RBI skipped releasing its weekly balance sheet for 30 June 2017!

July 20, 2017

Apologies for waking up really late to this development (HT: Amit Varma)

As per RBI Act Section 53: Read the rest of this entry »

Why Government ‘Nudges’ motivate good citizen behavior..

July 20, 2017

Article in HBSWK on Governments nudging:

Most governments aren’t subtle when they want citizens to do something. The United States spends close to $1 billion annually on advertising–trying to convince citizens to do everything from taking flu prevention shots to reporting unattended suitcases at the airport. But now agencies are finding that subtle “nudges” can motivate behavior much better than ads, fines, or deadlines.

Nudges, or small changes to the context in which decisions are made, are the subject of a new analysis by Harvard Business School Associate Professor John Beshears and colleagues, recently published in the journal Psychological Science. The paper, Should Governments Invest More in Nudges? answers its own question with a resounding “Yes.”

“We suspected that nudges on an impact-per-cost basis would be superior to traditional approaches such as a financial incentive or an educational campaign,” says Beshears. “But we were surprised to see the extent to which it is true.”

According to behavioral scientists, nudges are dollar for dollar a hugely cost-effective way of causing people to change behavior and do the kinds of things that government wants them to do, like save for retirement—which are both for the good of society and for their own good.

The idea is to make nudges complementary to existing incentives and try motivate System1 thinking:

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The slow rise of P2P lending: Moneylenders are back in business..

July 20, 2017

How things keep coming in circles especially in finance. The terms/names can change but in the end it is just some old wine in a new bottle.

Here is an interesting story of i2ifunding.com which is a Peer to Peer lending portal. It is not a classic moneylender which lent from its own capital but more an intermediary between lenders and borrowers:

Read the rest of this entry »

How do Venture capitalists make decisions?

July 20, 2017

Nice piece by Antoine Buteau.

Even though only 0.25% of companies receive venture financing, venture capital is an important source of financing that result in an outsized impact on the economy. Some studies estimate that 50% of U.S. IPOs are VC-backed and that these companies account for 20% of the U.S. market capitalization and 44% of R&D spending.

Although VCs fill a gap in the market by connecting entrepreneurs with good ideas but no money with investors, they are sometimes seen as a black box with little information on how they make decisions about their investments and portfolios. The authors of this paper wanted to answer these questions and they did so by surveying almost 900 VCs on multiple areas: deal sourcing, investment selection, valuation tools, deal structure, post-investment value add, exits, internal organization of the firms and relationships with limited partners. This summary will be focused on worldwide VC firms across stage (early/late) and on the information technology/software sector blended with the healthcare sector.


British Imperialism and the Making of Colonial Currency Systems

July 20, 2017

A fascinating question to think about is British were on Gold Standard for a long time but its colonies were kept on silver. Why were the imperial powers doing this considering a similar currency would have been more imperialistic? Likewise there are several questions on colonial currency systems imposed by other imperial powers. However, most monetary history accounts barely discuss the colonial currency systems.

In this aspect, this book by Wadan Narsey is a breath of fresh air as it discusses British currency policy in its various colonies. The author questions many a standard ideas around currency policy calling them a myth.

Here is a review by Kurt Schuler:

There must be few cases of a publication by an active scholar so long delayed as this book. Wadan Narsey wrote the bulk of it as his dissertation at Sussex University (England), completing it in 1988. That was at the beginning of his career as a university professor in his native Fiji. His retirement, hastened by the military dictatorship of which he was an outspoken critic, gave him the leisure to revisit and revise the dissertation for publication. The result is a work that has at least as much interest as when it was first written. There were many critics of the world monetary system then; there are at least as many now. It is all the more important, then, to know whether previous incarnations of the world monetary system worked better than the present one, or whether they had hitherto neglected disadvantages that should weigh against them.

The central argument of the book is that the British government arranged colonial monetary systems much more for its benefit than for that of the colonies. The British government’s ability to commandeer colonial financial reserves in London was crucial to enabling the Bank of England and the London financial market to avoid a number of crises. Among Britain’s colonies, those with a white majority or a large white minority received more advantageous treatment than majority nonwhite colonies, contributing to their faster economic development.

