wrote in her book "Capitalism: The Unknown Ideal" about the form, nature and purpose of government as being a means to protect man's right - protecting him from physical violence. It is from the person who is bound to utilize the unregulated free market for personal corruption and greed, that the government needs to protect others from. Not regulate the system itself. Any other interference by the government in the functioning of the market is detrimental. But most people find this line of reasoning a hard pill to swallow. Today when governments around the globe are bending backwards to come up with plans to 'bail out' underperforming financial institutions, it seems a far cry for anyone to keep believing in the merits of 'unabated capitalism' and the extent of greed of people who are not regulated.

But, this is again a case of assigning blame to the symptom and not the cause. It is a mistake to point blame at the capitalist ideaology for the current financial industry meltdown, because it is not under a purely capitalist system that these financial institutions functioned. Observe the conditions of pseudo-capitalism which has been at the commanding heights of every major economy in the world today. There is always an ever present creditor of final resort which each of these countries have - a central bank. As rightly pointed out by this article,

"Additionally, the only reason why the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were able to guarantee nearly $5 trillion in home loands with merely $100 billion in net equity is that both their management and other market operators knew that the government would step in if things took a turn for the worse. Acting as lenders of last resort, the Federal Deposit Insuarance Corporation (FDIC), the treasury department, and the Federal Reserve Bank fueled the crisis by encouraging a decade of careless lending"

A classic case of a Moral Hazard where the proper functioning of a free market does not happen because the players are tempted to risk more than what their judgements and analysis lead them to believe, because a pseudo net is ever apparent to cushion their fall. Free markets punish those who make unwise decisions and reward only those who take calculated risks. Free market success stories are those which exhibit fundamental growth and true value creation as against a 'sentiment' based growth.

There are many opinions about the bailout plans which are unfolding around the world - most, even pro-libertarian ones are saying that maybe a bailout was inevitable. But interventionist solutions are unfortunately never better than what a free market can come up with - in the long run. It is almost uncanny to see how the 'bailouts' have started popping up across the world after the US Treasury department came up with the $700 billion plan. It is seen as the repercussion of the failure of the 'capitalist bastion' of United States of America and leads many an undecided mind to disbelieve the essential efficiency of a free market.

To such doubters, I can only say - please observe where you cast the shadows of your doubts. The world may not be facing this problem in the first place had the true ideals of Free Markets been adhered to. The question of greed and favouritism does not hold too much merit in a free market economy because, like Milton Friedman said,

"In a capitalist society, it costs money to discriminate, and it is very difficult given the impersonal nature of market transactions"

Viva Liberty!

Co-opetition, collusion and free markets

Co-opetition is when traditional competitors in a market form a pact and offer a single product, service or an experience to the consumers in order to avoid splitting the market shares. It is optimal when the market is saturated and further fragmentation is not beneficial to the players involved.

Can co-opetition be a good solution all the times?

Consider the case of the flower vendors outside Dadar railway station in Mumbai. The small lane where the sell their flowers is a key artery which all the pedestrians use to get to the railway station from workplaces in the Dadar area. Come a festival season, this street is so crowded that getting to the station for commuters is nearly impossible! Now, assume that people who regularly use this street all decide to work out a deal with the flower vendors.

Assume that deal is simple - the flower sellers will sit only on one side of the road thereby allowing the commuters to freely use the other side of the road. In return, the flower sellers who are displaced could be incentivized monetarily or sell their daily quota to other flower sellers who sit on the side of the road where they are not displaced at prices slightly higher than what they would sell to consumers. All these transactions are facilitated by a small association formed with participation from the flower sellers and commuters. There is no involvement from the law enforcement agencies or the government.

