S.Muthiah has a fascinating article which once again shows how India was one of the trading powers till it got lost.
The author points to old names of Indian ports which are a pale shadow of their past:
It is 200 years anniversary of David Ricardo’s idea of comparative advantage. His book “On The Principles of Political Economy and Taxation” was released in 2017.
Oleg Komlik of Economic Sociology blog has a different take on the 200 anniversary of the book. One should not be surprised as economists usually hype very limited ideas from such classics. The best example is Adam Smith’s Wealth of Nations which has so many ideas but the profession just writes about invisible hand which Smith mentions just once in the book!
Coming to Ricardo. Hewrote about problems of distribution right at the beginning of the book. Economics is mainly about two problems: production and distribution. For the longest time, the profession focused just on first problem. After years of ignorance, this distribution problem is haunting much of the economics profession today.
But like of Ricardo wrote about it way back:
Prof Amit Bhaduri of JNU warns against the pretense and arrogance of economics:
This exclusion of alternative views is not merely a question of vested interest and the ideological view that we live in the best of all possible worlds where optimum equilibria rule, except during transient moments. It stems, also, from a misplaced notion of the aesthetics of good theory: Good theory is assumed to be a closed axiomatic system. Its axioms can, at best, be challenged empirically — e.g. testing the axiom of individual rationality by setting up experimental devices — but such challenges hardly add up to any workable alternative way of doing macro-economics.
There is however an alternative way, or, rather, there are alternative ways. We must learn to accept that when undeniable facts stare us in the face and shake up our political universe — e.g. growing unemployment is a problem, and money and finance have roles beyond medium of payment in an uncertain world shaken by financial crises — they are not transient problems; they are a part of the system we are meant to study. It is no good saying my axiomatic system does not have room for them. Instead, the alternative way is to take each problem and devise the best ways in which we are able to handle them analytically. Physicist Feynman (economist Dow (1995) made a similar distinction) had made a distinction between the Greek way of doing mathematics axiomatically, and the Babylonian way, which used separate known results (theorems) without necessarily knowing the link among them. We must accept this Babylonian approach to deal with macro-economic problems, without pretending that it must follow from some grand axiom.
Awareness of history must enter economic theory by showing that concepts such as cost, profit, wage, rent, and even commercial rationality have anthropological dimensions specific to social systems. The humility to accept that economic propositions cannot be universal would save us from self-defeating arrogance.
One of the biggest hoodwinks of governments worldwide has been to convince people that any income on which you pay taxes is white and what you manage to hide is black. It is just amazing how convincingly governments have managed to do this and how easily we have bought into this idea. Even so called liberals buy into this idea. The history of this conviction has to be tracked and written as it makes for a great story.
This piece from Jeff Tucker is a reminder that income tax is the root cause of all evil.
Daron Acemoglu and Pascual Restrepo research on emerging hot topic:
There are Fed dissenters who not just criticise policies but vouch for its closure. So far, we have known likes of Ron Paul who have tried to argue for the closure using the Federal Government route. However, there is another approach in which US States use their constitutional powers to undermine the money issued by Fed. The first approach is called top down and second bottoms up.
William Greene, an advocate of second approach explains:
Since its inception, the U.S. Federal Reserve’s monetary policies have led to a decline of over 95% in the purchasing power of the U.S. dollar. As a result, there have been several attempts to curtail or eliminate the Federal Reserve’s powers (e.g., the efforts of Rep. Louis T. McFadden in the 1930s; the efforts of Rep. Wright Patman in the 1970s; the efforts of Rep. Henry Gonzalez in the 1990s; and the efforts of Rep. Ron Paul since the 1990s). However, none have proven successful to date, due mainly to the constraints of strong political opposition at the national level. In contrast to these “top‐down” attempts at the national level, this paper proposes an alternative approach to ending the Federal Reserve’s monopoly on money: the “Constitutional Tender Act,” a bill template that can be introduced in every state legislature in the nation, returning each of them to adherence to the U.S. Constitution’s “legal tender” provisions of Article I, Section 10.
This approach would have a greater likelihood of success for a number of reasons. First, it is decentralized: rather than facing concerted political opposition at a single Federal level, it attacks the issue at the State level, where strategies and tactics can be adapted to the types and amount of political opposition they encounter. Second, it is diffused: it can be attempted in any number of States, which can cause the opposition to spread its resources much more thinly than would be necessary at the Federal level. Finally, it is legally sound: it relies on the U.S. Constitution’s negative mandate in Article I, Section 10, that “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.” Therefore, in contrast to “top‐down” attempts to “end the Fed,” a “bottom‐up” approach using “constitutional tender” laws will find greater success.
He points how Top Down approaches have been vetoed by some or the other official from Federal Government.
US monetary history is quite different in many ways to other countries…
Òscar Jordà, Björn Richter, Moritz Schularick and Alan Taylor research the issue:
UK’s Royal Mint has introduced a new one pound coin. The Mint proudly says it is the safest coin in the world.
