Alan Greenspan And ‘The Modes of Capitalism’

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With Central Planning proving to be ineffective in majority of the cases, Free Market Capitalism and Globalization are the left out options. Capitalism has proven to be rewarding but at the cost of the stress that incurs in the process of handling the risk and hard work that is put in. Free markets does not mean Governments are not at all involved, their intervention is minimized. Capitalism invokes Creative Destruction. Only the best stays longer in the market, old and obsolete is immediately cleared away. Such approach fosters innovation, competition which is against the human desire for stability and certainty. Pure capitalist countries dont exist because if they do, they will be dealing with basic issues that gave birth to socialism and communism. There will countries which are based on constitutions, republics, conditional monarchies and the list goes on. You can find the list of 2010 of all countries in the world here.

If you go little further, there will be Economic freedom if the Free Market Capitalism is entertained. Index of Economic Freedom is good measure of that. For Example if you take 2010 rankings you will get a clear picture. What made me sad when i was exploring this is that Rank of India is 124 and below the world average !

 

Source : http://www.heritage.org/index/Country/India

However, i am only sad but not disappointed because the tariff walls are coming down, the GDP growth is on the agenda, market-oriented economic reforms are coming ( FDI increase, entertaining international trade etc ). With the recession freeing up, change should be around the corner. Be +ve :-). The FDI currently in India is $41.1 bn, this is still Investment Freedom of 35%. Our Governments really needs to improve on that ,

The most important reason why countries which adopted free markets are successful ( in the economic sense ) is that economic freedom induces risk taking because the rewards are going to be high and nation as a whole become financially strong. But the major question which Greenspan highlights is the balance between open competition and civil conduct ( stress implied, ethical procedures etc ) in the free market economies. He also concludes it with example of US being a free market ( which is now but that is another story !! ) economy and over time these benefits of the open markets are diverted to greater civility in the states by improving the quality of life. It may have worked there, but i still have a doubt it will completely succeed in economies with corruption on the list of things to take care of !

Capitalism was never in command of things before World War II, after that, Japan, Europe, Briton, every thing was in ruins. They had to relax the financial markets in 1948 according to the decision by, Ludwig Erhard. After that Europe followed Briton and Capitalism gained prominence. The condition of Germany Post War was chronic. It faced lot of challenges including creative destruction.

Most countries follow it now but there is also fair amount of contradictory ideals against it as well. Check out http://wapedia.mobi/en/Anti-capitalism

Price of Commodities in Money

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Any good that is in demand and can be sold is called a commodity. There are two types of commodities. Soft and Hard. Soft Commodities are goods that are grown. Hard commodities are those which are extracted. Earlier these commodities were used for trading. Either Soft or Hard commodities explored has got an effort that is used for creating it. For example growing of corn has got certain labor associated with it. That effort is later converted into pricing using various regulatory rules. Before Money was born, commodity exchange was prominent.

Barter systems in the raw sense means exchange of labour. Exchanging commodities is as good as exchanging labour that is invested to produce/make those commodities. Different degrees of Hardships are endured to acquire the same. However these prices of commodities are fluctuating. So, it is hard to continue with the barter system. Money was invented and everything from then on was exchanged for money.

Commodities also serve as raw materials for other products, for example Iron ore. It is used to produce a lot other by products. Prices of various commodities vary according to the demand and supply of the same. If commodity produce is more than demand, the prices will be cheaper. If commodity Produce is less than demand, the prices will be dearer. Changes in the commodity prices effects other industries adversely. Supply of these commodities depends upon lot of conditions. One example is Agricultural commodities, the supply portion is directly proportional to the climate changes. A rough climate effects the crop adversely and commodity supply will be less, demand ( As always people need agri products for survival ) will continue to be constant there will be an increase in the price. Similarly a change in the Iron Ore deposit in the mines will affect the businesses which use iron ore as raw product.

Inorder to judge the price of any good, first you need to calculate its manufacturing value, As so far proven to work, the equation is as below.