A must read as it discusses case of India as well. This blog had also reviewed the British currency note policy in this post. As students of Indian economics, these aspects are rarely taught and discussed..



Encouraging Make in India clause to printing banknotes– a case of central bank using industrial policy…

July 19, 2017

This is an interesting development. RBI cancelled two older tenders for Supply of Security Features for Indian Banknotes. It has issued a new tender  which makes it mandatory for the bidders to agree/satisfy the Make in India clause.

The clause states:

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The part-time critics of central banks…

July 19, 2017

Nice article by Mark Spitznagel, Founder and Chief Investment Officer of Universa Investments.

He says most experts defend and criticise central banks based on whether central bank actions have hurt or benefited them:

There seems to be no shortage today of investors and pundits criticizing the market interventions of the world’s central banks. Monetary stimulus in the form of artificially low interest rates and bloated central bank balance sheets ($18.5 trillion, to be exact), the argument goes, have created another dangerous financial bubble (evidenced by ubiquitously bubbly stock market valuation ratios) that ultimately threatens the financial system yet again. The author shares wholeheartedly in this criticism.

The ethical problem is, where were these voices when this all started, with Greenspan in the 1990s and, more specifically, with Bernanke in 2008? The central bank critics today who were not critics of — and in most cases were even sympathetic to — the great bailouts and stimulus that started almost a decade ago have reserved their criticisms only for those interventions that appear to hurt their interests, as opposed to those that have helped them. After all, no one would disagree that bailouts and monetary stimulus got us out of the last financial crisis, but they also certainly got us to where we are today, vulnerable to another even bigger one.

You cannot be a part-timer in these matters:

One cannot be a part-time classical liberal, criticizing central planning only when it runs contrary to one’s interests. Indeed, this is the very problem of Socialism: there are winners and losers; the winners are in the here and now — the seen; the losers are in the future — the unseen. The winners don’t complain, and the losers can‘t until it is too late.

But as the future becomes the here and now, the unseen becomes the seen, those who now think they are anticipating a problem and its cause, yet supported that same cause when they stood to benefit, must be seen for what they are: fellow travelers in the central planning ideology that grips today’s financial markets. They are too late.


How to think like an economist (if you wish to)…

July 19, 2017

Brad DeLong has a long post on the topic:

I have long had a “thinking like an economist” lecture in the can. But I very rarely give it. It seems to me that it is important stuff—that people really should know it before they begin studying economics, because it would make studying economics much easier. But it also seems to me—usually—that it is pointless to give it at the start of a course to newBs: they just won’t understand it. And it also seems to me—usually—that it is also pointless to give it to students at the end of their college years: they either understand it already, or it is too late.

By continuity that would seem to imply that there is an optimal point in the college curriculum to teach this stuff. But is that true?

Every new subject requires new patterns of thought; every intellectual discipline calls for new ways of thinking about the world. After all, that is what makes it a discipline: a discipline that allows people to think about a subject in some new way. Economics is no exception.

In a way, learning an intellectual discipline like economics is similar to learning a new language or being initiated into a club. Economists’ way of thinking allows us to see the economy more sharply and clearly than we could in other ways. (Of course, it can also cause us to miss certain relationships that are hard to quantify or hard to think of as purchases and sales; that is why economics is not the only social science, and we need sociologists, political scientists, historians, psychologists, and anthropologists as well.) In this chapter we will survey the intellectual landmarks of economists’ system of thought, in order to help you orient yourself in the mental landscape of economics.

Nice bit..

Indian economy: A tale of two narratives (and a missing narrative)..

July 19, 2017

I came across this piece on two narratives on Indian economy. One of impressive macroeconomic stability and two of dipping growth which cannot be stimulated by monetary or fiscal policy.

Despite impressive statistics quoted in the piece one clearly sees how much of Indian economic story has been around government policy. The author says there are two narratives but actually there is just one: the role of government in Indian economy.  This is obviously ironical in its own way as we would imagine economy to be shaped mainly by several private hands rather than the one hand of government.