It has 12 sides and made of two metals (bimetallic). The outer ring is gold coloured and inner ring is silver coloured. This bimetallism feature is quite similar to our very Rs 10 coin as well. Just that we have gold in the inner and silver in the outer ring.
Civilization existed before money, but probably wouldn’t have gotten very far without it. Ancient humans’ invention of money was a revolutionary milestone. It helped to drive the development of civilization, by making it easier not just to buy and sell goods, but to pay workers in an increasing number of specialized trades—craftsmen, artists, merchants, and soldiers, to name a few. It also helped connect the world, by enabling traders to roam across continents and oceans to buy and sell goods, and investors to amass wealth…
Over the centuries, money continued to evolve in form and function. The ancient world’s stones and shells gave way to coins, and eventually to paper currency and checks drawn upon bank accounts. Those physical tokens, in turn, gradually are being superseded by electronic ones, ranging from credit card transactions to new forms of digital currency designed for transferring and amassing wealth on the Internet.
Nice pictures in the story as well…
Hayek died 25 years ago on 23 March 1992.
David Boaz of Cato Institue pays a tribute:
Hayek lived long enough to see the rise and fall of fascism, national socialism, and Soviet communism. In the years since Hayek’s death economic freedom around the world has been increasing, and liberal values such as human rights, the rule of law, equal freedom under law, and free access to information have spread to new areas. But today liberalism is under challenge from such disparate yet symbiotic ideologies as resurgent leftism, right-wing authoritarian populism, and radical political Islamism. I am optimistic because I think that once people get a taste of freedom and prosperity, they want to keep it. The challenge for Hayekian liberals is to help people understand that freedom and prosperity depend on liberal values, the values explored and defended in his many books and articles.
There is more here…
I just blogged about why importance of preserving local culture and values as SBI merges its associate banks.
So, one just came across this NY Fed chief William Dudley Speech in London on reforming culture in finance. In evening he participates in a panel discussion titled: Worthy of Trust? Law, ethics and culture in banking.
In the recent speech he says:
As I have argued before, incentives shape behavior, and behavior drives culture. If you want a culture that will support your long-term business strategy, you need to align incentives with the behaviors that will sustain your business over the long haul.6
Incentives—compensation and promotion, in particular—are powerful tools for communicating the conduct and culture you desire for your firm. Of course, the cultures of firms can and should vary. But, the culture of every bank should share a common theme: stewardship—a word that implies professional care, exercised year after year for the benefit of the firm and its stakeholders. A commitment to the long term must be at the core of banking. Incentives within a firm should support that goal, not undermine it.
My emphasis on incentives is not new, but it bears repeating. Bad incentives were a key contributing factor in the financial crisis. In the United States, the Financial Crisis Inquiry Commission concluded that “Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences.”7 This theme applied to all levels of banking organizations. One notable example was mortgage brokers, who were paid based on the volume of loans they generated, not their quality.8
The financial crisis came to a head in the fall of 2008. Fast forward eight years to the fall of 2016. Wells Fargo’s chairman and CEO resigned after regulators uncovered what appeared to be widespread fraud in the retail bank. Compensation, once again, seems to be at the center of a scandal. Neighborhood bankers were paid based on the volume of new accounts opened, apparently with utter disregard for whether customers wanted them or even knew about them. And, like mortgage brokers in the early 2000s, it appears that job security depended almost exclusively on meeting targets, regardless of how those targets were met. There was a serious mismatch between the values Wells Fargo espoused and the incentives that Wells Fargo employed.9
Investigations into what happened at Wells Fargo are continuing, so I will wait before drawing more definitive conclusions. For now, though, it is sufficient to note the powerful role—for good or for bad—that incentives can play in an organization. I understand that making progress on culture is difficult. But, if you want the next round of metrics to look better than the last, use a powerful lever—use incentives.
Today’s discussions—here at Mansion House and later at the Bank of England—are evidence that the issue of culture is important to the private and public sectors alike. We have to keep working on this. The public sector must continue to shine a spotlight on the issue, and the industry must continue to demonstrate that it is taking responsibility for its culture. And, culture cannot be a subject that only receives attention because bad conduct has occurred in the recent past.
I am convinced that a good or ethical culture that is reflected in your firm’s strategy, decision-making processes, and products is also in your economic best interest, for a number of reasons:
Good culture is, in short, a necessary condition for the long-term success of individual firms. Therefore, members of the industry must be good stewards and should seek to make progress on reforming culture in the near term.
Well, there was a time when NY Fed would never discuss such issues. They were seen as soft and not of any importance. NY Fed was more about hard finance and fancy stuff.
Another interesting piece by Prof Ricardo Hausmann. He brings in the case of South Africa whose leaders have tried to redistribute capital. But like most others, the results have not materialised.
