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Sunday, August 18, 2013

Economics – why has it become too complicated?

Recently I had a discussion  with a highly academically qualified [ in economics] and well experienced bureaucrat. While discussing, lot of theories of economics and names of great economists were popping off his mouth [ like it does with all theoretical economists like Manmohan Singh or the sick Amarthya Sen- I salute their knowledge in the field].

I could not remember even one tenth of whatever he was saying, not because I did not understand whatever he said but because I felt most of them were irrelevant , impractical and unimplementable in the context in which we were talking.

Then I realized why good theoretical economists can not only never become  good leaders like the politicians [ I mean here sincere and good ones] but they cannot even be  relied upon as economic advisers.

I wanted to reassure to myself that I was not arrogating myself to sit on judgement on all matters like TV anchors or act like the feigning petty know-all newspaper or news channel reporter but then I honestly wanted to evaluate why and where these highly qualified and knowledgeable people went wrong and ended up as footballs to be kicked by street smart politicians, cornered by small reporters, hated by the general public and cursed by generations who have been negatively impacted by their  perverted policies and deservingly consigned to the dustbins of history because of their dirty work.

No wonder the atlas of economic development has always been determined by intelligent leaders.

For the  sake of brevity I am writing in a paragraph my observations:

Economics – why has it become too complicated?

To me economics, like many things in life, is all about unbiased observations, unprejudiced perceptions, doing away with defensive statistical justifications, cutting off camouflaging irrelevant logical fallacies, chaffing off bombastic jargons, curtailing the instinct to churn out untested or untestable theories  and instead engage in interpretations of all the observed facts  uninfluenced by any ideological affiliations taking into consideration various factors that impact and/or involved in these facts appropriate to the context and relevant to the region.

By applying these criteria, I feel Julian L.Simon as one among the many great economists.

Here are some parts with summaries of some chapters of one of his work THE ULTIMATE RESOURCE culled from the internet

The late Julian Simon led a vigorous challenge to conventional beliefs about scarcity of energy and natural resources, the effects of immigration, and the 'perils of overpopulation'.
"With a full understanding of the opposition and smears he would encounter, Julian Simon nevertheless wrote 'The Economics of Population Growth', 'Population Matters', and his best-known book, 'The Ultimate Resource'. To him, the ultimate resource was human intelligence. We should also add, in his honor, the courage to use that intelligence."
        - Thomas Sowell

"A professor giving a lecture on energy declares that the world will perish in seven billion years' time because the sun will then burn out. One of the audience becomes very agitated, and asks the professor to repeat what he said, and then, completely reassured, heaves a sigh of relief, 'Phew! I thought he said seven million years!'"
     - Sauvy 1976
"My economic analyses rest on... some principles which are uncommon, and which may seen too refined and subtle for such vulgar subjects. If false, let them be rejected. But no one ought to enter a prejudice
against them, merely because they are out of the common road."

     - David Hume, Essays, 1777.
"Nothing is more responsible for the good old days than a bad memory."
- Franklin Pierce Adams

Food : Contrary to popular impression, food production per capita has been increasing for the half-century since World War 2, the only decades for which we have acceptable data. We also know that famine has progressively diminished for at least the past century. Average height has increased in developed countries in recent centuries, a sign that people are eating better.
Land: Agricultural land is not a fixed resource. The amount of agricultural land has been increasing substantially. Paradoxically, in the countries that are best supplied with food, such as the United States, the quantity of land under cultivation has been decreasing because it is more economical to raise larger yields on less land. For this reason, among others, the amount of land used for forests, recreation, and wildlife has been increasing rapidly in the US.
Natural Resources: Our supplies of natural resources are not finite in any economic sense. Nor does past experience give reason to expect natural resources to become scarcer. If history is any guide, natural resources will progressively become less costly, hence less scarce, and will constitute a smaller proportion of our expenses in future years. The costs of raw materials have fallen sharply over the period of recorded history, no matter which reasonable measure of cost one chooses to use.
Pollution : The key trend is that life expectancy, which is the best overall index of the pollution level, has improved markedly as the world's population has grown. This reflects the enormous decline in recent centuries in the most important pollutions - diseases borne by air and water.
Population: In 1989, the US Census Bureau forecast that US population would peak at 302 million in 2038 and then decline. Just three years later, the Census Bureau forecast 383 million in 2056 with no peaking in sight. The science of demographic forecasting clearly has not yet reached perfection.
Present trends suggest that even though total population for the world is increasing, the density of population on most of the world's surface will decrease. This is already happening in the developed world.

