Mises vs. Marx (Hax0r edition)

I saw this in the Mises Institute Blog today:

Background : In the 1920s, way before the collapse of Socialism and central planning, Ludwig von Mises (and later his student F.A. Hayek) argued that socialism was unworkable, because the socialist system couldn't 'calculate' . There was no way the planners could know what to produce, when to produce in what quantities without having a proper signaling system.

In the free-market, the rise and fall of prices convey this information which is otherwise difficult or very expensive to obtain. The rise and fall of prices act as signals for entrepreneurs (producers) to make decisions about production, investment -- basically everything. This debate between the Socialists and Mises is famously known as the calculation debate, no prizes for guessing who ultimately turned out to be the winner.

Myths and Realities of the U.S financial crisis

There is a financial crisis in the U.S. and we are hearing the same old silly arguments. Apparently, in the last few weeks capitalism has collapsed, Bush has become a socialist and it's all the fault of the World Bank and the IMF. If you belive any of that, you should really update your feed reader.

But if your concerns are more serious, the ever impressive Ajay Shah does some myth busting:

Myth: Governments are bailing out rich people. 

Reality: Acute pain is being inflicted on shareholders and top managers of financial firms.

Myth: unregulated hedge funds are dangerous.

Reality: The unregulated hedge funds were fine. The problems were created in the heart of regulated finance, in banks giving out home loans.

Myth: The crisis has demonstrated the failure of financial capitalism.

Reality: Financial capitalism has delivered $50,000 per capita of GDP in the US.

Myth: This is the failure of laissez faire ideology in the US

Reality: The US ‘Federal Register’ publishes over 50,000 pages of new regulations every year. Regulatory expenses rose 44% from 1990 to 2008 in the US. US financial regulation is far from laissez faire! What failed was dysfunctional governance structures.

Myth: The crisis has demonstrated that credit derivatives are dangerous

Reality: The crisis has demonstrated that OTC derivatives are dangerous.

Myth: Innocent bystanders have got hurt because of the shennanigans of millionaire rocket scientists. 

Reality: US GDP is doing surprisingly well.

The above is based on slides (PDF here) from a talk Ajay delivered on the financial crisis. Obviously, it would have been better to hear the man speak along with the slides. 

The presentation goes into broader range of issues and well worth a look for anyone trying to understand what went on in the financial markets. 

Marxism in Sri Lanka, RIP

The museum of Communism in Prague.
The entrance is through McDonald's. (A pic by udijw)

The Rajapakse Administration won, despite some irregularities, a genuine victory over the UNP in the recent provincial council elections. Perhaps the most exciting thing about the last election is how poorly, the Marxist-Nationalist JVP did in the polls. Here's a bit of a summary from the Island editorial on the JVPs plight:

[..]a huge crisis is staring the JVP in the face. Its ignominious defeat has strengthened the hands of its breakaway group. Dissident JVP MP and leader of the National Freedom Front Wimal Weerawansa said yesterday afternoon that he was willing to join forces with the JVP if the present leadership of the party changed. He has pointed out that the JVP vote has dropped in Anuradhapura from 50,000 at the 2006 LG polls to 19,000 at 2008 PC polls within two years. In 2006, it polled 19,500 in Polonnaruwa, 38,000 in Ratnapura and 36,500 in Kegalle but on Saturday it managed to secure only 7,000, 9,700 and 9,000 in those three districts respectively. The breakaway of Weerawansa and others has, inter alia, manifestly taken its toll on the JVP.

The pathetic performance of the JVP where the postal votes are concerned is proof that the JVP lacks following among the public servants in spite of its campaign to obtain a 5,000-rupee pay hike for them. More importantly, the JVP's vote has shrunk despite an increase in the number of young voters.

The indications are that, faction ridden and enervated, the JVP is reaching the end of the road in electoral politics. Another disastrous split is inevitable sooner or later. The JVP must be ruing the day it parted company with the SLFP, which helped it gain benefits disproportionate to its real strength which has now been exposed. [link] (emphasis mine)

and it's worth emphasizing. JVP is no longer, or fast unbecoming the youth party. That's a cause for celebration. Marxism is alive and (somewhat) well in the local universities, but since only less than 2% of the population (pdf source) ever gets to enjoy Sri Lanka's "free" education, and the rest of the 98% has found other ways of acquiring higher education, that's no longer a deciding factor.