I don’t know but reading the various articles today take you back to yeseteryears when all that mattered to Indian economy was the Indian Government. But we are told that since 1991 things have changed and it is private sector which rules the roost. However, ever since the government was voted in power in 2014, the focus of economic performance of the country is only seen from what government is doing. We have celebrated 100 days, 1 year, 2 years and now 3 years and 2 more to go. There are pieces after pieces highlighting the role of the government which is all so ironical. There is very little on what India’s private sector is really doing.  If Indian economy is indeed doing so well, we need to know about new products being made, new services being created, entrepreneurship and so on.

This glaring missing narrative also perhaps explains the puzzle between the two aspects of Indian economy discussed by the above piece. If macrostability is indeed so great, why is growth dipping? The piece as expected can only think in terms of policy:

How should policy respond? The key is not to panic, but keep fixing the economy’s plumbing. Double down on asset resolution in the banking sector, plow stronger tax-revenue from demonetisation/GST into higher public investment, rein in state deficits to push down the private sector cost of capital, and keep plugging away on reducing infrastructure bottlenecks. Put differently, hang in till the growth dividend from deleveraging and productivity-enhancing reforms (GST, Aadhaar) kicks in. Unfortunately, there are no quick fixes at the moment. Furthermore, overreacting to the second narrative (slowing growth) simply risks jeopardizing the first one (macro economic stability).

Well, what eventually matters is how private sector and households responds to most of these initiatives. It is this narrative which eventually matters. We are told that private sector investments are hardly picking and then there are always talks of jobless growth.

This clearly is the missing narrative which needs more attention than merely looking at government measures..

Improving money through competition….

July 19, 2017

Interesting piece by Norbert Michel, Director, Center for Data Analysis.

He says most forms of money have been discovered by the private sector only to be monopolised by State later. The State’s record in monetary matters has been mostly poor barring a few period. Even in those periods there must have been unintended consequences which are rarely mentioned. Best way to restore monetary stability is to improve money through competition. This is also what supporters of free banking also argue:

Money is the means of payment for virtually all goods and services. Most innovations in the means for payment have originated in private markets, but they were later monopolized by the government, thus mitigating their benefits. Policymakers rarely think about improving money with the same competitive market forces that improve other goods and services. That competitive process is the best way to expose weaknesses and inefficiencies in existing products, thus improving people’s lives.

Congress should avoid policies that single out alternative forms of money and impede people from using their preferred medium of exchange. Although it cannot provide absolute protection, allowing competitive private markets to provide currency would present as powerful a check on the government’s ability to diminish the quality of money as possible.

He says Post World War-II there are two types of money in US:

The U.S. monetary system consists of two types of money:

  1. Base money, often referred to as outside money, is the ultimate means of payment in the economy, and it comes from outside the private sector (i.e., the government).
  2. Inside money, often called credit money, consists of claims to the underlying base money, and it comes from inside the private sector.

Private financial firms compete to provide various types of credit money, such as checkable deposits with bankcards, money market accounts, and travelers’ checks. These financial firms are heavily regulated, often to the detriment of their ability to operate, but few policymakers question whether they should actually provide money.

Even fewer policymakers question whether anyone other than the federal government should provide base money, despite its fundamental economic importance. Because the Federal Reserve is the monopoly provider of base money, the U.S. government ultimately determines the total amount—and type—of money that private firms can create.  This monopoly necessarily limits the extent to which competitive processes can strengthen money, and exposes the means of payment for all goods and services to the mistakes of a single government entity.

Precisely because people are so vulnerable to the abuse of money (including modern monetary policy errors), Congress should not interfere with citizens’ ability to opt out of official currency.The competitive process is, ultimately, the only way to discover what people view as the best means of payment.

There are interesting references here which are not part of monetary economics syllabus in most universities. In all other things we are taught competition matters but not in money where powers are to reside with central bank. There is wide history of free banking which was quite successful as well but we hardly look at the evidence.

