Some Economics with Stefen.

Well this is one of the happiest day. There were many questions in my mind about the economics and I got the answers today. There still remains something to be studied but the stefen's argument has given me a way to look.

I:

Stephen, I found your claims very interesting and it has added a lot in me. I have some doubts here:

1. social cause - in any economy there are some basic requirements, the basic infrastructure like roads, education, health, etc. Do you mean to privatise everything possible? Privatisation may bring efficiency in the organisations but what about the affordability? Do you think no sector of the economy is left out? If a sector is left out and is out of the economy and if he doesnt get any government assistance, will he not turn out to be a social criminal?

2. When the economy is rising like in the developing countries, i think govt needs to invest heavily in infrastructure as per the economic needs while the private investors will invest only in the segments where there is high profitability. By this some of the segments are leftout and this will be the cause of the economic backlash in the future. What do u think on this?

3. Americans are heavy spenders and so it is also the largest market of the world. Many economists say that most of the Asian economies are running only by US consumptions. US has given more power to the private then any other country. It has deregulated the labor market but what about the fiscal deficit? Do you think the way US economy is going is safe enough for others to follow - less govt spending and more private ownerships? How do u see the US economy when many of its pillars are dying .... enron is out, GM and Ford are loosing? How do u analyse this situation?

4. Comparing India and China, China has built its infrastructure more and the govt spending is very high w.r.t the indians and so is the economy. China is growing faster than India, and the only reason is infrastructure as the govt in india is democratic and anyone want to come to India then to China provided they provide equal oppertunity. But the flow is seen the otherwise. The govt spending is strengthening the rural markets of China. comments on this plz.

5. Nepal govt had privatised most of its economy and it is the most capitalist country in the whole of South Asia but this resulted in social unrest, while the semi-socialist govts are slowing rising. dont u think a proper planning is necessary by the govt? One thing most of the countries while developing has been controlling their economy. the better the planning by the govt and more the govt spending the faster a country develop. Japan was most controlled market before opening its economy to the world. They had made huge investments with one of the highest tax rate in the world. Is this claim false??

I have seen by your comments that you follow that " the least governing govt is the best". But is this suatainable?

When a baby is born, if it is exposed to so much competition it will never get food and so will never grow. It needs protection till a certain stage of life when he can compete. So I think a optimal protection necessary for the new entrants in the market. Whats your view?

Stefen:

There are so many issues you raise. Let me try to keep the answer as simple as possible, mostly by referring you to other posts in this forum, e.g. the one on privatization.

The issue is not if investment is private or government, but if competition is legal. I wouldn't mind government as an agency, if it was just one actor among many and of course if government didn't finance its projects with tax revenue, which dissociates the payment from the actual demand and real cost.

Any infrastructure must be financed by the users. If users can't finance it, then who should? If there are "indirect benefits", the active users will charger their own costs (e.g. of road use for transportation of goods) to their customers through prices.
Every single infrastructure, including roads, railways, schools etc, were built privately in Europe and the US before the invention of the modern State, which is a very recent invention.

Things started getting worse, not better, when governments got involved. I highly recommend the book "The Myth of the Robber Barons", Burton W. Folsom, which documents wonderfully how an entirely privately operated railroad outperformed subsidized and then state run companies, to the point where government eliminated the annoying competitor through trumped-up anti-Trust charges.

Imagine that: government was running 80% or more of all the railroad services, but the tiny proportion that was run privately was supposed to "control" the market for railroad services and cause "unfair competition".

As a rule of thumb, any service operated by government costs 2 to 3x more than it would, if the exact same service was run through competitive enterprise. So the question becomes: can any society, especially a poor society, afford to waste so many resources? The answer is obviously NO.

The next question is: would private companies provide those services? The answer is YES. Why would government have to make laws to exclude competition, if no one wanted to compete? If government does not exclude private operators either directly or through excessive legal or financial requirements, then naturally, private companies will try to offer those services, as they expect them to be profitable.

The largest infrastructure project ever, the tunnel between England and France, was built with private resources. That is a very interesting example, as it turned out that there wasn’t really that much demand for it. The ferry services were quite good, though overpriced. What happened right away was that the new competition lowered the price of ferry tickets. Investors lost a lot of money, but the project was simply taken over by new investors, who were now operating at a lower cost. The initial investors had lost most of their capital, but that was their risk.
No one ever said that every infrastructure project is really useful and will be profitable. It is the risk of entrepreneurs to find profitable investments. Non-profitable ones represent a waste of resources and should be discontinued, if their cost cannot be lowered. Governments will finance such loosing projects at excessive cost way longer than any private business would.

Given that government operating costs are so much higher, they will even loose money on potentially profitable infrastructure, which is one of the many defects of loosing information via government interventionism and tax financing.

I don’t know enough about the situation in Nepal, except that government is very strong and cronyism is widespread. Hence I imagine that “privatization” really meant tax farming privileges handed over to people who are in favor with government. Tax farming is what brought on the French revolution. It has nothing to do with competitive enterprise.