True enough, in recent times, portraits of Lenin, Marx and other communist symbols were little more than decorations for the JVP, while most of it's popularity came from it's Nationalist and anti-LTTE rhetoric. But great many JVPers (and I've met some) are Fabian Socialists, thinking of the nationalist rhetoric as a vehicle for some sort of socialist society in the future. And it's agenda, however nationalist, has always contained a very definitive left-wing economic agenda.

Nationalism and anti-LTTEism is alive and kicking in Sri Lanka, but the movement has a different symbol and a leader in Mahinda Rajapakse's coalition. Separating the nationalist lobby from the socialist baggage of the JVP, if and when the party is sufficiently pushed off from the political discourse is definitely a step in the right direction and a happy outcome of this election which will help put Marxist and other leftover socialist thinking to the dustbin of history, where it truly belongs.

Related -- Museum of Communism, the website.

Lies, Damned lies and Naomi Klein

Cato's Johan Norberg has a detailed rebuttal on Naomi Klein's superficial claims about Milton Friedman and free-market policies made in her book, The shock doctrine. Here's a video of Norberg explaining how Ms Klein misrepresents what Friedman said:




Also see this follow up video.

I have leafed-through Klein's book. No one who has actually read Milton Friedman, will take Klein's claims seriously.

Klein's main ammunition is in the from a out-of-context quote by Friedman, who said that real change happens on a crisis, and that it will be led by ideas that are lying around at the time will be implemented. Friedman said this to emphasis the importance of working towards ideas which doesn't seem plausible right now, but might be some day, when people are looking for new ideas, such as in a financial crisis. He didn't mean this in the sense of a natural disaster nor did he advocate disaster.

This is clearly an ideologically neutral statement. If in the current financial mess in the U.S., ideas of more regulation holds sway, that will be implemented. In the face of high commodity prices, if someone is able to convince policymakers that price-controls are a good way of handling the 'crisis' there is a chance of that happening. The former is already sort of happening, the latter doesn't seem to be, thankfully.

It is also true that most important market-reforms did happen in financial crisis, like that of Sri Lanka in 1977, when the economy was squeezed through central-planing by the previous socialist government, or in the case of Indian reforms in the early '90's. Thanks to those reforms millions today are out of poverty. But if a different set of ideas were on the table, things might have gone in another direction.

Obviously, the likes of Klein doesn't have the cognitive power needed to understand this. See Norberg's full rebuttal and also see, Tyler Cowen's take.

Sri Lanka's retarded Oil policy

Now maybe it's just me, but it seems to me that the Sri Lankan Government's oil policy is a bit retarded. Let's summarize,

1. First, theres' a tax on Petrol (VAT, excise duties, so on)
   Some reports puts the proportion of the tax at about 37% of the total selling price which now stands at Rs.157 at state-owned CPC pumps.
   
   
2. Then, the earnings from petrol, subsidize Diesel.
   There is no real reason why diesel should cost less, but it does here in Sri Lanka. In some countries in fact, diesel is more expensive. Ironically, the richer sections in Sri Lanka have the diesel vehicles (thanks to a higher import duty on diesel vehicles) while middle and lower income earners who use motorcycles, three-wheelers, small vehicles, etc. are using petrol therefore subsidizing the rich kids. Some pro-poor policy.
   
   
3. Finally, the Ceylon Petroleum Corporation (CPC) makes a multi-billion rupee loss.
   The burden of which must be financed by the taxpayer -- which is basically everyone who buys anything. From January this year, the CPC has made a loss of about Rs.7 billion (700 Million US$)
   

So the policy is essentially this: you tax on one hand, and subsidize on the other. Taxpayer pays on both counts. That strikes to me as being rather retarded (or ingenious, depends on how you look at it).

Which other company you know does this kind of thing? I mean think, really. Can you even name a sillara mudalali (small shop owner) who'd practice this insane business model? If you could, then that person is probably out of business by now. That's a fundamental difference with governments and private initiatives.