Unfortunately, although I am a firm believer of free markets and voluntary regulations (like the one mentioned above), the following concerns pop into my head immediately:

• The above system will work when the monetary incentive which the displaced flower sellers get is more than what they can make in the free market. It won't be business sense to be party to such a scheme if the flower seller ends up making a loss. Hence, the value of the incentive would essentially need to be above the profit of the most profitable flower seller. A threshold price which will need to be borne by the commuters.
• How would the consumers distribute the cost of bearing the incentive given? As the commuters are not a homogeneous community and there would be many who would not be willing to partake any financial cost and not mind the madness.
• Where does co-opetition end and collusion begin? The displaced and not-displaced flower sellers can soon start forming cartels and look to make profits in the arbitrage thereby offsetting the commuter's costs.

And the problems I can forsee are many more. Some trivial and some profound. What about enforcing the framework of the law on those who default? It is when I see such situations where the market is so dense and players innumerable that I feel that regulation from the government is the only feasible way out. One overarching rule which all people have to abide by and enforced by the government. Although I hate myself for admitting this, I doubt free market mechanics to be able to handle such a situation when the market players are compelled to make a profit by any means possible, so that one can feed oneself the next day.

One mega solution would be to privatize the entire suburban railway system in Mumbai. This would force the private company to make the surroundings, entries and exits to the station commuter friendly to keep up business. This would involve costs, which eventually would have to be borne by the commuter, atleast initially - and given the fabric of current Indian society, such a plan would face severe opposition. So we are stuck in between a rock and a hard place. Bold plans like privatizing the suburban railway system in Mumbai would never get off the ground because of the opposition, and even small bottom up approaches like voluntary self imposed regulations by the people who are involved in the matter is also doomed to fail because of the immense number of variables. One would need to impose a very strict 'Police Raj' to see that all these variables are harnessed - which is defeating the very premise that it is a voluntary.

What really bugs me is, how then can a society like that of India be, even gradually moved towards a free market economy from its current socialistic bent of mind. Top down, mega projects would fail because they would never get off the ground and would have to be championed, ironically by the government itself, and bottom-up approaches which would act as shining examples of how efficiently a voluntary free market regulation can work, showcasing it so that it can be adopted in other situations, also are doomed to fail due to the sheer number of hurdles it needs to overcome!

Chalta Hai...

I recently finished reading Khushwant Singh's "Train to Pakistan". I had heard about it, read the reviews, read the sunday supplement commentaries about it and seen the trailer of the movie - but never read the book itself. The thing that struck me most about the story is the fact that it is poignant even today, 60 years after the brutal partition of the Indian Subcontinent. Khushwant Singh's prose is easy to read and almost like a screenplay unfolds to the reader and comes alive. The book was also accompanied by photographs of Margaret Bourke White, the renowned Life photojournalist who covered the horrors of the great partition. The horrifying photographs of vultures feeding on the carrion of human flesh and other such, helped bring the context of the prose in morbid detail.

The characters of the book are not all perfect and there are no true protagonists or antagonists. As the prose makes very clear, "The fact is both sides (Hindus & Muslims) killed. Both shot and stabbed and speared and clubbed. Both raped", almost every character in the book has some or other shade of grey. As I read through the book and was introduced to feelings of the various characters, another thing struck me as being very true. The character of Hukum Chand, the local magistrate and most influential person in the story is according to me, representative of our collective nature - of the people of the Indian Subcontinent - the fact that we do not have high standards for ourselves.

Hukum Chand's character is one of a lackadaisical, unkempt person who does not have very high standards for himself. He is corrupt and given the circumstance and the power that he wields, guilty of not doing anything constructive. He is also stuck in a moral conflict with himself - he recognizes his ineptitude and the bad that it is leading to, but is unable to compel himself to do anything better. He ends up rationalizing that "life is like that" and one has to go on with it. This is probably the most damaging kind of rationalizing a person can do and the mojority of the populace of the subcontinent is guilty of doing this throughout our lives. We have the "Chalta Hai" attitude - which is the anchor tied against our legs.