There is a reason Friedman said: Most economists do not question central banks as it provides them glamorous job opportunities. It is not just quetioning central banks in op-eds but even in teaching…


Smart or dumb? The real impact of India’s proposal to build 100 smart cities

July 18, 2017

Hugh Byrd Professor of Architecture at University of Lincoln has a piece:

The quest to make cities smart and liveable has been promoted alongside increased population densities and urban compaction. We argue that this planning goal is reaching a point where resources are inadequate for the functioning of a city.

Case studies such as Bhendi Bazaar provide an example of plans for increased density and urban regeneration. However, they do not offer an answer to the challenge of limited infrastructure to support the resource requirements of such developments.

The results of our research indicate significant adverse impacts on the environment. They show that the metabolism increases at a greater rate than the population grows. On this basis, this proposed development for Mumbai, or the other 99 cities, should not be called smart or sustainable.

With policies that aim to prevent urban sprawl, cities will inevitably grow vertically. But with high-rise housing comes dependence on centralised flows of energy, water supplies and waste disposal. Dependency in turn leads to vulnerability and insecurity.

Suburbia offers some buffer. Water and power can be collected from individual roofs and food produced in individual gardens. However, we argue that vertical urban form on this scale offers little resilience.

Smart may be, but questions on sustainability are always there..

Who Would Be Affected by More Banking Deserts (branchless banking)?

July 18, 2017

Learnt about this new term from St Louis Fed blog: banking deserts:

Although technology has made it easy to bank from almost anywhere, personal and public benefits are still derived from bank branches. In areas without branches—commonly referred to as “banking deserts”—the costs and inconveniences of cashing checks, establishing deposit accounts, obtaining loans and maintaining banking relationships are exacerbated.

As expected, the deserts ill impact the poor:

Read the rest of this entry »

Riding dangerously on Mumbai locals..

July 18, 2017

Nice article by Bhanuj Kappal:

in recent years, as the 164-year-old railway system struggles to ferry over 75 lakh passengers a day, the adjective that comes up more often is ‘deadly’. According to statistics obtained by rail activist Samir Zaveri under the Right to Information Act, 3,202 people died on the railway tracks of Mumbai in 2016. That averages out to almost nine deaths a day. Another 3,363 were injured. These figures are not statistical outliers, but representative of a long-term trend. The death count for 2015 was higher at 3,304. And according to figures on shodh.gov.in, 1,618 accidental deaths have been recorded so far this year. That makes the MSR one of the deadliest public rail transit systems in the world.

For years, this damning mortality rate was ignored by the railway authorities and the State government. The press followed suit, relegating statistics about accidental deaths to blurbs on the back pages. And Mumbai’s long-suffering commuters, used to risking life and limb every day on the way to work, became inured to the idea of daily commute as a life-or-death lottery. They even took perverse pride in it, treating a peak-hour ride on the insanely overcrowded Churchgate to Virar fast as a rite of passage towards becoming a real ‘Mumbaikar’. It took the death of 21-year-old Bhavesh Nakate, who was crushed under a train after slipping from its footboard, in November 2015, to wake everyone up. Nakate’s death was similar to hundreds of others that occur every year, but with one vital difference. A fellow commuter had captured his fall on his phone camera. And the video went viral.

A few weeks later, hearing a number of public interest litigations (PILs) on commuter safety and security, a Bombay High Court bench of Justices Naresh Patil and SB Shukre, came down heavily on the State government and the Indian Railways. “[In] no other country would so many deaths not be taken seriously, in India we just sit on the sidelines and watch on,” they observed, asking the authorities to list all measures taken towards addressing the issues of overcrowding and the rising accidents on local trains. “People are dying on the trains and the tracks every day and the authorities cannot continue to keep their eyes shut,” they added. “If you act now and succeed in saving even just one such life, your actions will make a large difference.”

“If this was happening in the US or UK, these officials would be in jail and the Railways would have to pay crores in compensation every day,” says Zaveri, who filed one of those PILs on commuter safety. Having lost both his legs in a railway accident in 1989, Zaveri is now committed to helping other victims. “But this is a country of poor people, so their lives have no value.”

