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…”.

South Africa needs a sensible debate about its Central Bank. Here’s a start..

July 12, 2017

Prof Vishnu Padayachee of University of the Witwatersrand and Bradley Bordiss PhD candidate at the same University argue for a more sensible debate on their central bank – SARB. Just recently, the Public Proctor asked the central bank to have a broader role leading to a lot of noise.

They say there are 2 mon pol camps:

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20th anniversary of Start of Asian Crisis: Is China making the same mistakes?

July 12, 2017

Prof Barry Eichengreen points to several things South East Asian Countries have done since the 1997 crisis.

For starters, the crisis countries have ratcheted down their investment rates and growth expectations to sustainable levels. Asian governments still emphasize growth, but not at any cost.

Second, Southeast Asian countries now have more flexible exchange rates. None is perfectly flexible, to be sure, but the region’s governments have at least abandoned the rigid dollar pegs that were the source of such vulnerability in 1997.

Third, countries like Thailand that were running large external deficits, heightening their dependence on foreign finance, are now running surpluses. Running surpluses has helped them accumulate foreign-exchange reserves, which serve as a form of insurance.

Fourth, Asian countries are now working together to ring-fence the region. In 2000, in the wake of the crisis, they created the Chiang Mai Initiative, a regional network of financial credits and swaps. And now they have the Asian Infrastructure Investment Bank to regionalize the provision of development finance as well.

Ironically, the more things change the more they remain the same. In 1997, China was not a risk. This time it is as it seems to be following the same model followed by SE Asian countries 20 years ago:

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Could You Live 90 Days on Bitcoin?

July 11, 2017

A couple just did and here is their story:

Like most newlyweds, Austin and Beccy Craig were excited about returning home to Utah after their honeymoon and beginning their new life together. But unlike most couples who find their lives calming down after the chaos of wedding planning is over, the Craigs were about to embark on an adventure no one had ever attempted before: Beccy and Austin were going to spend the next three months living solely on Bitcoin.

The Life on Bitcoin Kickstarter launched in 2013, four years after the elusive Satoshi Nakamoto had published his treatise on Bitcoin and then walked away from the entire project and dissolved into anonymity. The timing of the film is also important, as it came right after Bitcoin had rallied and crashed and critics proclaimed that the currency was dead. But as Austin points out in an exclusive interview with FEE, “A lot of people were saying Bitcoin is dead, but it was ten times more valuable than before the rally started.” He continues, “I learned enough to know that this was a revolutionary technology… it was essentially a pandora’s box. There was no way to close it up and pretend it didn’t exist. Bitcoin wasn’t going away.”

And how did Beccy feel about Austin’s desire to be involved in a documentary about cryptocurrency? As Austin says, “To my great amazement, when I asked Beccy about it she was onboard.”

The rules of the Life on Bitcoin documentary were relatively simple: Bitcoin would be the only medium of exchange permitted for all financial transactions made by the couple for 90 days. All cash, credit, and debit cards were to be confiscated and phones, internet, and any other accounts not currently set up to accept payment with Bitcoin would be shut off as well.

The Craigs have become modern pioneers in the world of cryptocurrency.

Each transaction made would also be limited to include only the buyer(s) and the seller, without a middleman exchanging US dollars for Bitcoin. For this experiment to really work and prove Bitcoin’s value as a form of real world currency, it would need to be as practical as possible.

Using a third party to exchange Bitcoin for USD, and then giving the USD to the seller would be a mere currency exchange rather than an actual transaction of money in exchange for goods or services. So an intermediary was only permitted for transactions after all other avenues had been attempted.

Since Utah is a tightknit community where its members care for each other often without being asked, there were also rules placed on the ability of family and friends to help out the couple. Unless the family or friends in question had legitimate commercial businesses, they would not be allowed to assist the Craigs. The only two exemptions to these rules were payroll taxes withheld from the couple’s paychecks, and of course medical emergencies.

To keep the experiment both interesting and applicable to the real world of Bitcoin transactions, the experiment was set to grow as the Craigs achieved success. If the couple proved that they were able to master the art of using Bitcoin to pay for food, rent, internet, and all other bills in Utah, then the limits would be pushed to include interstate travel and then international travel.

Amazing stuff..

Lessons from a Bank-Robbing Law Professor..

July 11, 2017

Well a bank robber first and is currently a law professor at Georgetown University. Thy name is Shon Hopwood.

Here is his unbelievable story via his interview (a really long but worth it):

Sample these answers:

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Case Study of a Unique Digital Museum: Itihaasa App which looks at history of Indian IT industry..