 

C = SIGMA(A x (1+m+n) x (1+o+p+r+s)) + B

 

C – Commodity Manufacturing Value

A – Net Work price of each worker for the assignment ( Total time consumed , Previously Quoted Price vs time , Current labour Prices )

m – The coefficient of workers employed in non-economy; it is expressed by the proportion of the work price of all workers employed in non-economy and in economy on the territory of the commune.

n – The coefficient of workers employed in non-economy; it is expressed by the proportion of the work price of all workers employed in non-economy and in economy on the territory of the commune.

o, p, r, s are constant values which can be computed

B – The cash assets that are involved 

For more information, click here,

 

The Commodity Manufacturing value is obviously less than the market price and there would be no point otherwise 🙂

Commodity Price Index is one of the important measures of inflation is the CPI. Each nation calculates the CPI and keeps a close watch on inflation.

Indian Statistics for 2006-2009 are available here. Commodity Channel Index measures the deviation the commodity prices from average historical pricing. Calculation of CCI is available here.  Commodity Research Bureau gives good information about trends and analysis of the Commodity Prices http://www.crbtrader.com/

From Wiki, Indices across the world.

Supply and Demand Effects the prices of commodities in the following manner

  • if Market is at the equilibrium price and Quantity (Intersection of supply and demand), majority of the sellers and buyers are satisfied ( cant say 100%)
  • Supply Constant, Demand is more then Demand curve takes a shift. Prices will be higher
  • Supply Constant, Demand has gone down, then Prices will come down
  • Demand is constant, Supply is more, Prices will come down
  • Demand is constant, Supply is less, Prices will be higher

 

References and Further Study :

Joseph Stiglitz @ his best,

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They dont hand over noble prizes easy, winners have a point, Yet another voice against US and IMF.

 

http://www.mindfully.org/WTO/Joseph-Stiglitz-IMF17apr00.htm

Bad Samaritans .. Globalization

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I have never read a book of a critique but i am glad at least now i did that. Bad Samaritans, written by Ha-Joon Chang a Korean economist, hits at the epi center of the world trade policies and their problems. The world as i know, started after 1991 crash and exposure to the chronological order of events before and that and their impact, for me at least is from Thomas L Friedman and his active contribution to the Globalization. Its the Berlin wall isn’t it !!

Globalization from an Economists angle looks much different. The most important thing here is the regulations on the industries based on tariff regulations. Initially when colonies existed, the colonies or currently developing nations were forced to follow free trade policies. This free trade policy has in many ways made those nations under privileged.

When Developed countries had industries like textiles in the primitive states they levied heavy tariff’s on imports. Overtime the domestic industries became competitive enough and then the tariff’s were reduced. Now they are forcing the developing nations into free trade and exporting their technology and products at a fair price. However the developing nations don’t also have a choice. What the developed countries did long time back was termed as protectionism. It is against free trade and thus also against globalization.

Without these policies many of the Briton’s industries would be wiped out. By the time these policies were abolished in 1860 from its colonies, it was too late, Briton was already having the competitive advantage on technologies.

Same was the case with the US. Alexander Hamilton went across the argument of Adam Smith and framed a report to go for import bans, higher export tariff’s; ban on the export of key raw materials. Initially lot of the politicians did not agree, but later when Anglo-American war broke out in 1812, they had to ban all exports and imports and increase tariffs. The blueprint given by Alexander Hamilton was followed after the second world war. He was the person who coined the term ‘infant industry’.

The key historic events for which the tariff’s stayed at an all time high is the 1812 Anglo-American War ( 1812-1816 ), 1921 ( First world War ), Second world war and Great Depression ( 1912 ). In such a situation the governments don’t have any choice.

The two contrary examples for protectionism are US and Mexico. Mexico tried freeing the trade policies and succeeded in showing growth. US on the other side was protectionist all the way, however still succeeded.

But when Brettonwood institutions was formed, they started intervening with the economic policies of the Developing and under developed nations. The borrowed money from the IMF and World Bank is so high for some nations that they have to let the Brettonwood institutions to closely monitor their fiscal economic policies. What a series of events ! Till date the countries like india have a lot of debt and still cannot sustain the markets when they are still struck with olive tree issues, less innovation. They are still dependant of technology from other nations like Russia for Defence technologies and US for outsourcing.