Back in college a professor asked us - a batch of soon to graduate MBA students, a question - "What is holding India back?". After some debate about population and restrictive government policy and other such like, the professor answered his own question. He showed us students the need to be fiercely demanding in improving the quality of one's life, a spirit which he had found in people struggling to survive in post-war Cambodia - and in juxtaposition, the lack of the same spirit in the Indian psyche. Most of us were moved by this and spent sometime debating and discussing this topic. But soon the hullabaloo of the topic waned and we were all consumed in the pursuit of academic requirements. Most of us now have comfortable jobs and are settled in the pursuit of monetary rewards and the topic is all but lost as one good presentation during the MBA course.

As I read the book, I have realized that it is the nature of Hukum Chand and truly that of the majority of our populace is the main cause of our being backward and toothless. And toothless we are. Consider the issue of our national security. A few colleagues and friends of mine were recently having a conversation about the spate of bomb blasts which has hit our metro's in the last couple of months - Jaipur, Bangalore, Ahmedabad, Delhi. Soon we realized that there is probably no other part of the World today, apart from Iraq where there is a full scale war, that there are bomb blasts every other day and the response or the action to curb it is not even registering a blip. We as a nation have come to accept this sorry state of affairs as just another incident and "Chalta Hai" attitude is manifest.

I live in Mumbai and commute everyday to office on the local suburban trains. The passanger carrying capacity these trains according to estimates is around 1700 people. A recent survey estimated that more 5100 people occupy the space meant for 1700 people during rush hour. The conditions of the trains are bad - one is barely able to find a foothold into the train at most times and many people hang on precariously at the edge and on the roofs, but very few people are committed to do anything about it. One soon realizes that there is no other viable alternative for getting from one place to another, without burning a hole in one's pocket or loosing a lot of time. The traffic is so bad that one ends up rationalizing that travelling for a short time with one's face directly in the next person's armpit on the local suburban train is better. According to statistics around three people die everyday in cases related to the Mumbai suburban train system and the effort to solve this horrendous situation is hardly visible. The number of people falling off trains and getting seriously hurt are innumerable - I happened to witness one such incident earlier today morning - but we hardly are bothered to improve the situation. In fact, the reaction one is more likely to hear about the Mumbai suburban railway is, that it is amazing that despite all these problems, it still manages to run and ferry millions of people to their destinations everyday1 The "Chalta Hai" attitude is manifest here in the fact that we dont have demanding standards and the alternatives are so bad that we are okay even with the despicable conditions.

And this attitude has a the same nature as a contagious disease. We are 'okay' with people defecating all over the railway tracks and footpaths - afterall these poor people do not even have a place to stay - and we are also 'okay' with our kitchen refuse to be thrown just outside our own front doors. We have only recently started getting water in our taps, so we need to adjust if the government cannot organize garbage disposal yet. And this attitude also makes us accept multiple bomb blasts as something borne as a result of India's muti-ethnic populace. We always seems to be under the misconception that we need to adjust with what we have or what is thrown at us - but fail to realize that once we have accepted this, we will always get only what is thrown at us.

Another thing which is common to our response to all the bad things that happen to us is a display of rage - usually misdirected. I can recollect an incident of arguement with my friends over an alleged case of racism against us Indians in foreign countries. The reaction to such a situation was rage and anger directed at the foreigner. The arguement which I had to this reaction was that, rage against a racist remark is futile and it was as if "I can't do much about the fact that I am being racially abused, but as long as I can react to it by being angry its okay". This for me is another manifestation of the "Chalta Hai" attitude as being angry and retorting to someone will not help solve the situation.

The crux of the problem with the pschye of a majority of Indians is that we do not set high standards for ourselves. We are in moral conflict with ourselves because of this and to make up for the lack of standards we have developed a pseudo sense of bravado which demands us to react to situations and expect some counter reaction. All the time we are hoping that something or someone will step up and make the case for us and show us the path to betterment while always accepting what is thrown at us. This according to me is the main cause of India's backwardness.

Sad demise of the 150 year old Brothers...

From the Economist:

EVEN by the standards of the worst financial crisis for at least a generation, the events of Sunday September 14th and the day before were extraordinary. The weekend began with hopes that a deal could be struck, with or without government backing, to save Lehman Brothers, America’s fourth-largest investment bank. Early Monday morning Lehman filed for Chapter 11 bankruptcy protection. It has more than $613 billion of debt.