Emphasis is mine. Strong words indeed. Cost of life in India..


“The root cause of the problem is overcrowding,” says veteran transport journalist Rajendra B Aklekar, who has written extensively on the Indian Railways, including Halt Station India, a book on its history. “When Mumbai got saturated we built townships in Kalyan, Dombivali, Thane. We kept on building new townships, but never built a sustainable transport system connecting those townships with Mumbai. So when those people wake up in the morning, they go to the same old stations. That leads to crowding, that leads to everything.”


What Remains of Milton Friedman’s Monetarism?

July 18, 2017

Robert Hetzel of Richmond Fed has a paper:

From the early 1960s until the early 1970s with the emergence of rational expectations, under the rubric of monetarism, Milton Friedman defined macroeconomic debate. Although the Keynesian consensus that he challenged has disappeared, the current academic literature makes little reference to monetarist ideas. What happened to them? The argument here is that those ideas remain relevant but require translation into terms expressible in modern macroeconomic models and in the monetary policies of central banks, neither of which contain any obvious references to money. Moreover, the Friedman and Schwartz methodology for identifying shocks retains relevance.

Lots of monetary history in the paper..

20 Years of South East Asian Crisis: How Clinton, The IMF and Wall Street Journal toppled Suharto

July 18, 2017

Interesting piece by Prof Seteve Hanke who was in the thick of things during the SE Asian crisis. He suggested to Suharto to implement Currency Board which was poosed by IMF and Washington. Why? They wanted to get rid of Suharto and only a deep crisis could have helped in the cause.

By late January 1998, President Suharto realized that the IMF medicine was not working and sought a second opinion. In February, I was invited to offer that opinion and was appointed as Suharto’s Special Counselor. Although I did not have any opinions on the Suharto government, I did have definite ones on the matter at hand. After nightly discussions at the President’s private residence, I proposed an antidote: an orthodox currency board in which the rupiah would be fully convertible into and backed by the U.S. dollar at a fixed exchange rate. On the day that news hit the street, the rupiah soared by 28% against the U.S. dollar on both the spot and one year forward markets. These developments infuriated the U.S. government and the IMF.

Ruthless attacks on the currency board idea and the Special Counselor ensued. Suharto was told in no uncertain terms — by both the President of the United States, Bill Clinton, and the Managing Director of the IMF, Michel Camdessus — that he would have to drop the currency board idea or forego $43 billion in foreign assistance.

Economists jumped on the bandwagon, trotting out every imaginable half-truth and non-truth against the currency board idea. In my opinion, those oft-repeated canards were outweighed by the full support for an Indonesian currency board by four Nobel Laureates in Economics: Gary Becker, Milton Friedman, Merton Miller, and Robert Mundell. Also, Sir Alan Walters, Prime Minister Thatcher’s economic guru, a key figure behind the establishment of Hong Kong’s currency board in 1983, and my colleague and close collaborator, endorsed the idea of a currency board for Indonesia.

Why all the fuss over a currency board for Indonesia? Merton Miller understood the great game immediately. As he said when Mrs. Hanke and I were in residence at the Shangri-La Hotel in Jakarta, the Clinton administration’s objection to the currency board was “not that it wouldn’t work, but that it would, and if it worked, they would be stuck with Suharto.” Much the same argument was articulated by Australia’s former Prime Minister Paul Keating: “The United States Treasury quite deliberately used the economic collapse as a means of bringing about the ouster of Suharto.” Former U.S. Secretary of State Lawrence Eagleburger weighed in with a similar diagnosis: “We were fairly clever in that we supported the IMF as it overthrew (Suharto). Whether that was a wise way to proceed is another question. I’m not saying Mr. Suharto should have stayed, but I kind of wish he had left on terms other than because the IMF pushed him out.” Even Michel Camdessus could not find fault with these assessments. On the occasion of his retirement, he proudly proclaimed: “We created the conditions that obliged President Suharto to leave his job.”