Immigration: The migration of people from poor to rich countries is as close to an everybody-wins government policy as can be. Countries in North America and Western Europe thereby advance just about all their national goals - higher productivity, a higher standard of living, and an easing of the heavy social burdens caused by a growing population of aged dependents. Immigration does not even increase native unemployment measurably, even among low-income groups.
"Summing it all up, for nearly all the nonrenewable resources, the known or confidently expected world stores are thousands of times as great as the annual world consumption. For the few which like petroleum are available in relatively small quantities, substitutes are known or potential sources of alternative supply are at hand in quantities adequate to meet our current needs for many thousands of years. There is no prospect of the imminent exhaustion of any of the truly essential raw materials, as far as the world as a whole is concerned. Mother Earth's storehouse is far more richly stocked with goods than is ordinarily inferred."
        - Kirtley Mather
"Reserves are but a small part of the resources of any given commodity.  Reserves and resources are part of a dynamic system and they cannot be inventoried like cans of tomatoes on a grocer's shelf. New scientific discoveries, new technology, and new commercial demands or restrictions are constantly affecting amounts of reserves and resources.  Reserves and resources do not exist until commercial demand puts a value on a material in the market."
        - Donald Brobst
A vivid illustration of the changing role of natural resources is a floppy computer disk: with a standard word processing program on it, it sells for $450. It embodies only a cent's worth of petroleum and sand.
If mineral resources such as copper will be more scarce in the future - that is, if the real price (netting out inflation) will rise - you can make money by buying the minerals now and selling them later at higher prices. As soon as information about an impending scarcity becomes known and accepted, people begin buying the commodity; they bid up the present market price until it reflects the expected future scarcity. Current market prices thus reflect the best guesses of professionals who spend their lives studying commodities, and who stake their wealth and incomes on being right about the future.

The Japanese, and above all Japanese officialdom were seized by hysteria in 1974 when raw materials shortages were cropping up everywhere (due to the OPEC oil embargo). They bought and bought. Now they are frantically trying to get out of commitments to take delivery, and have slashed raw materials imports nearly in half.
Japan began paying heavily for this blunder. The program of stockpiling strategic materials is one more testament to the human propensity not to trust the workings of markets and to only feel comfortable when one has control of resources - especially when someone else is paying the bill. The result of this propensity is that the public pays a pretty penny for the folly.

False scares are not costless and benign; far from it. Starting in the early 1970s, Mexico and Venezuela borrowed heavily to finance the development of oil. But the price index of Latin American exports sank sharply from 1974 to the late 1980s, vastly exacerbating the debt crisis of the 1980s. Mexico and Venezuela could not sell oil at the high prices they had anticipated.
"Of what use is research? Of what use is a baby?"
- Michael Faraday
There is one resource that has shown a trend of increasing scarcity rather than increasing abundance - the most important of all resources - human beings. Yes, there are more people on Earth than ever before. But if we measure the scarcity of people the way we measure the scarcity of other economic goods - by how much we must pay to obtain their services - we see that wages and salaries have been going up all over the world, in poor countries as well as rich countries. The amount that you must pay to obtain the services of a driver or a cook has risen in India, just as the price of a driver or cook - or economist - has risen in the United States.
The common morally charged statement that the average American uses (say) 90 times as much X as does the average Asian or African (where X is some natural resource) can be seen as irrelevant. The average American also creates a great deal more of 'natural' resource X than does the average African or Asian - on average, by the same or greater proportion as the resource is used by Americans compared with Asians and Africans.
Our whole evolution up to this point shows that human groups spontaneously evolve patterns of behaviour, as well as patterns of training people for that behaviour, which tend on balance to lead people to create rather than destroy. Humans are, on net balance, builders rather than destroyers. The evidence is clear: the civilization which our ancestors have bequeathed to us contains more created works than the civilization they were bequeathed.
In short, humankind has evolved into creators and problem solvers. Our constructive behaviour has counted for more than our using-up and destructive behaviour, as seen in our increasing length of life and richness of consumption.

