Monday, November 30, 2009

The Economic Enlightenment Of Adam Smith: The Lesson For Malaysia & China

Most economists, learned or otherwise, associate Adam Smith's economics with the workings of the invisible hand in markets - and presumed that the market economy is the best way an economy works. Whilst this may be true under special conditions, there are limitations to the market such as the existence of monopolies, the insufficiency of market size, and the failure of market signals. So the market economy is more than just supply meeting demand.

So, Adam Smith's greatness, to me, is not his views on the market, but his enlightened view that economics is not about the accumulation of wealth but the increased production and consumption of goods and services that results in an improvement in human wealth.

He argued against the focus of the policies of politicians on the accumulation of gold and foreign reserves (wealth) as such policies tend to create monopolies, trade restrictions, the underpayment of workers (his labour theory of value led to Marx's militancy), and general inflation who adversely affect the general public.

Instead, Adam Smith argued that the focus of policy should be on building the prerequisites for an improvement in human welfare where more consumption can be obtained using the same amount of resources simply through specialisation and exchange. It is not a question of price but economies of scale and exchange.

To improve human welfare given the resources we have, it is far better for individuals or societies to specialise in what they are good at rather than trying to do everything themselves. It is possible to do everything on one's own but it is far better for everybody to cooperate - each doing what they are good at, for otherwise, we will be wasting the opportunities to do things better for oneself and everybody else.

Who does what therefore depends on what one is good at, naturally or trained, and depending upon consumer needs the renumeration or return one gets. It is just a question of knowledge and training.

If this system can be made open and unbiased (through proper teaching and training), then it is possible to train people to do good for society and to think and formulate in the interest of society.

It therefore does not augur well for our economic future if we teach our young to be self-interested and restrictive in their generosity. They may be wealthy but we will pity for their selfishness.

We can be generous only if we are confident about ourselves and our environment.

China can grow on its own if its entrepreneurs and captains of industry can bring themselves to pay workers sufficiently so that they can live a better existence. Afterall, the whole purpose of production is for the consumption of the people - rather than just to export and accumulation foreign reserves who turn out to be the worthless papers of a silly government.

That's why we should always focus to specialise in order to do things better so that we can all have everything that we need - which means that we should strive to be ordinary and homogeneous so that others may also have what we have. Otherwise, we'll all live poor lives.

Disequilibrium & Positive Change

Sometimes I wonder whether we human beings know exactly what we want.

We are constantly unhappy with what we have in order to create change.

1. Equilibrium

We dislike equilibrium and create disequilibrium.

Equilibrium means a stable state where everything is functioning well and smoothly. There are two such states: desired, or undesired.

If undesired, we want to get out of our low equilibrium by creating change and disequilibrium. In so doing, we hope to start the journey of arriving at a higher desired equilibrium state.

If desired, we would be quite happy for the equlibrium state to carry on forever.

2. Malaysian Society

In the context of Malaysia, when we started out in 1957, the economy was in high equilibrium but the society was in low equilibrium.

There was intention to disturb the low social equilibrium in the hope of maintaining the same high economic equilibrium.

In so doing, the social disequilibrium led to the downward adjustment of the economy as confidence evaporated.

3. What Do We Do?

Efforts are now made to re-establish the social equlibrium in the sense of social harmony. This is a good thing and should be vigorously pursued.

Whether this will necessarily lead to a higher economic equilibrium is another matter.

For all we know, we may want an economic disequilibrium with a process or dynamics that can bring us higher and higher, rather than stagnating at some sketchy vision.

It is a fact that Malaysia today faces an unsettling of its society with agitation at all levels.

While agitation will create change, there is no guarantee that things will necessarily change for the better. It takes good people in high places who know what they are doing to create positive change.

We cannot go back to where we were. We may not want to. But the forward march should start with more than just the same old agitation. It should be a modern view that our young generations can relate, for it is going to be their burden.

Saturday, November 28, 2009

Consumption Tax Or GST

de minimis stirred up some dust on GST with the help of walla; I here contribute a speck or two.

Q: What is the purpose of imposing a consumption tax?
A: To reduce consumption and to increase tax collection.

Q: Whose consumption will be reduced?
A: Those at the margin.

That is, those who have a very tight and they have to decide whether they want to buy A or B because now they cannot afford it because of the GST when they could buy both A and B before. They may forego B and left with A and have some cash to spare.

But if A is rice and B is milk, then obviously there is a problem for the consumer which the government may wish to step in to help if it wants to stay in power.

If A is a watch and B is a phone, then probably the problem isn't that severe and the government is happy to reduce that consumption.

Q: What is the reason for reducing consumption?
A: There is no particular good reason. In fact, it goes against the latest craze over stimulating demand by reducing the EPF contribution and putting money into the pockets of consumers.