I think this photograph is heart wrenching.When whole financial systems are crashing based on investments in dubious assets, this small time trader finds his most valuable asset - the people who are his main customers, lose their lunch money! Sad, sad day! (The article here)

Push Cart Coffee Guy in front of Lehman Brothers HQ in NYC

An Example of Perfectly Competitive Market Condition

A market condition where no buyer/seller has market power - ability enough to influence the price at which a product/service/experience is sold, is called a perfect competition. Such conditions are not very common as there is a tendency for cartelization and the market condition usually becomes a oligopoly. But, I think there is one market which is a superb example of a perfect competiton example - the festival offerings market near Dadar Station in Mumbai!

The Ganesh Festival is currently underway and everyday as I walk to office walking amidst the bustling market which sells everything from flowers and incense sticks to toys and sweets, I cant help but be amazed at the number of buyers and sellers who throng these markets. There are many 'firms' which are selling 'homogeneous'- identical products and innumerous buyers. Also, anyone who wants to sell flower garlands or homemade wicker baskets can find a spot on the road and set up shop - very low entry barrier; well, there is a threat that some goons or a police guy might object to you sitting in that particular spot - but finding another spot nearby will not be difficult. All these conditions indicate towards a perfectly competitive environment.

I did a small dipstick survey to test this hypothesis the other day. I went around asking prices for one yard of a flower garland. The market can be classifed into three distinct geographical locations- as the sellers who are close to the entry of the rail station, those who have set up shop under the flyover and those who are on the pavements on the roadside. The price was uniformly in the range of Rs.6 to Rs. 6.50 for one foot of the flower. This price was probably on the lower side as I asked the questions in the evening and the quality of flowers was not as good as in the morning. Those under the flyover whose product was safe from the rain and sun during the day asked for Rs.6.50, but the number of people buying from them was much lower (This could also be because the area under the flyover is limited and the crowds feel suffocated). The ones near the station entry had poor quality products - dried out flowers. Probably because of the sheer number of people who move in that area during the day and the heat. The ones on the roadside pavements had the bulk of the business and uniformly charged Rs.6 for one foot. I asked quite a few people on the road for the price and all of them concurred with this amount.

I tried demanding, for a foot of flower, to be sold at Rs.4 and found nobody willing to sell. Market information is also high among the producers (another classic condition of a perfectly competitve environment) and they know that no other in that market would sell to me at Rs.4 and they are willing to forgo my business not offer an attractive price (Although, the quantity I was consuming was very small, I doubt if they would have budged from the price had I mentioned even a bigger volume of purchase). On the other hand, although there was no way for me to test it, the information of price and quality was high among the buyers also. Most of the people buying were women who are streetsmart and have an 'andaz' (right estimate) of what needs to be paid for the product.

This is an interesting market to study economics in. The dynamics of the market are purely competitive. I wish I could have spent a longer time in the market to see how the price transition from Rs.10 per foot in the morning (estimate), when the flowers are fresh to Rs.6 in the evening happens and where amongst the three geographical sections of the market does this happen. Is this price an equilibrium price which comes after fluctuations or is it a straight drop in price. This could be an interesting school assignment on economics if someone is willing to spend sometime in all the grime and brave both the rains and sunshine!

Some more interesting links!

Have been reading many different stuff these days. Some links are below, which I found worth commenting on.

1. The Dark Knight was a superb movie. I have blogged previously about Heath Ledger's superb performance in the movie. This link discusses the concept of Game Theory through the medium of the plot in the movie. Those who have seen the movie would agree that the opening scene of the robbery is simply brilliant. The author of this article has described the concept of game theory that is prevalent in that scene.