Why did Suharto have to go? President Clinton had his own personal reasons for leading the charge for a regime change. This presented a golden opportunity for the neoconservative regime changers led by Paul Wolfowitz, a former U.S. Ambassador to Indonesia (and subsequently a key figure in the Pentagon — Deputy Secretary of Defense — who pushed for the invasion of Iraq and the overthrow of Saddam Hussein). Their agenda was for the U.S. to control the Greater Middle East, a swath stretching from Indonesia to Morocco.

Fascinating tales if you believe them. These conspiracy theories have just such an amazing appeal to them..

Trying to figure different monetary standards in India using data from Paper Currency Reserve (1861-1935)…

July 17, 2017

Monetary history despite being highly fascinating, is confusing as well. There are so many terms/standards which one does not understand. If there is one thing positive from India’s demonetisation and rise of digital currency, it is to understand history well. The basics keep coming back and haunting you for your ignorance.

Chandravarkar (1985) in his essay in Second Cambridge Economic History of India said:

India witnessed practically every variety of monetary standard, passing successively from a silver standard to a managed inconvertible silver currency, then almost fortuitously to the gold exchange standard; thereafter, to a paper standard, a gold bullion  standard, and after 1931, to a sterling exchange standard. India also played a pivotal role in the days of the international gold standard, 1890-1914, insofar as her merchandise surplus with the rest of the world and her merchandise deficit with England helped England to square her international payments on current account.

 Keynes in his Indian Currency and Finance Report (1913) too had marvelled over India’s Gold Exchange Standard.

But then whenever you try and figure these different monetary systems you struggle to understand. The dates of transition from once system to another are confusing and difficult to remember.

One useful way to figure all this is to analyse the data. In historical matters, time-series data helps one understand and remember things like no other. The next question is where is the data? Which data should we look at?

Interestingly, British colonists were highly efficient at collecting data especially on monetary and financial matters. We have some useful data which is not used by scholars for analysing Indian monetary history from various lenses.

One such data is that of Paper Currency Reserve, which was instituted by the British in 1861. Before 1861, the Presidency Banks (and other banks) issued their own paper currency. These notes circulated in their respective areas. Post -1857, as powers to run India moved from East India Company to the British Government there were talks of issuing a Government Paper currency. James Wilson the first Finance Member (today’s Finance Minister) had started proposed a Government currency in 1859 but passed away before the idea could be executed.

In 1861, the British authorities set up Paper Currency Reserve which was to issue government paper notes. The power of Presidency Banks to issue banknotes was taken away. Despite suggestions to let the banknotes being universally accepted across the country, the government let them be legal tender only in their respective areas.  These areas were called as circles. Initially they were just three circles which were expanded later to many more over time.

This Paper Currency Reserve is key to figuring the different monetary systems mentioned by Chandravarkar.

The Currency Reserve balance sheet had following heads:

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Tibet’s really colorful currency notes (which were demonetised in 1959)…

July 14, 2017

JP Koning points to this interesting article on history of Tibet currency notes in 1912-59. The article has pictures of many notes during the period but they are not clear. Seperately, Koning puts the picture of one of the notes:

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How New Keynesian economics betrays Keynes

July 14, 2017

Roger Farmer has an interesting essay on evolution of macro thought (HT: Cafe Economics). It is actually an extract from his book Prosperity for All.

He reviews the history of macro thought and says New Keynesians miss a basic point from Keynesian view:

The program that Hicks initiated was to understand the connection between Keynesian economics and general equi­librium theory. But, it was not a complete theory of the macro­economy because the IS- LM model does not explain how the price level is set. The IS- LM model determines the unemploy­ment rate, the interest rate, and the real value of GDP, but it has nothing to say about the general level of prices or the rate of inflation of prices from one week to the next.

To complete the reconciliation of Keynesian economics with general equilibrium theory, Paul Samuelson introduced the neoclassical synthesis in 1955. According to this theory, if un­employment is too high, the money wage will fall as workers compete with each other for existing jobs. Falling wages will be passed through to falling prices as firms compete with each other to sell the goods they produce. In this view of the world, high unemployment is a temporary phenomenon caused by the slow adjustment of money wages and money prices. In Samuelson’s vision, the economy is Keynesian in the short run, when some wages and prices are sticky. It is classical in the long run when all wages and prices have had time to adjust.