Why? The reason is leaders have been inspired by Marx who seek to redistribute income. In a Marxian world only two ingredients matter: capital and labour. But another key ingredient – knowhow- misses from their thinking:
Nice piece by Leonid Bershidsky:
Iceland, compared with Ireland and Greece, is an economist’s dream. It’s tiny and open, so it responds to stimuli spectacularly and almost without delay. It turned overnight from a fishing-dependent economy to a highly financialized one — a transition brilliantly described in Michael Lewis’s book “Boomerang”; it went just as quickly to a tourism-driven economy after the banking crash. The quick turnaround is an advantage, but also a potential drawback.
The lifting of capital controls is driving the krona back up. It achieved its post-crisis high earlier this month and is close to that level now. It’s one of the world’s five best-performing currencies so far this year.
Without the capital controls, Iceland, with a benchmark interest rate of 5.75 percent, again becomes attractive to carry traders — something that nearly killed its economy last decade. Now, they can provide cheap resources for the construction boom, which depends on tourism, which, in turn, depends on a relatively cheap krona. But the influx of these resources will strengthen Iceland’s currency, and if the government and the central bank are not careful, the country may soon find itself in trouble again. The Organization for Economic Cooperation and Development pointed to that danger in November, writing in a brief economic assessment that “liberalization of the capital account raises uncertainty about capital flows, while at the same time the relatively high interest rates could cause large capital inflows and strong appreciation of the krona, hurting the economy.”
It’s likely that Iceland wasn’t really saved by the convenience of having its own currency or by the resolve it showed in cleaning up banks and jailing bankers. A unique combination of attractiveness to international tourists and a nine-year disconnection from global financial markets were the major drivers behind its recovery.
The volcanoes, glaciers and hot springs are still there, but Iceland is dangerously open to the global capital flows again — something it may not be able to afford.
Hope to visit this place sometime..
It is quite fashionable to build narratives around economic growth/development of a country with one/two individuals. Nothing sells as much as this narrative. It has an immediate appeal. What starts as a narrative eventually becomes a fairy tale of sorts and that person a very popular character. What better than India to see this where 1991 was the year when Dr Manmohan Singh just changed Indian economy.
The problem with such grand narratives is the story starts much before and is a series of multiple steps and actors which culminates in that big narrative. So in India’s case researchers have often pointed things started with Rajiv Gandhi post 1985 but it does not really capture the mood.
Similarly in this piece, Profs. Nauro Campos and Fabrizio Coricelli question the Thatcher narrative:
These results provide new evidence that the great British reversal was driven by membership of the European Economic Community, not Mrs Thatcher’s structural reforms. These two explanations may, however, be complementary.
These reforms were implemented in the second term of the Thatcher government. Her June 1983 general election victory was the most decisive since Labour’s victory in 1945. The main reforms that defined her second term covered labour, product, financial market liberalisation, privatisation and openness to foreign investment (Card and Freeman 2004, Oulton 2016).
Our main finding was that the 1969 turning point is more powerful than structural breaks at the launch of Mrs Thatcher’s programme of structural reforms in 1983 or 1986. Our earlier Vox column on this topic discusses the determinants of the UK decision to join the EU (Campos and Coricelli 2015), while here we focus on its implications by providing new statistical evidence on the effects of European integration on UK economic performance, compared to Mrs Thatcher’s reforms. Hence our study combines the empirical identification of structural breaks with an analysis of how and why the benefits from EEC – and later, EU – membership changed over time (Campos et al. 2016, Crafts forthcoming). The UK’s per capita GDP relative to the EU founding members declined steadily from 1945 to around 1970, and became relatively stable after that. If the UK joined the EEC to stop its relative economic decline, it worked. It also laid the ground for future improvements in relative economic performance with the introduction of the single market.
The success of Mrs Thatcher’s reforms required EEC membership. These structural reforms were not implemented in a vacuum. They could not have existed without the powerful support of British entrepreneurs (Grossman and Helpman 2001), who benefited from a larger, deeper and more innovative market (contrast the EEC at the time with EFTA and the Commonwealth). These entrepreneurs also realised that to be competitive they would need access to deeper capital and labour markets supported by a set of common standards, rules and regulations (Baldwin 2016, Mulabdic et al. forthcoming). Without support from such powerful constituencies, Mrs Thatcher’s reforms would not have been implemented as they did, and certainly would not have been as successful.
This explanation draws parallels with the French experience in the immediate post-war period (Adams 1989). Between 1945 and 1957, there was a conflict of interest between powerful groups of French entrepreneurs, some of whom were against, and some in favour of, further European economic integration. The interests of those against were associated mostly with the former French colonies, though they lost influence in the run-up to the Treaty of Rome and found themselves locked into the European integration project even after de Gaulle was elected president in 1958 (Moravcsik 2012). At that point, they could redirect but not reverse the process.