Sunday, November 25, 2012

Beyond the obvious

Is allowing FDI in multi-brand Retail good for the country? What is the true impact of raising diesel prices or restricting LPG subsidy on the people? Should telecom spectrum and coal mines be auctioned to the highest bidder, or should they be allocated cheaply so that the price paid by the ultimate consumer (for telephone services and electricity) is kept low? Should rail fares be raised? Should the Central Bank reduce interest rates to stimulate industry and make loans cheaper? Should the government act against airlines who fleece passengers by charging exorbitant fares during peak season? Should the government explicitly promote export oriented industries that earn precious foreign exchange? Should cheap imports from countries like China be banned to protect domestic industry? Is the government right in spending thousands of crores on welfare schemes like MGNREGA? Questions such as these are debated daily, and are of interest not only to politicians and bureaucrats who decide on these, but also to citizens whose lives are affected.

How does one take a stand on all these? How does one decide what is right and what is wrong? How does one assess the impact of these decisions – beyond the immediate fallout that we can see (such as, for example, that one would pay more for diesel if diesel prices are raised)? Do these decisions have implications that are beyond the obvious? How do we know what will work out best for us in the long run?

“Economics in One Lesson” by Henry Hazlitt is a remarkable book by any means. Written in such a simple language that even a layman can understand, Hazlitt unravels the mysteries of economic decisions and their long run effects on the health of the economy and welfare in general. Hazlitt explains how markets work, how people behave, how governments decide and what they do to the very people they seek to assist. Hazlitt gives a framework that enables the reader to analyze the long run impact of such decisions, including that  which is not so obvious but nevertheless very important.

Hazlitt's remarkable book should
be compulsory reading for all
The book is divided into twenty five chapters, each dealing with a distinct topic such as taxation, effects of mechanization, import tariffs, export promotion, government price fixing, inflation, and so on. Hazlitt explains the basic principles underlying these actions and the impact of these on the economic activity as a result. Hazlitt uncovers not only that which is seen, but also that which is not seen. In Hazlitt’s own words, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely on one group but for all groups”

It is amazing how much ignorance about economic issues is prevalent even among the policymakers today. Take the following paragraph from the chapter on government price fixing, for example. You might want to read it in the context of the current mess in India’s Oil & Gas sector, but keep in mind that Hazlitt’s small book was written in 1946!

Hazlitt writes, and I quote, “We cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy more of it. The second is to reduce supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. In addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. Marginal producers are driven out of business….if we did nothing else, therefore, the consequence of fixing a maximum price of a particular commodity would be to bring about a shortage of that commodity. But this is precisely opposite of what the government regulators originally wanted to do…. Some of these consequences in time become apparent to the regulators, who then adopt various other devices and controls in an attempt to avert them. Among these devices are rationing, cost-control, subsidies and universal price fixing.” Hazlitt then goes on to systematically demolish each of these.

As we all know, relying on the promise of deregulation, billions of dollars were spent on all stages of the oil & gas value chain in India, from exploration to refining to pipelines to storage & distribution. But the country still doesn’t have enough of what it needs. Most of the capacity in the private sector has been shut or is on the verge of closure, the public sector survives on huge doles of support from tax payer’s money. People don't have enough of what they want and the private producers have all but fled, all because of faulty price fixing.

It is remarkable that such a storehouse of knowledge can be crunched in such a small book and explained so lucidly. This book should be compulsory reading for all the lawmakers who decide our future, and for all of us who choose them.


  1. Before we get into issue of Subsidies. Lets look into the "Market" Prices of commodities. Does markets really shows a fair price of commodities? Answer is NO!.

    The international prices of commodities like Oil and food are not determined by fundamentals of demand and supply. The prices of commodities are decided by financial speculation. United Nations has acknowledged this fact and called for rigorous measures to curb speculation with measures like Transaction Tax. In wake of Great recession and Global food price surge, US Government is also taking strict measures to contain parasitical speculative activity specially in commodity markets.

    Global oil Prices show wild fluctuation going to as high as $147 a barrel to $40 a barrel. When speculators flooded the commodity markets in early stages of financial crash in 2008, the Oil sky rocketed to its highest levels. When Markets liquidated their long positions to raise capital, Oil prices collapsed to $40 a barrel! Similar thing happened with Global food prices. Prices of commodities like Wheat and milk inflated enormously because of speculative activity, most of which comes from New York, Chicago and London.

    US Congressional hearing on Oil prices revealed how derivatives like commodity index Swaps and synthetic ETFs affects the Oil prices. The head of Exxon Mobil confessed to Congress that as much as 30% of Oil prices are based on Speculation. For more information, see Congressional testimony of Prof. Michael Greenberger. Nobel Laureates like Paul krugman, Joseph Stiglitz and countless economists have also blamed Speculation for driving up commodity prices.