With all of them turning to free trade there came WTO into picture ! 

MBA no longer Most Wanted ??

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via http://www.economist.com/displayStory.cfm?story_id=14742624.

“The Economist !”, you put me in jeopardy !

World Trade and the Recession 2009

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While 2010 starts with a lot of hopes that the world will come out of recession this year, the economists were always cautious enough to warn the governments not to remove the clutches from the economies. Removing the clutches will only make things worse. Thats what happened in 1930’s. While one way to put it is to understand the underlying factors that went down with the fall of the GDP and bring them back to strength as well. One of them is world trade. The world trade numbers in early 2009 were much worse.

The World Trade took a free fall. Picture : WTO website. It also states that the world trade took a big hit since the great depression of 1929. The export and imports %’s also fell down significantly. The reasons put forward by the WTO as they know it are as below.

1. Severe drop in domestic demand
2. Lack of trade credit
3. Much longer production chains / globalisation
4. Rise in protectionism

While the alarm triggered in early did have its impact 2009 , the short term analysis of the numbers say that the trade ( Export and Imports ) are bouncing back.

WTO WEBSITE : Export volume statistics

The chart above states that the there is 16% increase in the export volumes. I could not get a hold of the combined statistics like the one above. It does suggest an upward trend. Exports increase will mean an increase in imports as well. 🙂 Putting it back to Q2 2008 might be very tough. Governments across the world have a lot to do before they actually start considering that the recession is over.

OECD website has a different numbers for various countries, they call it leading composite factor.

Innovation in Africa ..

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One among the major assets of a country or an organization is the incremental innovation activities and their impact on their Economy. Africa, as we all know is a developing nation. But considering the amount of natural resources they hold they should been on the top of the world long time ago. Unfortunately their slavery ended much later than on other continents. They are coming back on the track !

UN, World Bank, IMF and other NGO’s have offered great help to build up the nation which was backward even with respect to the GDP and even basic amenities. Now they are one of the fastest growing nations. I read a quote some that went like, Innovation comes from limitation and scarcity. When you have limited resources and you have much to achieve you walk forward as a nation by over coming difficulties.  There cannot be any compromise over such activities.

As we understand, the nation’s or an organization or a community will always have limited resources. ECON C 101 :).

To Quote an example, William Kamkwamba and the wind mill is the best example one can give. One of the impressive writings from him is “The Boy who harnessed the wind”. Its a story about how he used the limited resources he had to solve a problem in the community. More people were inspired after reading his writing. Book

Most of the innovations in Africa are around irrigation, agriculture, Energy Harvesting, Health Care and Tools used in the daily life. Dont live with the problem, try to find a solution for it.

You can find more information in these websites.

This initiative is very good. A list of projects is here under.

  • A pedal powered hacksaw for the disabled
  • Recycling car batteries in Rural Kenya
  • Solution for Nairobi Blackouts
  • Football: Made in Africa
  • A Wearable Flexible Solar Panel Vest and many more….

Ethan Zuckerman has written a beautiful blog on the proceedings related to Africa and Innovation. You can find it here.

He has written 7 rules of innovation which are below.

  • Innovation (often) comes from constraint (If you’ve got very few resources, you’re forced to be very creative in using and reusing them.)
  • Don’t fight culture (If people cook by stirring their stews, they’re not going to use a solar oven, no matter what you do to market it. Make them a better stove instead.)
  • Embrace market mechanisms (Giving stuff away rarely works as well as selling it.)
  • Innovate on existing platforms (We’ve got bicycles and mobile phones in Africa, plus lots of metal to weld. Innovate using that stuff, rather than bringing in completely new tech.)
  • Problems are not always obvious from afar (You really have to live for a while in a society where no one has currency larger than a $1 bill to understand the importance of money via mobile phones.)
  • What you have matters more than what you lack (If you’ve got a bicycle, consider what you can build based on that, rather than worrying about not having a car, a truck, a metal shop.)
  • Infrastructure can beget infrastructure (By building mobile phone infrastructure, we may be building power infrastructure for Africa.)

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