[msdivy]

@tsk1979, the instances you quote has got nothing to do with economics as a subject or its failure. Those are examples of exploitation of employees. At best it amounts to bad HR policies or scrupulous corporate ethics.

I might be repeating myself, but let me add, economics, like maths is a subject. If somebody adds up wrongly and short changes, doesn't mean maths has failed. Likewise, in the examples you have quoted, someone has picked up some economic logic to justify their unethical practice.

Coming to original question, people pay for value, comfort, service, convenience. If somebody pays doesn't mean they are losing money. Its just that they are happy and you made a profit.

[vivekiny2k]

Originally Posted by msdivy

Money multiplier is different concept and is not related to profit/loss. With money multiple, the central bank can ensure many times the original money is in circulation in the economy. Just to give a simple example, RBI might lend Rs 900 (print Rs 1000 amount and keep as Rs 100 interest) to big banks. Big banks might lend Rs 800 to smaller banks (Rs 900 amount with Rs 100 interest deducted). Smaller banks might lend Rs 700 to money lenders (Rs 800 amount with Rs 100 interest deducted). Money lender might lend Rs 600 to people (Rs 700 amount with Rs 100 interest deducted) and so forth.
Big banks think they have Rs 900. Small banks think they have Rs 800. Money lenders think they have Rs 700. People think they have Rs 600. So there is Rs 3,000 (900+800+700+600) in the market. But RBI printed just Rs 1,000.

PS: I am not an economist. Please correct if any point is wrong.

What you are saying is money multiplier is exactly what I made it out to be, creating more supply of money in market. instead of clogging the thread, I just gave a pointer to the wikipedia article.

you could question why I put it it here in the first place, that was because I was afraid somebody would come and say economics is a zero sum game, how can one create bubble. there are the economic tools that help us create the bubble, overconsume, and then go in recession.

Originally Posted by roy_libran

Almost there, but IMO, this sentence needs to be edited as follows:

You win, because you get the search results you want for free. But, You Lose, since you are going to pay for all of this, by buying something that you perhaps did not NEED (not WANT), aka Consumerism.

At the end, everyone else Profited, and customer Pays.

that's why trade is usually prefixed with "voluntary" in economics. You would not pay until you think the return is more than the worth of money you are paying for it. so if you pay, you did get mpre than the worth, hence a win win situation. in absence of google, you may not even have found out about the coffee maker that saves you time (that you value so much that you paid a handsome amount of money for it) and would continue to make it by hand.

Originally Posted by tsk1979

A meltdown would a global pandemic which reduces the population of the world. Eg Spanish flu in 1918.

Last I checked, doctors are saving people who otherwise would have died. So quite a wrong analogy.

let me extend the analogy. the spanish flu is mitigated, but if you were to look at the number of diseases "created" because of the medical science in last one century, you would know that even with good intentions, science can create bad outcome.

Economic tools have solved most basic problems, but created more complicated ones that need much more scrutiny.

Originally Posted by tsk1979

Yes, the risk reward ratio has gone for a total toss.
Risk is transferred to the small guy now, without the rewards.

A guy with 50 million dollars losing 1 million loses more than guy making losing 80,000$ out of 100,000$, but if you look at the loss, the little guy, while making less loss, actually lost most of his earnings.

So 80000$ loss is much less than 1 mill$ loss, however, in income terms, the small guy actually suffers much more.

which is why I said economics can be evil (or good), depending upon how it's applied. Economists advocate cutting off a region which is not profitable (think quake, flood, etc). Government on the other hand is obliged to put more money in that region to save people's lives. Which is why govt and business are almost always in conflict, which is good, else we will have a one sided decision.

To save one from evil economists, we put our faith in the government which we elect, and hope it will create a balance between profitability and social good. The problem you keep referring to is really the social good, which is almost always opposite to economic (rational) decision making of corporates.

[phamilyman]

Originally Posted by roy_libran

At the end, everyone else Profited, and customer Pays.

No absolutely not. Here, let me give you another practical example.

A friend of mine is running Book cab - Hire Taxi - Rent Car in Delhi Mumbai Bangalore Hyderabad - Online Car Rental Portal (Get Me a CAB) How does he make money?
- Indica Taxis today run at 50-70% occupancy (small independent guys, not contracted call center cabs) (i.e days of usage) and are barely profitable
- My friend is offering quality services at the regular market rates, but being an internet demand aggregator, he is able to ensure 80-90% occupancy if not more.
- He makes a very nominal margin which is totally offset by the increased cab occupancy
- Customers like you and me get a more assured service at cheap rates (let's face it - no one wants to pay meru rs 20/km out of their own pockets)

so its TRULY WIN-WIN. There are many more examples, but coming back to google, what it does, by driving so much more business (at a very slightly lesser margin) to the vendor, that the customer does not REALLY pay extra.