In private enterprise, failure would mean closure. No more resources are spent on that failed project. In governments, failure usually means even more money and even more resources are spent on that project, compounding the problem.

This is especially apparent when CPC's only rival in the business, Lanka IOC managed to make a profit, without any freebies from the taxpayer. The reason for this has to do with incentives, while Lanka IOC faces market incentives, CPC doesn't. It faces political incentives, which are nearly always economically disastrous. LIOC's incentives tells them to diversify business, make productivity enhancing investments, etc. Whereas CPC's incentives instructs them to hold down prices, hire unnecessary labor, etc resulting massive losses.

To cut to the chase, yes, CPC should be privatized. There's no doubt about it. Why on earth would you, the beggars on the street, taxi drivers or anyone for that matter finance state blunders.

If you are waiting for the bright sunny day, where we'll have good governance and efficient state enterprises living the democratic socialist dream, sorry machang it ain't coming. It's time we realize that, dismantle the leftover socialism and take advantage of market efficiencies.

The biggest Big Government

Karu Jayasuriya, Sri Lanka's Minister of public administration has confirmed something I've been saying for a while on this blog : Sri Lanka has the world's largest government. That's in addition to having the largest cabinet (literally) and having an enormous legislature.

Here's an LBO report on what Karu said at a Sri Lanka Administrative Services Association meeting:

"From our population (21 million), there is one public servant for every 17 citizens and that is the world biggest public service sector," public administration minister Karu Jayasuriya said. [..]

The island's public servant to citizen ratio is larger than India's ratio of one to 80 citizens and USA's ratio of one to 240, he said.

"The state sector is too big for a poor country like ours… Some sectors are filled from various appointments given at various instances and for different reasons."

Last year Sri Lanka earned 508 billion rupees in taxes, but 282 billion went for the salaries and pensions of state workers, indicating that 55 cents out of every tax rupee collected went to state workers. [..]

The public sector expenses grew mainly because of hiring of unemployed graduates, new recruitments to the public sector, including the security forces, and payment of allowances.

Sri Lanka also has more than 100 ministers. Jayasuriya himself crossed over from the opposition and helped make the magic number.

Jayasuriya says that despite the overstaffing, the administrative sector in the public service has a dearth of 1,600 employees. [link]

Now read that last line again, there's a dearth of employees despite overstaffing? are you kidding me?! Sigh. This sort of nonsensical situation is only possible in governments.

But despite correctly identifying Sri Lanka's Mega Government as a problem, Minister Jayasuriya goes on to "appeal to public sector employees to provide a responsible and productive service". Right. Were they really waiting around for Karu Jayasuriya to come and tell them to be "responsible and productive" ? This patronizing has to stop, policy makers need to come to their senses and start cutting down on this massive government, that's the need of the hour. Public sector won't become productive if their overstaffed. That defies logic. If they do this, if we decide cut down the size of government, then our taxes can be lowered or put to better use, instead of being eaten up to pay salaries of bureaucrats.

Like I've said before, this is not a debate of Big-government Vs. Small government. This is a debate between Mega Government Vs. Biggish government and on this, there's only one reasonable side.

Related posts on Deaned : Where your taxes Go, The myth of the open economy, obstacles to growth

Our Socialist Ways

Today the Sri Lankan government announced price controls on rice. From the Daily Mirror:

The government in a move to control the escalating prices of locally produced rice imposed maximum wholesale and retail prices from midnight yesterday. A gazette notification to this effect was issued last night.

According to the new government regulations, the retail price of Samba rice will be Rs 70 per kilo while the wholesale price will be Rs 63. Prices have been fixed for Nadu, Rathu Kekulu and Sudu Kekulu rice as well.

Trade Minister Bandula Gunawardene told a news conference last night that this decision was taken to resolve the current crisis in the marketing of rice and to control the sky rocketing prices. He said this was the first time in the country’s history that price control had been imposed on rice.

[..]The minister said that those who sell above the specified rates and those who hide stocks would be severely dealt with under the Consumer Protection Act. [link]

This is coming from the supposedly pro-market minister of trade and consumer affairs, Bandula Gunawardene who previously warned that he would introduced legislation which could bark and bite solve the problem of cost of living. With pro-marketers like this, who need socialists?