2. Usain Bolt. This man is a genius. He has set the world record in the 100m and 200m atheletics events at the Olympics. A small survey of the world records shows the magnitude of his achievement. He ran the 100m in 9.69 seconds, an amazing 37 km/hr. Donald Lippincott in 1912 covered the same 100m in 10.6 seconds. So, it basically means that to remove around 0.9 seconds of the world record, it has taken mankind 98 years! This shows the magnitude of competiton that exists in the event and the intensity of physical and mental preparation the athelete needs to go through to acheive this. But, the IOC chairman Jacques Rogge, a 'sports functinary' and a kind of person who spends his time admiring modern art and literature, doesnt seem to care too much about this. Sample this,

“I have no problem with him doing a show,” Rogge said in an interview with three international news agency reporters. “I think he should show more respect for his competitors and shake hands, give a tap on the shoulder to the other ones immediately after the finish and not make gestures like the one he made in the 100 meters.”

What a load of Cr*p. I think the chairman needs to focus on being a sports functionary and not worry about how world champions react. I think he is no better than our Indian Politicians who claim that they are responsible for helping our Indian Atheletes win medals!

3. Always wanted to have your own shop? If you wanted to become a Dukaandar here is your opportunity. This is the Dukaan of the web kind, but still its kinda interesting. This website offers you a chance to create your own web store, where you can sell products from other websites and also make money in the process. What will you be selling you ask? Anything for that matter. Even Lemonade maybe!

4. Imagine sitting with your headphones on, disconnected from the world listening to your favorite music. Is it pretty much a solitary experience which helps you zone out? Does music helps you get a high? Yes. And it can get you rather stoned apparently! These are called Digital Drugs and they supposedly synchronize your brain waves with sound and move them to altered states of relaxation and alertness. Hmm, I wonder if all the musicians are getting high on dope or music, actually!

Hey, Stop Stealing My Jokes!

Remember those moments back in college or at work when your friend or colleague 'stole your thunder' by quoting your joke? You had come up with this brilliant funny piece about the new lady professor's dressing sense and had done a small dry run with your friend, but the rascal upstaged you by telling the joke when both of you are in a larger group of peers? Or when you came up about a good imitation of the client's reaction and wanted to score some brownie points with the boss, but your cubicle mate overheard you and mentioned it in the review meeting before you. Now that we know that humor is a great way to attract the opposite sex, this kind of 'humor piracy' just got costlier.

So some people have decided that this needs to be dealt with. This article studies "The Emergence of Intellectual Property Norms in Stand-Up Comedy". And before you think that it is all a big laugh, sample this;

Copyright law does not provide effective protection to stand up comedians, a fact made clear by close look at the business of stand-up. Despite what appears to be a persistent practice of joke stealing among stand up comedians, there have been few lawsuits asserting copyright infringement in jokes, and there is little evidence of threatened litigation, settlements, or indeed public dissatisfaction among comics regarding the weakness of IP protection.

This is very true. The only instances which comes to my mind are Sienfeld's irritation that Banya (a stand up comic character in the hit comedy sitcom) is stealing Seinfeld's thunder by working the crowds right after Seinfeld's bit or Russel Peters 'making a joke' about the many 'Bast**ds who are sitting at home downloading' his comedy routines. Both these are instances of preventing the 'piracy' of content by mooching of another's popularity. But these are not instances where the comic is worried about somebody else using his or her content. In fact, humor is something which we never seem to associate very much with the comic, apart from the way each person delivers the humorous routine; I would for instance find a Yo! Mama joke just as funny if I read it on some comic's internet website or if a friend had it as his gTalk tagline!

This brings us to the crux of the issue. Should 'humor intellectual property' be protected? While this is similar to a situation in the music industry where the creative content is being pirated and the creators of this content are not able to reap its full benefit, the humorous intellectual property arguement at first glance seems funny! Now, don't get me wrong; I am sure the comic needs to be protected from just as many negative externalities so that there is incentive for him to remain funny, but maybe the humor industry is more similar to the fashion industry (And no, I do not mean that the fashion industry is a joke). Going by Tyler Cowen's arguement that fashion is a status good, and the 'rip offs' syndrome in fashion is a stimulus (or incentive) for creating new fashion, the Humor 'industry' can also be a status good. Humor afterall is an indication of physical and mental wellbeing (hence attracting the opposite sex to the one one who possesses good humor). Hence, the more humor is ripped off or 'stolen' the more the incentive for the comic to come up with a better joke.