Originally Posted by Samurai

Exactly, this is what most people fail to grasp.

Economics is not a zero sum game. In fact, it is opposite. Economics strives to maximize benefits for everybody who participates in the transaction. However, it is not easily evident to everybody. Therefore, it leads to misconceptions like one can profit only at the cost of others. Thanks to this misguided idea, poorer people start hating the richer people even though their income sources are unrelated.

As before, let me take a very simple example.

X is a farmer, who grows rice.

Y is a goat herder, who milks the goat and also slaughters them for meat.

Let's say currency doesn't exist for now.

X can manage to live just eating rice. And Y can manage to live just eating meat and drinking milk. But that will really limit their food options. However, they are neighbors, and they decide to barter portion of their food. As a result X gets to eat rice + meat + milk. And so does Y. Can you tell me who is the loser here? None. Both benefited by the exchange. Both improved their diet by this transaction. This is the Win-Win situation.

Wonderful example. Exactly what I wished to quote - damn Sam!

Basically barter works in a world without currency. the problem with commodities is that you cannot move things further. So even though i need milk, but if you need chicken, you will sell your milk to someone who has chicken.

Currencies' role is to encourage trade - where you are not limited to a world of exactly matching your wants with someone else's tradeable assets.

The beauty of currency and esp why it is NOT zero sum is that it can be invested or circulated. So investment means that money can CIRCULATE in the system, unlike a chicken or a mug of milk. If you give me a mug of milk, and i have drunk it - that's it. the end.

but with money, it multiplies. so if the government gives money for NREGA, first an asset is created and poor villagers get wages, then they spend it on food, which increases demand, and thus prices go up, and inflation index goes up, and govt gives even more money for NREGA and then our taxmen want more tax from us! See, can so much economic mess be caused by just bartering chicken with rice or milk? no! So money is a multiplier.

If used as an agent, its awesome. Used as NREGA, its a money-hole. But that's another topic for another day.

[Samurai]

Originally Posted by Hayek

The right solution to fuel pricing in India is to get the government out of the way - reduce customs duties to zero, decide on a moderate level of specific central and state VAT (fixed as Rs. Per liter instead of percentage of selling price, can vary by state), be clear that the government owned OMCs will never receive any subsidies from either the GOI or upstream oil producers, let private sector companies market fuel products, and wait for the benefits of competition to set in. Fuel prices will vary every day like prices of tomatoes or onions, there will be times when prices are too high, but the premium to crude will be driven by efficient private sector cost structures than by opaque PSU under recovery calculations.

Well, it all sound very plausible. In fact, it sounds like what Adam Smith said in wealth of nations. In fact, Alan Greenspan pushed this idea for a long time and look where we ended. I too believed in 100% free market for most of my career, but after seeing what happened to US economy that followed this motto has left me disillusionized.

If the people who are making decisions in a 100% free market economy are ethical, then the economy would truly reap all the benefit of truly free market. But that is never the case. After a while (may be right away), even in a 100% free market, companies will look to maximize profits at any cost. The interest of the public is never taken into account, since companies don't answer to public, but only to shareholder who want more and more profits. Government is the only entity that is answerable to public, per se, because they want to be re-elected. A large company run by professional managers will always look at bottom-line, and never at greater good. Government regulation is the only thing that reins them back.

Remember, even Alan Greenspan agreed he was wrong about his life long policy. http://www.nytimes.com/2008/10/24/bu...y/24panel.html

Therefore, please don't think that the self-correcting power of free markets will look after the interest of general public. In a long run, it never has. Government regulation of fuel prices is a necessary evil.

[Hayek]

Originally Posted by Samurai

Well, it all sound very plausible. In fact, it sounds like what Adam Smith said in wealth of nations. In fact, Alan Greenspan pushed this idea for a long time and look where we ended
....

Therefore, please don't think that the self-correcting power of free markets will look after the interest of general public. In a long run, it never has. Government regulation of fuel prices is a necessary evil.

I guess we are drifting off topic here but since you are an admin, I can be permitted a response. Please delete this post if you think it is inappropriate.