No, I'm not saying we are on the road to serfdom just yet, but like I've said before, we still have this socialist mentality which assumes we can centrally plan the economy. It's one thing allow the market to flourish and introduce regulation where you think it's inefficient (I would argue against it, but at least that's tolerable), it's quite another to believe that a government bureaucrat knows the accurate price of something.

My Socialist Experiment

When I was growing up, this idea that 'our country was poor' puzzled me. How can we be poor I thought, the government print the money don't they? So how can they have all the money and still be poor? After days of thinking over this, I came to the conclusion that perhaps printing money costs, about the same amount of money that's being printed. That is for example, it costs the value of Rs.10 to print a Ten Rupee note. I remember asking my dad if this was the case, he said no, money is just paper he told me. I Can't remember if I followed up on the question, but I'm pretty sure he did not satisfactorily answer my questions.

This is about the time I invented my own version of socialism (I was really very young, honestly.) Deanist-Socialism was simple. Under my plan, every citizen in the country will receive a fixed amount of money at the end of every month courtesy the government. That way, there's no real need to work and we can live happily ever after.

I can't quite remember what I did with my theory, but finding answers to why oh why governments didn't just print money and distribute lead me to many realizations. First among them - not many people understand 'money'. For a long time, I didn't either.

So in my quest to understand this thing called money better, I began reading by coincidence (now this is much much later) the likes of Friedman, Rothbard, Mises and (eventually) the likes of Mankiw, Cowen and other contemporary practitioners. Having gone through all of this, I feel like I have the basics covered. But seeing media reports, listening to local politicians and even what some of our Central Bankers say, it seems many doesn't even have these basics covered.

So in the near future, (possibly tomorrow, I'm sleepy now) this blog will have Inflation for Dummies by dummies post to dispel some of the myths that's being perpetuated when talking about Cost of Living and particularly inflation in Sri Lanka.

But first, a few more of those realizations..

#2) Wealth is not Money. If it were, my little socialist experiment would have worked, to make it's people more wealthy, all a government has to do was print money and distribute them. Wealth, put it bluntly, is stuff or things we value (some of which could be money) and can be defined as the productive capacity of the economy.

But why doesn't governments do this? why don't they just print the money and distribute? The answer, is to do with the value of money.

#3) Paper-money has no intrinsic value. It's just paper. Turns out dad was right, the kind of money we use is just paper (fiat money). The only reason why you would accept it in exchange for payment for something is because we have the confidence that in the future, some other person would take it to exchange with something we value. If anyone doesn't think they can exchange this paper for something valuable in the future, they would not accept it.

For example, right now, I have with me a 20 Rupee Indian-Note in my purse, signed by a few friends and given to me as a souvenir. In India, this would have bought be breakfast. But here, in Sri Lanka, this would buy me nothing. The Indian rupee has (almost) no value here. (unless at a money-exchanger) The value of money, like any thing else is determined by the forces of it's supply and demand.

Realizing these two things, and the notion of value of money is perhaps the key to understanding inflation.

How J.R. Ruined Everything

If you are a socialist, that is.

The chart below from Gapminder shows increasing incomes per person at accelerating rates after president JR Jaywardene liberalized the Sri Lankan economy in 1977. Certainly, this isn't good news for the lefties.

(a still pic from gap minder, an awesome tool. You can link to the real-time chart too)

Say what you want about JR's politics, but the fact remains - his (partial) market-based reforms did make a lot of people's lives better. We need more of it, not less.

These stats of course, wouldn't change the mind of people like this commenter to whom I dedicate the title of this post. These are obviously some fake statistics compiled as part of a neoliberal conspiracy initiated by the CIA and planted in Google gapminder.

No but seriously, Gapminder is just awesome, it converts boring numbers into enjoyable, animated and interactive graphics. See it's founder Hans Rosling's talks on TED here and here. Must See videos!

Only in Cuba

One Cuban young woman complains to another. "He lied to me! He told me that he was a luggage handler! It turns out, he's nothing but a neurosurgeon!"