Such statements as 'The US has 5% of the population, and uses 40% of resources,' without reference to the creation of resources by the same US population. Many writers have commented on the fact that natural phenomena such as copper and oil and land were not resources until humans discovered their uses and found out how to extract and process them, and thereby made their services available to use. Hence resources are, in the most meaningful sense, created.
"As for the Arts of Delight and Ornament, they are best promoted by the greatest number of emulators. And it is more likely that one ingenious curious man may rather be found among 4 million than among 400 persons."
- William Petty, 1682.
"Wherever there are most happiness and virtue, and the wisest institutions, there will also be the most people."
- David Hume, 1777.
"Little else is required to carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things."
- Adam Smith
"It is impossible for the arts and sciences to arise, at first, among any people unless that people enjoy the blessings of a free government. An unlimited despotism effectually puts a stop to all improvements, and keeps men from attaining knowledge. A republic necessarily by an infallible operation gives rise to law. From law arises security; from security curiosity; and from curiosity knowledge. Nothing is more favorable than the rise of learning than a number of neighboring and independent states, connected together by commerce. The divisions into small states are favorable to learning, by stopping the progress of authority as well as that of power."
- David Hume
Consider these countries, and try to guess which one(s) is (are) rich and which poor: (1) Landlocked, mountainous, almost no oil or metals or other extractive resources, little flat farmland, high population density; (2) So flat and low that it is in constant danger of being flooded by the ocean (which has happened many times in its history), high population density, no natural resources; (3) Fastest population growth rate, and largest rate of immigration, in the world in the past half century, very high population density, no natural resources (not even fresh water); (4) Low population density, huge stores of natural resources, much fertile farmland.
In order the first three countries are Switzerland, Holland, and Hong Kong. The fourth country might be most of the countries in Africa or South America. The first three are among the richest and most economically vibrant countries on Earth; many of the fourth group are dirt poor.
Bangladesh and Holland are both very low to the sea, though Bangladesh has a much better climate for agriculture. If the Dutch were in Bangladesh for a quarter of a century and applied their skills in farming and in keeping the sea at bay, or if Bangladesh had the same institutions and educational level as the Dutch, Bangladesh would soon be rich, as Holland is.
The extraordinary improvement in the cleanliness of the environment may be discerned from the types of pollutants that Americans now worry about - substances of so little harm that it is not even known whether they are harmful or not. Alar was a notorious false alarm, as was DDT. There is equipment today that allows you to dinf a whole lot of nasty things in the food we eat. This does not imply that these substances hurt us.
As wealth increases, one of the goods that people are prepared to buy is a cleaner environment. The demand for a cleaner environment may be expressed through political activity, as was observed centuries ago in Great Britain; citizens clamor for businesses to be held responsible for their noxious emissions, which is entirely consistent with free-market principles.
The most horrifying stories of air pollution in recent decades come from Easten Europe. The revelations in the 1980s of the terrible air and water pollutions in Eastern Europe have provided powerful evidence of the role of government structure in such matters.