The claim that the global economic crisis was caused by free markets is a myth propagated by the Media, especially the lead demagogue of the NY Times, Paul Krugman. The fact is that government regulators like Alan Greenspan, who played lip service to free markets, but kept interfering in them all the time (whether through the LTCM bail out, super low rates post the dot com bust or 9-11), were substantially responsible for the crisis. Effectively, the US government created a one way bet for banks and hedge funds - if you take risks and win, you gain; if you lose, the government steps in through low rates or an orchestrated bail out to socialize part of the losses. Other government regulations such as stepping in to bar short sales added to the market distortions and made it impossible for those who saw that the status quo was not sustainable to use market mechanisms to correct the distortion. The one way bet still continues - what with LTRO, QE 3 et al.

The private sector will always try to exploit loop holes created by government regulation, whether it is by making a one way bet in the US financial sector or by buying diesel cars and using subsidized diesel, LPG or even kerosene in their businesses. Remember the Bombay Club, when a number of industrialists got together to slow down economic reforms in the 1990s?

Government regulation creates a false perception of stability in inherently unstable systems, and provides opportunities for the connected and the influential to create and exploit arbitrage opportunities. Increasing government interference hurts the ordinary Joe the most. If the oil subsidies in India are not scrapped and soon (and please don't tell me that the government should not tax fuels - it would need to reduce other expenses or raise other taxes in that case), India is heading head-long into a 1991 style crisis. Please remember that your net worth measured in USD terms has probably fallen 20% in the last 12 months (unless you are an industrialist who has moved the majority of your net worth outside India through acquisitions etc.). Free markets are not perfect and are inherently unstable. But there is ample empirical evidence to show that the instability created by governments is greater than that created by markets, and with the added disadvantage that governments can be and usually are bought by vested interests.

[Samurai]

Originally Posted by Hayek

The private sector will always try to exploit loop holes created by government regulation

And what will they do in complete absence of regulation? With no ethical compass, such freedom can be completely misused to the hilt. Right now I am late for something, I'll add more later.

[Samurai]

The main reason why I moved the posts after #64 to this thread is because I wanted a pure discussion on the role of Government Regulation in economics. Finally I have some time to discuss it.

Originally Posted by Hayek

The private sector will always try to exploit loop holes created by government regulation, whether it is by making a one way bet in the US financial sector or by buying diesel cars and using subsidized diesel, LPG or even kerosene in their businesses. Remember the Bombay Club, when a number of industrialists got together to slow down economic reforms in the 1990s?

Government regulation creates a false perception of stability in inherently unstable systems, and provides opportunities for the connected and the influential to create and exploit arbitrage opportunities. Increasing government interference hurts the ordinary Joe the most.

This is what I call as the anecdotal approach to describing economics. It is like deciding all dogs are bad, because dogs sometimes bite little children.

Citing bad regulation is not an argument for doing away with all regulation.

Corporates have only one only agenda, maximize profits to the company while staying within the law. If there is no law (regulation), they can do anything. In the absence of environmental law, industries can pollute rivers and ground water with impunity. In the absence of trade practices law, industries can lie to & cheat customers and get away with it.

Why did US companies move most of their manufacturing operations to third world countries? They say to reduce cost. Guess which countries have the least cost, the ones with least regulation. That is why most of the electronics we buy are made in sweat-shop like factories in China.

Check this article published in Journal of Business Ethics: http://www.utm.edu/staff/jfieser/vit...h/business.htm

Originally Posted by Hayek

Free markets are not perfect and are inherently unstable. But there is ample empirical evidence to show that the instability created by governments is greater than that created by markets, and with the added disadvantage that governments can be and usually are bought by vested interests.

Well crafted regulation when combined with proper enforcement does a good job in forcing the companies to do the right thing. A thermal power plant can be forced to cleanup the effluents before releasing it into rivers by law. In the absence of such law, they wouldn't. A good consumer protection law can severely penalize companies that cheat the customers.

This is what regulation is supposed to do. However, if the industry lobbyists manage to bribe the politicians to create a bad regulation, then it is the subversion of the system. You shouldn't use that as a reason for doing away all regulation.

[tsk1979]

When left alone, without regulation, free market turns into a free market illusion. Its in the interest of competitors to collude, and eventually create monopolys and duopolys and cartels.
Thats why you need FCC to forcible stop mergers of big telcos, you need regulatory authorities to prevent big OS makers from forcing hardware vendors to carry their OS, you need the govt to go after companies when they cartelize memory prices.

With no regulation, its in the best interest of companies to collude(esp in sectors which high entry barrier), indulge in price fixing, and cartel formation

So govt interference and regulation is absolutely necessary, even if it causes heartburn. The corporates are already subverting regulation, imagine what kind of mess they would cause without any.