As for China, what really drives their economic growth is the fact that they finally allowed people to keep most of the benefits of their private activity. It has nothing to do with government infrastructure, which would be built one way or another. As I understand, there is even a lot of excess infrastructure and useless, glamorous projects, instead of things that people would really need.

Extremely rapid growth is possible for countries that start low. They just need to copy what is already well known from elsewhere. When they approach the state of the art, growth will naturally slow down. The amazing thing is not that some countries grow rapidly, but that many others grow very slowly or not at all, which just demonstrates how many obstacles they must impose on all economic activities. They must use FORCE to stop people from acting in their own interest to remain so poor.

The most amazing thing is that people from more wealthy countries are lining up to invest in such poor countries, something that was entirely unavailable for people in Europe or the USA in the 19th century, because there were no foreign countries with great wealth and technology. They had no choice but to do it all by themselves. So what gives? The fact that there is very little protection for private property in poor countries, that political whims may change rapidly, that corruption is universal and finally, absurd nationalistic opposition.

Nationalism is particularly stupid. Think of Argentina: while some British companies were operating the Argentinean railroads, they ran perfectly well. But then, some idiot decided that they should be “nationalized” (he stole private property for his own benefit, garnering public support for the theft through emotional appeal). As a result, within a few years, those railroads stopped working. WHO owns a company is entirely unimportant to the consumer. The only thing that counts is that he can purchase some useful service at a low price.

India still has many roadblocks for foreign investment and so does China. The successes of China are currently so visible that the shortcomings are not given much thought, but they are quite real. If China grows faster than India, it simply means that India still has more bureaucratic hurdles, more corruption and less protection for private property.

The same is true for western countries: their comparative wealth is so great that they are assumed to have done everything right, when in fact they are far below the possible level of wealth they could have if they had not given in to Keynes and Socialism. Their wealth only seems great as compared to countries that really, really screwed up their economies.

The US are an incredible mix of a very free society with a very large and heavy government. The spirit in America is one of free enterprise and individual achievement, which is what creates all the very real wealth, while the government is often totally out of control. Fortunately, the total share of government in the US GDP is only about 29%, which goes a long way to explain their prosperity. More than the nature of any interventionism, it is the absolute share of GDP that is really important. In France, it is 65%, which explains why they have so many problems.

US spending is not the cause of US growth and their contribution to the world economy. Far more important is their very real productivity. Why should anyone want to sell to the US if they don’t expect to get anything in return? You don’t produce just for the benefit of US consumers, right?

Americans have a special trump: they benefited largely from the fact that a lot of foreigners are happy to hold US currency. Given the instability of most national currencies, the USD is still far more convenient. So Americans are able to buy tons of real goods in exchange for some pieces of paper, because these pieces of paper are of real value to their customers. Currency DOES have a value, if it is stable. The dollar is not, but it is still far more stable than most other currencies. The US supply a service to other people in the form of a universal currency system and they get a lot of consumer goods in exchange. Fair trade.

When some stupid Marxists propose to burn US dollar notes, I always wonder just how stupid they are: that is the greatest service they can render to Americans. If currency is burned, they will never have to deliver any good in exchange for it.

Even if foreigners did demand goods in exchange for their dollars, there wouldn’t be any shortage: the total wealth in the US in the form of land, buildings, companies and available services is immense, so people who sell to Americans do act rationally. The “trade deficit” is not a problem at all. We all run trade deficits. I for one buy a lot more from supermarkets than they buy from me, but that doesn’t bother either of us, because I earn income from other sources with which I am able to pay the supermarket.

“When a baby is born, if it is exposed to so much competition it will never get food and so will never grow.”

It is not really the baby that is competing, it’s his parents. And competition is exactly what allows the parents to buy food, health care and everything else cheaply. It is the lack of competition that produces poverty. Countries where children die of hunger know almost no competition at all. They do not participate in global trade. If they did, they wouldn’t be so poor. The more “protected” a country’s economy is, the poorer it is. Switzerland has almost no protectionism, except for agriculture. The only sector of the Swiss economy that is a complete failure is agriculture.

It’s amazing to see that when the market for cheese was finally deprived of protection and subsidies, it soared and started exporting like crazy. The producers simply didn’t have any alternative and so they started marketing their product, specialized in products where they had an edge and oh, surprise, they became profitable.

“ It needs protection till a certain stage of life when he can compete.”

A very bad analogy: companies are not children. A company is run by adult people who need to make rational decisions. Size is never a problem: small companies can be far more profitable than large ones.

“So I think a optimal protection necessary for the new entrants in the market”

The current justice minister of Switzerland, Christoph Blocher, is an entrepreneur. He got into politics as an act of self-defense against the increasing pressure on private business. He started his activity by taking over a tiny chemical company that was on the verge of bankruptcy. At great personal risk, he bought it and built it into one of the largest Swiss companies, with factories all over the EU and China. He went from zero wealth to 2 billion CHF.

His opinion on “protecting” small firms? “Any company that is not able to survive on its own should fail! There never should be any form of government protection or subsidies.” It is hard to survive when you run a small company, but its independent success is the only way to know if it is viable.


....................Thanks a lot Stefen. (Stefen is a Independent software from Switzerland, educating people on Economics is his hobby).