Although Samuelson’s neoclassical synthesis was tidy, it did not have much to do with the vision of the General Theory. Keynes envisaged a world of multiple equilibrium unemploy­ment rates where the prevailing rate is selected by the propen­sity of entrepreneurs to take risks. He called this propensity animal spirits.

In Keynes’ vision, there is no tendency for the economy to self- correct. Left to itself, a market economy may never recover from a depression and the unemployment rate may remain too high forever. In contrast, in Samuelson’s neoclassical synthe­sis, unemployment causes money wages and prices to fall. As the money wage and the money price fall, aggregate demand rises and full employment is restored, even if government takes no corrective action. By slipping wage and price adjust­ment into his theory, Samuelson reintroduced classical ideas by the back door— a sleight of hand that did not go unnoticed by Keynes’ contemporaries in Cambridge, England. Famously, Joan Robinson referred to Samuelson’s approach as “bastard Keynesianism.”

The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS- LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are funda­mental. My work brings these concepts back to center stage and integrates the Keynes of the General Theory with the mi­croeconomics of general equilibrium theory in a new way.


Lots more there..

How economics became a religion…

July 13, 2017

Another piece berating economics and its soothsayers. It is a book extract from a book:

Although Britain has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.

Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment. For a long time, they seemed to deliver on that promise, succeeding in a way few other religions had ever done, our incomes rising thousands of times over and delivering a cornucopia bursting with new inventions, cures and delights.

This was our heaven, and richly did we reward the economic priesthood, with status, wealth and power to shape our societies according to their vision. At the end of the 20th century, amid an economic boom that saw the western economies become richer than humanity had ever known, economics seemed to have conquered the globe. With nearly every country on the planet adhering to the same free-market playbook, and with university students flocking to do degrees in the subject, economics seemed to be attaining the goal that had eluded every other religious doctrine in history: converting the entire planet to its creed.

Yet if history teaches anything, it’s that whenever economists feel certain that they have found the holy grail of endless peace and prosperity, the end of the present regime is nigh. On the eve of the 1929 Wall Street crash, the American economist Irving Fisher advised people to go out and buy shares; in the 1960s, Keynesian economists said there would never be another recession because they had perfected the tools of demand management.

More than the predictions going wrong, it is how economics has come to dictate most things we do. If it makes economics sense, there is a point in doing something else dump it..

Econs do their best work when there is humility and limited hubris:

Economists arguably do their best work when they take the stories we have given them, and advise us on how we can help them to come true. Such agnosticism demands a humility that was lacking in economic orthodoxy in recent years. Nevertheless, economists don’t have to abandon their traditions if they are to overcome the failings of a narrative that has been rejected. Rather they can look within their own history to find a method that avoids the evangelical certainty of orthodoxy.

In his 1971 presidential address to the American Economic Association, Wassily Leontief counselled against the dangers of self-satisfaction. He noted that although economics was starting to ride “the crest of intellectual respectability … an uneasy feeling about the present state of our discipline has been growing in some of us who have watched its unprecedented development over the last three decades”.

Noting that pure theory was making economics more remote from day-to-day reality, he said the problem lay in “the palpable inadequacy of the scientific means” of using mathematical approaches to address mundane concerns. So much time went into model-construction that the assumptions on which the models were based became an afterthought. “But,” he warned – a warning that the sub-prime boom’s fascination with mathematical models, and the bust’s subsequent revelation of their flaws, now reveals to have been prophetic – “it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends.”

Leontief thought that economics departments were increasingly hiring and promoting young economists who wanted to build pure models with little empirical relevance. Even when they did empirical analysis, Leontief said economists seldom took any interest in the meaning or value of their data. He thus called for economists to explore their assumptions and data by conducting social, demographic and anthropological work, and said economics needed to work more closely with other disciplines.