Saudi Arabia no more 'supports' the Netherlands by exporting oil than the Netherlands 'supports' Saudi Arabia by exporting electronic goods. If you are white-collar workers, you support a farmer with what you produce just as much as the famer supports you. To divide the exchange in half and call one direction 'supportive' and the other 'exploitive' can only be misleading. Any attempt to make each of us self-sufficient pushes us back toward the short, sickly, hungry, impoverished life of subsistence agriculture.
Anthropologists lament the arrival of civilization to the Yonomami Indians of Brazil. But the anthropologists also seek the health and cultural benefits of civilization on behalf of the group. Whichever way it goes they will feel regrets, and both cannot be the case. It is natural to want things both ways. When an economist uses quintessential economic thinking to point out that we must accept the necessity for a trade-off and that we cannot usually have our cake and eat it, the argument is met with denial of any such necessity.
The economist does try to focus on matters other than motivations. Economists care more about results than intentions. If we can succeed in focusing others' attention on results rather than intentions, too, we will achieve results that people will like better than they will otherwise obtain.

Should you conserve energy by turning off lights that are burning needlessly in your house? Of course you should - just as long as the money that you save by doing so is worth the effort of shutting off the light. Recycling does not 'save' trees. It may keep some particular trees from being cut down. But those trees never would have lived if there were no demand for new paper - no one would have bothered to plant them.
An increase in the population of chicken hawks leads to fewer chickens, but an increase in the population of humans leads to more chickens. Consider elephants. If people can personally benefit from protecting elephants, and then selling their ivory and the opportunity to hunt them, the elephant population will grow in that place - as is the case now in Zimbabwe and Botswana where ownership belongs to some regional tribal councils.
But where no one has a stake in the welfare of elephants because they are owned only by the 'public' at large, a ban on the sale of ivory will not prevent the elephant herds from being slaughtered.

Some say that the human population should be stabilized or reduced because we threaten some species of animals. This raises interesting questions. If we assume there is a trade-off between more people and more of species X, then which species should we favour? Buffalo or golden eagles over Homo Sapiens? If yes, does the same logic hold for rats and cockroaches? And how many people do we trade for more buffalo? Should the whole Midwest be made a buffalo preserve, or do we want only to maintain the species this side of extinction? If the latter, why not just put them in a few big zoos? And do we want to protect malaria-carrying mosquitos from extinction?
We ought to consider the species of animals whose numbers are increases when the human population increases - chickens, goats, cattle, minks, dogs, cats, laboratory white mice, and canaries. Is this a justification for increasing the human population? Here lies a problem for those who are against killing animals for food or clothing. Without humans to consume these products there would be fewer chickens and minks to be killed. Which way does one prefer to have it from the viewpoint of animal welfare?
Where costs do not settle the issue, the decision about what is conserved, and how much, is a matter of tastes and values.

Of those who praise a reduction of population in the name of making the world more beautiful, I ask these questions: (1) Have you not seen much beauty on this Earth that comes from the hands of humans - gardens, statues, skyscrapers, graceful bridges? (2) The population of Athens was only 6000 persons in 1823. Do you suppose Athens was more beautiful in 1823, or two millennia earlier when it was more crowded? (3) If the world's population now were only a hundredth of what it actually is, would there be a transportation system to get you to Yosemite, the Grand Canyon, the Antartic, Kenya's wildlife preserves, or Lake Victoria?
Enabling a potential human being to come to life and to enjoy life is a good thing, just as protecting a living person's life from being ended is a good thing. Of course a death is not the same as an averted life, in large part because others feel differently about the two. Yet I find no logic implicit in the thinking of those who are horrified at the starvation of a comparatively few people in a faraway country (and apparently more horrified than at the deaths by political murder in that same faraway country, or at the deaths by accidents in their own country) but who are positively gleeful with the thought that a million or ten million times that many lives will never be lived that might be lived.
I do not say that society should never trade off human life for animals or even for nonliving things. Indeed, society explicitly makes exactly this tradeoff when a firefighter's life is lost protecting a building or a forest or a zoo, and neither I nor hardly anyone else says it should not be so.