Apparently luggage handlers in Cuba make more money in one day than some doctors get in a month. Heh. Arnold Kling has more on the life under Socialism.

End of Chávez

It seems, like others who try to follow his ideology in a democratic set up, Hugo Chávez's run of popularity is slowly coming to an end. According to The Economist, during the last 5 years of the Chávez presidency, the proportion of households below the poverty line increased by 11 percent, despite the increased "social spending". It's a sad day for Sri Lankan quasi-socialists, who used to sing his praises. Micheal Moynihan has more to say at Reason.

Democracy, so long as you're socialist.

All politicians in India have to be socialists. I don't mean it in a cynical kind of way, they actually have to. The Indian constitution gives you all the democracy you want, as long as you pledge allegiance to socialism.

It's a fascinating little story, something I've been following ever since I've known about it about an year ago, now the matter has been finally brought to the Indian Supreme court's attention. Barun Mitra relates the story. Ajay Shah has more.

I wonder what the situation is in Sri Lanka, it could be the case that's actually similar. The preamble to the Sri Lankan constitution too mentions a Socialism as something which constitutes the country, although I don't know whether the Sri Lankan political parties need to take an oath in it's name.

chick peas and green gram for the new year

That's what Bandula Gunawardene wants you to eat next year.
From the bottom-line,

With the price of flour shooting up by Rs. 9 per kilo with immediate effect, Minister of Trade and Consumer Affairs Bandula Gunawardena yesterday demanded Sri Lankans not to rely on wheat flour instead, cultivate and consume more chick peas and green gram as an alternative to flour Reacting to the announcement from Prima, the minister told The Bottom Line that there was no point in taking legal action against the flour company again.

“Already three cases are pending in courts with regard to Prima irregularly increasing flour prices, sans approval from the Consumer Affairs Authority,” he said.

“So, until the court decides, we ask the public to cultivate grains and to eat chick peas and green gram,” Gunawardena said. (emphasis added) [link]

Sigh. There's a reminder that we haven't progressed much from the days when the government dictated what we have for lunch. So much for the "Open Economy". I wonder why the bright heads at the Ministry haven't figured out why there is a monopoly in the first place, here's a pointer - get rid of the consumer affairs authority. But wait, no wonder they wont figure that out, nobody likes being unemployed.

Authoritarianism 2.0

Ajay Shah has an interesting post on Authoritarian Capitalism :

... a series of countries have now embarked on what I term `Authoritarianism 2.0' : a blend of free markets with authoritarian politics. This aims to produce good resource allocation and high growth rates through sound economic policy, while retaining one-party (or one-person) rule, denying the rule of law, and supressing the rights of individuals. Rowan Callick has written an article titled The China Model which reviews this style of design of the State, where individuals are seen as consumers but not citizens; where individuals have some economic flexibility but weak political rights. This model is being attempted in Russia, China, Vietnam, UAE, etc. In some ways, Singapore also exhibits some of these features. These countries do not see their political systems as illegitimate way stations on the road to democracy. The effort is to make Authoritarianism 2.0 work; liberal democracy is not even the long-term goal.

The question we really face is about the soundness of the `Capitalism and Freedom' hypothesis. Does the growth of a free market economy inevitably generate pressures to modernise the political system? Or is it possible to combine 21st century economic policy with pre-enlightenment politics? [link : Authoritarianism 2.0]

From recently i have been inquiring into the inadequacies of democracy, but i think i still hold economic freedom would yield greater political freedom, now that political freedom might not necessarily produce a functioning democracy, but it would certainly make authority less coercive thus delivering more political freedom.

In the case of china, they've not brought in market reforms in where its politically disadvantages to the Communist Party i.e. media, telecom, the internet - all avenues which market decentralization would have made censorship difficult and contributed to greater political freedom.

The question is of course whether it is sustainable ? I can only speculate. The reason for its partial success is, to my mind, that people attach a greater value to economic freedom than political freedom because they are more affected by it. You may support Gay/Lesbian Rights, but if you're not gay, it doesn't really affect you. But if you have to queue in the morning to get bread, which you might or might not get, you're bound to be more pissed.