[e1t1bet]

Late comer in this thread, but still:
Say the government doesn't intervene the way it does today. I like how everyone uses a hypothesis like "it's not even imaginable what corporates would do...". I want to know at least one hypothesis that is more specific. Please bear in mind that free-market advocates are not anarchists. They do advocate companies to be taken to courts of justice for fraudulent behavior - i.e. basic laws exists to protect contracts between companies and customers. They simply do not want government to make laws that would have a direct impact on the market dynamics involved in arriving at a market price. Any regulation of such kind leads to regulatory capture (corporates lobbying first, and then literally buying out the government)
Say, hypothetically I remove Department of Telecom today - reducing its size to the bare minimum required to simply sell spectrum to the highest bidder. Even if one guy wants to buy all the spectrum (2g+3g+4g) and has the cash, I sell it all to him. However, there are no regulations on how spectrum is shared, what is roaming, how numbers can be ported etc, minimum level of technical competency required etc.
I can see 100s of benefits as a consumer already (like, as of today, I am stuck with a Vodafone number on roaming in Karnataka where Vodafone has a horrible network - and I can't get an MNP done because it's illegal as per DOT. Or that random websites get blocked by DOT)
What benefit do I, or anyone, get from its existence???
I'd like to know what you mixed-economics guys think. I have always heard arguments like "oh, it'd be horrible and unimaginable". What is that unimaginable, and how is it any worse? Please elaborate

[Samurai]

Originally Posted by e1t1bet

Say, hypothetically I remove Department of Telecom today - reducing its size to the bare minimum required to simply sell spectrum to the highest bidder. Even if one guy wants to buy all the spectrum (2g+3g+4g) and has the cash, I sell it all to him.

You mean you prefer monopoly? Without any competition, that guy can literally rob the customers at antenna point.

Originally Posted by e1t1bet

I can see 100s of benefits as a consumer already (like, as of today, I am stuck with a Vodafone number on roaming in Karnataka where Vodafone has a horrible network - and I can't get an MNP done because it's illegal as per DOT. Or that random websites get blocked by DOT)
What benefit do I, or anyone, get from its existence???
I'd like to know what you mixed-economics guys think. I have always heard arguments like "oh, it'd be horrible and unimaginable". What is that unimaginable, and how is it any worse? Please elaborate

You want us to defend one more bad regulation? Sorry, not falling for that one.

Listen, this theme is repeating on this thread over and over. Every time some economic theory is explained, somebody quotes a bad policy or bad enforcement or both, and claim that the theory is wrong.

[e1t1bet]

Originally Posted by Samurai

You mean you prefer monopoly? Without any competition, that guy can literally rob the customers at antenna point.

And which telecom provider is sitting on that kind of cash - to be able to buy the entire pan-India spectrum? The 3g spectrum auctions were more-or-less at market rates - and not a SINGLE provider could buy a pan India license, let alone buying exclusive rights to the entire spectrum. Again - please specify how a monopoly would occur?

Originally Posted by Samurai

Listen, this theme is repeating on this thread over and over. Every time some economic theory is explained, somebody quotes a bad policy or bad enforcement or both, and claim that the theory is wrong.

Of course I am going to cite bad regulations
Well, the statists,socialists and those on the other side, do much worse. They have been in control since Independence, and managed to do nothing other than come up with bad regulations. At least we are citing real examples. All the criticism by central-planners tend to be unproven hypothesis along the lines of "OMG! If you do this, then Umbrella corporation will arrive" - without any sound basis.

Since this is team-bhp, and I must cite more bad regulations - insane import duties on cars. This single regulation has ensured that each and every car manufactured out of India is overpriced and under-equipped.

[Samurai]

Originally Posted by e1t1bet

And which telecom provider is sitting on that kind of cash - to be able to buy the entire pan-India spectrum? The 3g spectrum auctions were more-or-less at market rates - and not a SINGLE provider could buy a pan India license, let alone buying exclusive rights to the entire spectrum. Again - please specify how a monopoly would occur?

Again, you are trying to extrapolate economic theory from a certain prevailing situation in a particular industry. Situations can change, but the theory won't.

Originally Posted by e1t1bet

Of course I am going to cite bad regulations
Well, the statists,socialists and those on the other side, do much worse. They have been in control since Independence, and managed to do nothing other than come up with bad regulations. At least we are citing real examples. All the criticism by central-planners tend to be unproven hypothesis along the lines of "OMG! If you do this, then Umbrella corporation will arrive" - without any sound basis.

