Tag Archives: Ethics

An economic depression is not a bad thing

Most people I speak to think that an economic depression is a problem that needs to be solved. Take a look at this article, for instance. This notion is far from correct. An economic depression is a period of necessary correction. An economic depression is necessarily and always preceded by an inflationary boom.

The real problem is the inflationary boom for which the bust is the cure

During the boom, policies targeted at interest rate depression allow the banking system to expand credit way beyond the available pool of real savings. This results in massive investments into projects that never would have been invested in on the free market. At the very least, new investments would need to be accompanied by
1. additional net saving by consumers
2. movement of capital from lines of production of other less preferred goods
These prevent the possibility of an inflationary boom. These conditions are a logical necessity for the new investment to happen.

However, an inflationary boom creates malinvestments. The process of creating the inflationary boom necessarily also includes the pins required to prick the bubble at some unexpected point in time. When this happens, the market reassesses all the investments made and sorts them into good and bad investments. This is done through the profit/loss mechanism and made explicit through the phenomenon of business bankruptcy. While this process involves pain, without it, the market cannot realign investments to be in line with consumer preferences, especially across time periods.

Economists would say that the boom causes intertemporal discoordination while the bust corrects those errors and brings about the highly necessary intertemporal coordination once again.

The free market is capable of keeping the inflationary boom in check

Even if the banking industry or a segment of it were to engage in fractional reserve banking by emitting far more paper, plastic and electronic forms of money than the real money commodity that they have on hand, the free market has a built-in mechanism to keep this under check. This is called bank failures.

Let us take, for instance, a region that uses dollars defined as a 1 ounce coin made of sterling silver as the unit of money. If a bank with $1 million in real dollars issues $10 million in paper dollars, the over-supply of paper dollars can easily be identified by the market. Further, the fact that on this market, every bank’s notes would be clearly identified with the bank (they would be printed as XYZ bank notes) and the market would easily be able to establish different rates of discounts for notes issued by different banks.

A more inflationary bank’s notes would be more deeply discounted than the notes of a less inflationary bank. Prices of goods might be quoted in dollars but one would have to fork out more $1 notes of an inflationary bank than the quoted dollar price. For instance, if an inflationary bank’s notes faced a discount of 50% on the market, a customer wishing to buy a good priced at $50 by paying in notes of the inflationary bank will need to fork out notes of $100 face value. If the discount were 75% because the bank is perceived as highly inflationary, he will need to fork out notes of $200 face value. Thus, the greater the inflationary condition that the market sees in a bank, the less valuable would be the money substitutes emitted by the bank.

Further, the more inflationary a bank is assessed to be, the more likely it is to be brought down by note and deposit holders walking into the bank’s branches and asking for real money in exchange. While this could be due to a loss of trust in the bank, it could also be because a trusting customer has issued a cheque to the customer of another bank that is asking the inflationary bank to pay in real dollars (which it does not have).

Such failures of fractional reserve banks would lead to a more cautious public wary of inflationary fractional reserve banks. Fractional reserve banks would then have to incentivise people to place money in their accounts, which in turn would raise the cost of their funds available for loans. In addition, being rated as a non-inflationary bank would make a bank more attractive to a public seeking greater safety of their money. In this process, the very service of getting rated on inflationary practices would become a valuable service that could be offered by rating agencies. Thus, we see that on the free-market, there exist many possibilities of mechanisms to keep fractional reserve banking in check.

If fractional reserve banking is in check, so is the inflationary boom. Thus, we see that an inflationary boom of the kind that we see today is impossible on the free market and that it is only fractional reserve banking with no market controls that causes the inflationary boom.

When we will encounter massive inflationary booms

Massive inflationary booms necessarily require massive interventions that prevent the functioning of market mechanisms. These typically take the form of government action aimed at protecting the inflationary segments of the banking industry. Today, these take the following forms
1. Central Banking with a monopoly on money issue and bank licensing
2. Central Banking as a source of lending of last resort to failing banks
3. Deposit insurance that is politically motivated and priced
4. Legal tender laws that force acceptance of inflated money substitutes at par
5. Capital gains taxes on alternate forms of money
In the absence of these forms of protection, it is impossible for a fractional reserve banking system to become as prevalent as it has become today.

The conclusion

We need to stop fearing or hating the economic depression. What we really need to be wary of is the inflationary boom that forces the pain of the bust on people at large. We also need to fear all the interventions that make the inflationary boom possible and the periodic pain of the depression a “necessary” feature of our lives.

Excise evasion charges and Cadbury India Limited

This is an interesting bit of news. The reason I find it interesting is that it raises fundamental and searching questions about our sense of right and wrong and our attempts as a society to transform these into a code of law.

Let us assume for a moment that Cadbury India did indeed evade excise duty. What is the underlying premise in this incident? It is that as per The Law (Please note that I am NOT saying as per law. There is a difference between law and The Law. I am leaving that for another day.), it is a criminal offence to use any technique to avoid paying what the makers of The Law decide is due to government (which is nothing but the makers of The Law themselves). If Cadbury India has done this, it should be deemed to have committed a criminal act and criminal proceedings should be initiated against it and those in Cadbury India who are responsible for this act.

Before we jump in judgement at Cadbury India, let us pause for a moment to think of a fundamental question – Did they do anything wrong? I know that a majority out there would say “Of course, YES! Why do you even have a doubt?” So let me ask another question – Why is what they did wrong? The answer I am most likely to get is “They broke The Law, didn’t they? That’s why they are wrong.”