July 11, 2017

I blogged about this itihaasa app earlier in 2016 when the app was just launched. It is a brilliant and a unique initiative of using the app platform to tell history about an industry, Information Technology in this case.

N Dayasindhu who is one of the key architects of the app has written a paper about this unique digital museum:

This industry case study describes the genesis and development of itihaasa history of Indian IT, a unique digital museum chronicling the evolution of Indian IT over six decades. itihaasa is a free mobile app that captures important milestones defining the history of Indian IT in the voice of key actors who shaped them. It has a rich repertoire of original oral history videos, digital documents, and photographs from personal archives and publications. Users can navigate the itihaasa app based on timeline, people or organization views. Or they can search tags to access specific content. It is unique because the evolution of Indian IT is captured as oral histories of multiple key actors who shaped important milestones, and business history is presented in an entirely digital format.

Useful stuff…

We clearly need more of such apps which gives us atleast some sense of how businesses evolved..

Regulations for Small Finance Banks: A bit too many?

July 11, 2017

Yesterday Ira Dugal tweeted about AU Small Finance Bank trading at 7.5 times its Price/Book Ratio, much more than any other Private Bank.  Case of early froth/bubble in valuation of Small Finance Banks? We will get to know soon. Markets hype both ways – upside and downside- very quickly.

Anyways, over the weekend RBI released a document called: “Compendium of Guidelines for Small Finance Banks”.  Compendium is a deceptive word as it means- a collection of concise but detailed information about a particular subject, especially in a book or other publication. Concise yet detailed.

So are RBI’s guidelines for Small Finance Banks:

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Evolution of banknotes in New Zealand (1967-2017)

July 10, 2017

In 1967 New Zealand moved to decimal currency system.

Matthew Wright of RBNZ tracks the changes in banknotes ever since:

Banknotes are always designed with imagery relevant to the society in which they will be circulating, symbolising the national identity of the issuing country. Reviewing the historical designs of New Zealand’s banknotes from this perspective reveals a more complex picture of the 1967 switch to decimalisation than the usual perception of a discontinuous change.

Despite the switch from imperial to decimal currency, there were clear social continuities in the imagery used for the pre-decimal Series 2 and first
decimal Series 3 notes. The real conceptual break came with the Series 5, 6 and 7 decimal notes introduced from 1992–93, which introduced new
iconography and themes common to all three series. While the Series 2 pre-decimal and Series 3 and 4 decimal series, by intent, reflected similar mid-20th century social values – underscoring the stable social character of the New Zealand society of their day, the decimal Series 5, 6 and 7 carried a different range of subjects which were selected through public consultation, formal public survey and independent expert analysis, for relevance to the society of the late 20th century and beyond.

Nice bit..

What lies behind the rise of Christian universities in Africa?

July 10, 2017

Fascinating article by Joel Carpenter, Director of Nagel Institute for the Study of World Christianity, Calvin College. The role of religion in shaping education has been critical. I doubt other religions have excelled in this shaping as much as Christanity has. Be it primary or secondary education, the Christian education places generate a lot of trust.

In Africa, there has been a rise in Christian Universities. Reason is both demand and supply:

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World Bank’s shifting role: From development bank to an investment bank?

July 10, 2017

Prof. Steven Friedman of University of Johannesburg points to the shifting role of World Bank:

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Canada’s beautiful coins…

July 10, 2017

Alex Tabarrok has stunning pictures on Marginal Revolution Blog of Canadian coins. Are they really coins?

Lessons of economics and globalization from Raj Kapoor’s song – Mera joota hai Japani

July 10, 2017

Amit Varma, the editor of Pragti has a nice piece.

He says one can learn economics lessons from the famous Raj Kapoor song: Mera Joota hai Japani.

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How did usury stop being a sin and become respectable finance?

July 7, 2017

This is just a superb article  by Alex Mayyasi who is a freelance writer. He looks at one of the most fundamental questions of finance: How did usury stop being a sin and become respectable finance?

There is never one answer to such questions but several plausible ones. He brings the contribution of Scholastics to making finance respectable:

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How Governments protect their Lutyens Bungalows but remain ignorant about historic monuments…

July 7, 2017

Prof Nayanjot Lahiri of Ashoka University alerts to this new Amendment of the Ancient Monuments and Archaeological Sites and Remains Act, 1958.

The amendment allows construction of public works in area of protected monuments which was prohibited till now:

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