"I know that it is a hopeless undertaking to debate about fundamental value judgments. For instance, if someone approves, as a goal, the extirpation of the human race from the earth, one cannot refute such a viewpoint on rational grounds."
- Albert Einstein, "Ideas and Opinions"

"Dr Paul Ehrlich predicted that the ocean could be as dead as Lake Erie by 1979. Today Lake Erie is palatable, and Dr Ehrlich still is not."
     - PJ O'Rourke, "All The Trouble In The World"
You may wonder why the tone of this book is so overwhelmingly positive whereas that of most popular writings is no negative. The most important explanation, I think, is the nature of the comparisons that are made. The comparisons in this book mostly compare now with earlier times. The comparisons others make often show one group versus another, or contrast how we are versus how we think we should be or would like to be - situations that guarantee a steady flow of depressing news.
The doomsters say that there are too many of us; on the other hand, they warn that we are in danger of most of us being wiped out. Usually, a larger number of members of a species is greater protection against being wiped out. The doomsters reply that because there are more of us, we are eroding the basis of existence, and rendering more likely a 'crash' due to population 'overshoot'; that is, they say that our present or greater numbers are not sustainable. But the signs of incipient catastrophe are absent. Length of life and health are increasing, supplies of food and other natural resources are becoming ever more abundant, and pollutants in our environment are decreasing.
The world's problem is not too many people, but lack of political and economic freedom. Powerful evidence comes from pairs of countries that had the same culture and history and much the same standard of living when they split apart after WW2 - East and West Germany, North and South Korea, Taiwan and China. In each case the centrally planned Communist country began with less population 'pressure', as measured by density per square kilometer, than did the market-oriented economy. And the Communist and non-Communist countries also started with much the same birthrates. But the market-directed economies performed much better economically than the centrally planned economies. This powerful demonstration cuts the ground from under population growth as a likely explanation of poor economic performance.
If Indians and Americans exchanged countries, in a few decades the United States would look like India now, and India like the United States.
The most important benefit of population size and growth is the increase it brings to the stock of useful knowledge. Minds matter economically as much as, or more than, hands or mouths. In the long run the basic forced influencing the state of humanity and its progress are the number of people who are alive to consume, but also to produce goods and knowledge; and the level of wealth.

Wealth is far more than assets such as houses and cars. The essence of wealth is the capacity to control the forces of nature, and the extent of wealth depends upon the level of technology and the ability to create new knowledge. A wealthy world can find remedies for a new disease more quickly than can a poor world, because the wealthy world possesses stocks of knowledge and skilled persons. That's why wealthy groups live longer, with better health and fewer accidental deaths.

It is a proof of our extraordinary success in healing the Earth that the horrors of the past which were transmitted by filthy air and water are no longer even thought of as pollutants. Now that we have largely overcome humanity's historic enemies - wild animals, hunger, epidemic disease, heat and cold - we worry about a large new class of phenomena in the environment and society. This saying expresses this idea: No food, one problem; plenty of food, many problems.
Some say 'If we have more children, when they grow up there will be more adults who can push the nuclear button and kill civilization'. True. More generally, as one writer reduced the matter to an absurdity: 'All human problems can be solved by doing away with human beings'. But to have more children grow up is also to have more people who can find ways to avert catastrophe.
"Multitudes of people, necessity, and liberty have begotten commerce in Holland."
- David Hume, "Of the Rise and Progress of the Arts and Sciences"
In that short sentence, Hume summarized everything important about economic progress - economic liberty, which comes from a country being 'ruled by laws rather than men,' allows people to make the most of their individual talents and opportunities; necessity - that is, in Holland's case, the lack of great stretches of fertile land on which to grow crops easily, and therefore the necessity of creating new fertile land by fighting the sea for that land; and multitudes of people - the human talent to invent new ways of doing things and of organizing and effective society.

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