But there might be a catch in this line of reasoning; if I go and buy a Gucci rip off at a much lower price, I (the consumer) still aspiring to be seen in designs which have a likeness to a Gucci design and thereby gain a positive aura. At the same time Gucci's brand grows in my mind. But when a comic steals another's routine, the original comic does not get the recognition from the consumer for his intellectual creation. And this is not funny at all!

Scrabulously Wrong!

The Open Source revolution is here to stay, say most internet and computer experts. The open source revolution which has spiralled from writing operating system programms like Linux to application ‘widgets’ for various we based applications is currently in vougue with most programming savvy people indulging in. The advantage of the open source revolution is volunatry sharing of user generated ‘open’ source codes for the applications which can be sold at a price if the developer so intends, but essentially is a free to be upgraged, modified and marketed by any user if he or she is also into coding. This is a tremendous opportuity for millions of computer programmers around the world who are able to use thier coding knowledge to build better models of a basic functional tool and market it for profits.
But there are many, for lack of a better word, discrepancies in the open source revolution. Take for instance a situation when an open source program creates an application which replicates a patented real world product, service or an experience in the virtual world. What are the rules which govern this? Is it in violation of the patent rules? This is exactly what is happening in the case of Hasbro vs Scrabulous. Scrabulous, developed by two Kolkata residents, Jayant and Rajat Agarwalla is the virtual version of the hit word game Scrabble which is a patented product owned by Hasbro.

Read On...

Autorickshaw vs The Free Market!

Again, the autorickshaw driver refused to give me conveyance from the suburban railway station back home. I was late in the evening and maybe he was winding up for the day and the direction he wished to go was opposite to where I wanted to. So, I was stranded at the railway station, tired after a long day at work, with a daunting task of having to walk 5km back home. Should I curse the free market system? After all, it is this system which allows these autorickshaw drivers to decide if they are going to accept taking me as their passenger, based on the overall benefit they see in the transaction. Right?
I think not... Read on

Smaller State? No, Smaller Government is Better...

The American magazine has an interesting article on the topic of Geopolitics and how maps are being redrawn. The article titled “Map Quest” talks about the continual flux in the way the various nations of the world keep changing in their ideaologies and with it the economic conditions leading to different postures in foreign policy. Economic changes and the ambitions of the people of a nation always seems to have some kind of correlation. What seems to be interesting is the fact that this economic upswing and downswing seems to be of a cyclical nature.

Take for example the case of India and China; some three hundred years ago, the Indian and Chinese economies were the dominant economies in the world. America and Japan were nothing more that third world countries. During this period, most products that originated in the subcontinent and China were held in very high esteem. And true to the famous saying that ‘imitation is the best form of flattery’ the western businessmen actually copied the articles from the oppulent orient and sold it in their countries for a premium. Ceramic is a classic example of this kind of a situation. It was a product of China and some European entrepreneurs perfected a process to make cheap imitation ceramic and sold it to the western nations. Today, when the US is the dominant economy, we see a reverse situation. Chinese and Indian entrepreneurs are the one becoming competitive by manufacturing western products in a cheaper and better way! Continue...

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Constraints, and the way to approach issues

Manangement techniques and aproaches argue that there are constraints which govern any business model and the businesses need to exploit their available resources to the maximum extent therby achieving the best possible outcome that is ‘allowed’, as defined by the limits imposed by the constraints.
A thought came to me when I was travelling on the local suburban trains here in Mumbai. Amongst the three suburban rail corridors which run in Mumbai, the Western Railway system is considered to be better than that of the Central Railway and the Harbour Line. Not that the Western Railway is any less crowded, but what one observes is that rakes on the Western corridor are better maintained and rattle and sway less, literally!
I was being thrown about on the Central Railway earlier today, between the Currey Road junction and Victoria Terminus; and this dichotomy came to my mind.... Continue

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