But then I have another question – Why is breaking The Law wrong? Is it possible that The Law is wrong? In that case, a person could be doing the right thing but faces the strong arm of The Law because he fell on the wrong side of it? What should we do when a provision in Law is clearly wrong? Should we just shrug our shoulders and tell the victim “Tough luck, mate”?

I have a serious problem when The Law departs from basic notions of right and wrong. I do understand that quite a few people think that right and wrong are matters of individual opinion but I beg to differ. I think right and wrong are objectively definable, especially in the interpersonal space. For instance, none of us would say that whether murder and robbery are right or wrong is a matter of individual opinion. Killing another person may not be wrong if it is in self-defence, but that is not a matter of opinion but of the facts of the case.

As I understand right and wrong, a simple theoretical and conceptual yardstick can be used to determine whether an action is right. See if the action involved
1. the initiation of force (aggression) against person or property
2. the commission of fraud
Any one of these two qualifies an action as wrong. This is why murder and robbery are so obviously wrong.

When I apply this yardstick to the Central Excise Act under which Cadbury India is accused of the crime of evasion, I am unable to escape the conclusion that the Law is wrong. The Law basically empowers government to compel producers to part with a portion of the income they receive from sale of their manufactured goods in favour of government. The income of the producer is his rightful property. Compelling a person to part with his property involves aggression or the threat thereof. Imagine a local Mafioso threatening producers in his zone of influence to part with a certain percentage of the income they receive from production to obtain his protection. Clearly, we would call it extortion and understand it as wrongful.

What I fail to understand is how the Central Excise Act is any different from the Mafioso’s threat of “pay or else”. Excise duty collection, like every other form of taxation, is an act of coercive expropriation, i.e., forcible taking away of the property of another individual. By the simple yardsticks I have given above, coercive expropriation is wrong because it involves aggression against property, which if successfully resisted invites aggression against person. So why do we accept it as right when government puts it in the statute book? Does the statute book have the magical power to turn wrong into right and vice versa?

This is a deep and important question for all of us to answer. The answers that we give will determine the shape of the society we create for ourselves. If we accept the legitimisation of aggression through statute, we will eventually end up in a society where aggression is a way of life, i.e., the society of the warrior. If, on the other hand, we reject the legitimisation of aggression, we can pave the way to a society based on peaceful coexistence, cooperation, specialisation, division of labour, and voluntary exchange, i.e., the society of the trader. Which one we choose is up to us.

One thing is certain. The society of the trader will be more prosperous and happy. How do I know that? That’s what economic theory is all about.

The Right to Education (RtE) Act – Flawed at the root

As I watch the circus happening over the RtE act, I just can’t help thinking what a sad moment it was when the bill was actually passed. It represents the moral degradation of many decades and shows that if you repeat a lie enough times, you can get a good number of people to believe it.

At the core of the RtE Act is a fundamental flaw – the notion that Education is or can ever be a “right”. If we ever pause to think of the very concept “right” and understand the nature of education, it will be obvious that it is utterly ridiculous bordering on (intellectually) criminal to treat education as a “right”. That’s exactly what I shall do out here.

What’s wrong with the RtE Act

The error at the core of the RtE Act is to treat rights as an entitlement (let’s not pretend that it is not so). The very notion that everyone is entitled to education and that the State has an obligation to ensure, by whatever means, that everyone gets an education is totally ridiculous. No one is entitled to anything. Not food. Not water. And surely not education. We all have to EARN what we want to consume.

The problem with treating rights as an entitlement is this – someone, somewhere has to PRODUCE the thing that you are “entitled” to. Government (or the State) does not produce anything, least of all education. To give something to A, it has to first take that something or the means to obtain that something from B. It has to do that forcibly because B will not give that up voluntarily.

It does not matter whether it is running government schools or coercing private schools into accepting 25% of their students from economically weaker sections (at a lower fee, of course). In every case, government is forcibly taking away what belongs to B in order to provide education for A. To run government schools, the government robs everyone in the unholy name of tax and steals from everyone under the garb of inflation. To coerce private schools to admit students at lower fees, it just flexes its muscle and threatens to shut down schools (they call it withdrawing recognition/affiliation).

Let’s face it – whichever route government chooses to implement RtE, it has to behave like a common thug on the streets. Right to Education, therefore, translates very simply into Right to unleash violence on others. I am amazed to see that a lot of people really think that this is indeed a legitimate right.

What rights are

Rights are a moral concept defining and sanctioning man’s freedom of action in a social context. Saying “you have a right to X” means that you are FREE to act to get/maintain X. In a social context, that in turn means that no one may prevent you from acting thus. It does not mean that you are entitled to X or that anyone else is obligated to provide you X.

For instance, if I say “You have a Right to Life”, it only means that you are free to act to sustain your life as you deem fit. If that means eating fatty foods or consuming narcotic drugs or smoking cigarettes or drinking yourself into oblivion, then so be it. No one should be free to force you to act otherwise. It does not mean that anyone at all has an obligation to keep you alive.

The concept “Right to property” does not mean that you are entitled to some property and that others should provide you some property. It means that you are free to act to acquire property and hold property that you have acquired. To claim that others should provide you some property is tantamount to claiming that others are your slaves.

The same holds true for education. You are free to get the education you seek and can get. That does not mean that anyone else is obligated to provide you with that education. Unless you are claiming that some people have the right to treat others as slaves who ought to provide them with an education, RtE makes no sense.

Conclusion

From an ethical perspective, RtE is shockingly immoral. The only right thing to do is to call for its repeal.