    You should read these articles -


    Now talking about Speculation in our Indian Commodity markets, the problem is serious and is growing. Indian economist Kavaljit Singh has written papers which are self explanatory. Have a read -


    The above mentioned matter is to show you that "markets" are highly unstable and destroys the natural supply and demand mechanism. There is no reason why we should fix the prices of commodities based on parasitical speculative activity of "markets". There is no reason why average Indian should pay for goods and services based on prices that is decided by speculators specially from Wall Street and London Stock exchange.

    Our goal should be to fully regulate financial markets including commodity exchanges. Impose a transaction tax as prescribed by UN. This will automatically brings prices of commodities down and there will automatically reduce the burden of Subsidies. But trying to cut Subsidies and exposing poor Indian people to full wrath of financial speculators will worsen our economy and will be a failure.

    In the names of reforms our Present Govt. is deregulating financial markets which will increase commodity prices and increase inflation. Solution is not to cut subsidies but to cut the long arms of speculators and their criminal trading activities.

    1. Hi,

      This book gives a framework to understand how free markets solve economic problems to the best satisfaction of both buyers and sellers.

      Your point is taken, I do agree that price discovery in commodities which are traded in paper form may be getting affected by speculation and manipulation. I too have reservations on this subject.

      However, this cannot be a basis for forming a blanket opinion on Capitalism itself. From bananas to watermelons and cars to textiles, from plumbers to waiters and from grocers to barbers, markets are solving economic problems in most of the goods and services efficiently.

      I think the superiority of Capitalism as an economic model has now been proven beyond doubt. Unfortunately, even the capitalist countries of the West today are not truly capitalist – what we have is crony capitalism for those at the top, Welfare State at the bottom, and part capitalism, part-exploitation in the middle.

    2. Dear Acharya,

      The era of "Markets" as we know it is over. I don't know what you mean by superiority of Capitalism. The Capitalism is dead and what you see is like a old lady who is braindead being survived on the ventilator support. Some background about Great recession that started in 2008-09. Every too big to fail Bank (the symbols of modern Capitalism) - Bank of America, Citigroup, RBS, Llyods, SocGen, Santander, Goldman Sachs, Lehman bro, JP Morgan etc - all had become Bankrupt. Those banks that were foundation of Global Capitalist structure were on verge of collapse. It was then that US Govt along with European partners in collusion of their central banks (ECB and Federal Reserve) provided a multi trillion dollar bailout and 0% credit line to prevent the total collapse of banking industry.

      If you pull out the plug of 0% credit from the Banking industry in western world, their economy will collapse overnight. Entire western banking sector has been playing with fictitious capital in model that can be best described as Casino economy. They bet with CDOs, CDS, Currencies, mortgages, debts, commodities and pretty much everything. They don't contribute to real economic activity.

      Now about the trade model of modern capitalist system. Its based on crony capitalism. The theme of Globalization, Washington Consensus and market fundamentalism. Western nations have become post industrial society. The jobs from western world are being shipped to China and India where low wage sweat shops provide the labor for Multinational corporations. Whereas 3rd world has provided the workforce for western world, people in 3rd world themselves can't afford goods and services which the manufacture. Whereas the western world is facing the crisis of unemployment, 3rd world is facing the bigger crisis of falling standards of living, poverty, social insecurity and utmost misery.

      The trade model of Global capitalist structure is severally flawed and biased. It may suit the big mega corporations who are ripe the fruits of Billions and trillions of profits but it doesn't suit to middle class and poor world wide.

      There is no fair capitalism, what you see today is institutionalized degenerated form of crony capitalism that is the model of global economy. A sad thing indeed.

      As a fellow Indian. let me give you some advice. The world is full of crackpot economists, pundits and pseudo experts. You can find millions of books in which author presents their views on economy and capitalism. Don't be dedicated to some particular ideology. One particular poisonous ideology is Austrian School Mises institute. Its an ideology of crackpot economists that promote the agenda of western Banking industry. It promotes Deregulation and Privatization while calling for complete removal of Govt's role in economy.

      Let me suggest you a book if you want in depth view about Global economy - The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy

      I am not against Capitalism. What i am against is present form of Capitalism that has become a predatory and parasitical beast that is destroying the true potential of mankind. I am for reform of present Capitalist structure. Something of this kind.

    3. Thanks for your detailed comment. This is precisely what I have also said. See the last line of my comment: "Unfortunately, even the capitalist countries of the West today are not truly capitalist.....". So I think we are on the same page on that count.

  2. Dear Acharya,

    Here is the ebook edition of this book. It will refine your perspective towards economy and world situation.