Leontief’s call for humility some 40 years ago stands as a reminder that the same religions that can speak up for human freedom and dignity when in opposition, can become obsessed with their rightness and the need to purge others of their wickedness once they attain power. When the church retains its distance from power, and a modest expectation about what it can achieve, it can stir our minds to envision new possibilities and even new worlds. Once economists apply this kind of sceptical scientific method to a human realm in which ultimate reality may never be fully discernible, they will probably find themselves retreating from dogmatism in their claims.

Paradoxically, therefore, as economics becomes more truly scientific, it will become less of a science. Acknowledging these limitations will free it to serve us once more.

This blog pointed to the Leontief lecture just a few days ago.

Learning economics from Amol Palekar..

July 12, 2017

Well one Amol is still trying to figure economics, but the other Amol despite not being concerned with the subject has useful lessons. Such is the irony of economics as well. Those who study it get lost in the subject and have nothing much to say, those who don’t study make statements about economics pretty freely in their conversations.

So here goes the brilliant Amit Varma again who points to housing economics lessons from Amol Palekar’s songs. Earlier he pointed globalisation lessons from Raj Kapoor’s Mera Joota Hai Japani song.

He picks two songs this time:

Ek akela is shahar mein/ Raat mein aur dopahar mein/ Aab-o-daana dhoondta hai/ Aashiana dhoondta hai. – Amol Palekar in Gharoanda.

One person, alone in the city/ At night and in the afternoon/ Looking for food/ looking for shelter. In the film Gharaonda, Amol Palekar plays a young man who has come to Bombay (as it was then), and is worried about food and shelter. I can identify with this, as I too was a young man in Bombay once with identical worries. Indeed, most young people migrating to big cities would empathise with Palekar.

Most of us get by when it comes to aab-o-daana, but aashiana can be a different matter. Housing in Mumbai (as it is now) is incredibly expensive, and most middle-class people cannot dream of buying a house. There are two important things I would like you to note here.

One, prices are a matter of supply and demand, and if there is relative scarcity of housing, prices will seem high. That’s just how it is.

Two, the supply of housing is artificially kept low by government regulation. If not for the government, real estate in our cities would cost a fraction of what it now does. If you cannot afford to buy a home where you live, then repeat after me: This is the government’s fault.

There are a number of terrible regulations that lead to this effect. I want to focus on two in this piece.

The culprits are well known: Floor Space Index and Rent Control.

In the end, he picks the second song:

Let’s shift to a pleasant subject now: from real estate to love. As Gharoanda progresses, Amol Palekar finds romance with Zarina Wahab, and the two then sing a version of the song that he sings earlier alone.

Do Diwaane shahar mein/ Raat mein aur dopahar mein/ Aab-o-daana dhoondte hai/ Ek aashiana dhoondte hai.

Two lovers in a city/ At night and in the afternoon/ Looking for food/ looking for shelter.

The two young people have the same problems that the one young person did earlier – but as you can guess, they are considerably happier at the time of singing this song. Thank goodness the government does not regulate Love like it regulates Land.

(Spoiler alert: The artificial scarcity of Land eventually destroys their Love as well. Sigh.)


But there is much more to Mumbai real estate which is not present in most Indian cities. Things like FSI etc will help lower the pressure but not much.  Some apartments where allowed FSI is much higher, the difference between top floor and ground floor apartments could be several lakhs. And for most even the ground floor is unaffordable, so the story ends there.

One can always argue how much more expensive NY would be if FSI were like Mumbai. But even with such high FSI, the one big issue with NYC remains – high cost of apartments. It is perhaps something in these financial centres where property remains unbelievably costly and is such a privilege.

Even the whole property broker market in Bombay is unlike any other. People are migrating to other cities as well, but it is only in Mumbai where you see the clout of the broker. The broker is as big and even bigger than apartment owners. It keeps making your life miserable every 11 months!

Perhaps the song which fits the real estate market in Mumbai is from another movie which showcased crime in the city. The movie was D Company and the song was ” Ganda hai par dhanda hai yeh…”.