Economic theory is like Newton's laws of motion. Trying to disprove economic theory using bad examples, is like trying to disprove Newton's laws of motion by citing a strange traffic accident.

"The baby survived an car accident at 100kmph without a scratch. Newton's laws of motion must be wrong!"

This thread is about explaining economics theory, and not about explaining bad implementations.

[e1t1bet]

Originally Posted by Samurai

Again, you are trying to extrapolate economic theory from a certain prevailing situation in a particular industry. Situations can change, but the theory won't.

Economic theory is like Newton's laws of motion. Trying to disprove economic theory using bad examples, is like trying to disprove Newton's laws of motion by citing a strange traffic accident.

"The baby survived an car accident at 100kmph without a scratch. Newton's laws of motion must be wrong!"

Nonsense. The basic tenet of the scientific method (at least as per Popper - and what is the widely accepted principle) is that (1) it must be falsifiable and (2) if a claim is made which renders the theory false - it must either address it, or modify itself.
Give me one example of non-quantum, non-relativistic physics where Newton's laws fail, or the theory of gravity fails - and I'd rest my case.

Originally Posted by Samurai

This thread is about explaining economics theory, and not about explaining bad implementations.

The problem with a lot of economic theory is that it's not hard science, and as a consequence its validity (and efficacy) is masked because of political interests.
Also, what do you mean by economic theory? There are a lot of different schools to begin with. There are classicals, keynesians, neo-classicals, neo-keynesians, austrians, monetarists etc. Thus, it is prudent to discuss how well grounded some, or all, of these theories are - if the thread is really about explaining "economic theory" i.e.

[RS_DEL]

Originally Posted by tsk1979

When left alone, without regulation, free market turns into a free market illusion. Its in the interest of competitors to collude, and eventually create monopolys and duopolys and cartels.


So govt interference and regulation is absolutely necessary, even if it causes heartburn. The corporates are already subverting regulation, imagine what kind of mess they would cause without any.

+1 to your contentions.

To further validate your post I will just cite one example. The entire Mortgage linked Bond crisis. Ever since Glass-Steagall Act was repealed in the U.S. the unfettered environment lead to banking corporations evolve into bloody casinos. The differentiation between pure banking services and investment banking became illusory at best. This single dilution of regulatory control lead to this mind boggling fiasco where bankers dumped their fiduciary responsility into the garbage bin and engaged in rank criminal abdication of responsibility in favour of annual bonuses. All they wanted was asset creation linked bonuses. No control or oversight on credit quality.Laissez faire at it 's best!! So even though I abhor state intervention in economic activity I believe that the experience of free markets right from the tulip mania till date suggests that markets need regulation to perform their primary function i.e. facilitating trade and fostering comeptetion for the benefit of the larger majority else they tend to be subverted to benefit a powerful minority.

[e1t1bet]

Originally Posted by RS_DEL

+1 to your contentions.

To further validate your post I will just cite one example. The entire Mortgage linked Bond crisis. Ever since Glass-Steagall Act was repealed in the U.S. the unfettered environment lead to banking corporations evolve into bloody casinos. The differentiation between pure banking services and investment banking became illusory at best. This single dilution of regulatory control lead to this mind boggling fiasco where bankers dumped their fiduciary responsility into the garbage bin and engaged in rank criminal abdication of responsibility in favour of annual bonuses. All they wanted was asset creation linked bonuses. No control or oversight on credit quality.Laissez faire at it 's best!! So even though I abhor state intervention in economic activity I believe that the experience of free markets right from the tulip mania till date suggests that markets need regulation to perform their primary function i.e. facilitating trade and fostering comeptetion for the benefit of the larger majority else they tend to be subverted to benefit a powerful minority.

@The Glass-Steagal act: Would you really call it removal of regulations, or implementing a new regulation - that'd allow investment banks to access FDIC insurance?
The libertarian position was always clear: If you remove GSA, then don't allow FDIC insurance to anyone.
This just brings to light the problem with allowing politicians (who get influenced by lobbies) to regulate the economy. They'd only selectively bring in regulations that benefit their masters - what is now called regulatory capture. Under a free-market - there would have been no GSA. But then, there would be no FDIC or bail-outs for banks either. You fail - you pack your bags. Period.

Also, please do not forget that a big reason for the crisis was excessive subprime lending, and not "gambling" with the money of the savings accounts holders. Again - the Congress actively backed ninja loans.