But if you insist, then we have to go back to the textbook which says that it is better to impose a consumption tax to discourage consumption and to reduce income tax in order to encourage work and production.

Q: So will there be a reduction in the income tax with the impostion of the GST?
A: The answer is probably no, and the justification is probably that there has been a cut in the income tax already in the last budget.

Q: Why is it that the GST will be 4% when the last income tax cut was 1%? Is it fair?
A: The probable answer is yes because the objective is to raise taxes. But this answer is not healthy.

The GST will hit the total turnover or revenue as this is what final consumers will pay. Income comprising profit and wages and fees are at best a fraction of the total turnover of the economy. If profit and wages are 30% of the final sale price, then the income tax may need to be cut 3% to be equivalent to a 1% imposition of the consumption tax.

Since the expressed objective of the government is to increase tax collection, we may accept a 1% consumption tax to the 1% income tax cut.

Q: Will the consumption tax stimulate work and production?
A: No, if there is no or no significant cut in the income tax. The government then cannot claim to be stimulating work and production when it is imposing the consumption tax which will discourage consumption.

Q: Will there be inflation?
A: No, because it's objective is to reduce consumption. When retailers expect a reduction in their sales, they are likely to absorb the consumption tax.

Q: Will there be a reduction in consumption?
A: No, if the retailers are absorbing the consumption tax.

Q: Will it put marginal retailers at risk?
A: If no reduction in income tax, yes. If there is sufficient income tax reduction, consumption may even rise. This then defeats of discouraging consumption (and encouraging savings) and increasing the incentive for work.

Q: Will a consumption tax increase savings?
A: Not necessarily, if there are insufficient savings instruments.

Q: Will the consumption tax stimulate the economy?
A: Not necessarily. The consumption tax will increase the tax collection for the government. Somebody has to pay for it. If it is the local consumers, then there is a net reduction of the welfare of the local people. The only time when an increase in tax does not impair the welfare of the people is when the economy is growing and that growth comes from investment.

The trick for the government in trying to solve its fiscal problem is not to raise more taxes but to spend less and at the same time trying to encourage more investments by pulling up its socks!

Monday, November 23, 2009

The Closing And Re-Opening Of The Malaysian Mind

The Malaysian Mind has been closed since 1970 when the policy thrust was changed from economic growth to economic sovereignty.

The global past-time was to fight colonialism and capitalism, to look inward with import-substitution and the chasing away of investors ostensibly colonial.

The closing was not only of the Malay Mind. The Chinese Mind was also closed, and so was the Indian Mind. Each looks to its own past and forgot its future.

The closing of the Malaysian Mind resulted in the systematic and willful destruction of the entrepreneurial spirit of an already advanced high-income global economy - with a narrowly defined educational system, and a narrowly defined arena for investments.

The future of the Malaysian economy lies not with foreign investors, but with the opening of the Malaysian Mind so that Malaysian Talents can flourish and Malaysian Capital released to take calculated risks and be entrepreneurial again.
The Malaysian Mind must be allow to flourish like the Malaysian Cuisine which is intermingled and where the hybrid is far more exciting than the original, although the original still display its quiet authencity.
The Malaysian Mind could have been distracted by political shinanigans, and probably still is, such as the PR ploy of 1Malaysia.

It is far better for Malaysians to forget who they think they are and for them to be themselves and as freely as a bird display what is in the innermost self. I bet, under those circumstances, we truly display ourselves as Malaysians.

Friday, November 20, 2009

How Does Malaysia Get Trapped In The Middle-Income

This question is mesmerising so long as it is not answered properly.

So far, most of the answers given are either too disjointed or too outcome driven. Let me give you an example. We are now told that for the economy to make the quantum leap we have to be technology savy, created more IP stuff, attract more IP, etc. The policy action then becomes a simple immigration issue.

But by far the most significant underlying trend that is the cornerstone of Malaysian economic policy since 1970 until today (we'll see how the transformation is taking place) is the redistribution of wealth. We all know this. It is obvious. It is explicit as a policy. It is a policy and a national characteristic which we are proud. We defend it, locally and internationally. We even try to export it to Africa.

I think the original idea behind it is good - that there should be a more equitable distribution of wealth in the country, or in any country for that matter. It has always been an economic issue. But unfortunately it has become a political problem.

In its metamorphosis from an economic issue into a political problem, all the energies of government has been turned into an efficient process for the redistribution of wealth - all done simply by the indiscriminate spending of savings and reserves of the people and the nation extracted from the labours of the past in mining, plantations and oil and gas.

During this process of wealth redistribution, the focus has been on how to spend that wealth, which is demonstrated by tall buildings that we have in the capital cities but nowhere else in the country and by the investment of those wealth by individuals in instruments of higher returns which typically are more developed economies which a better organised system.

As the nation is drained of its economic juice and energy, the only major policy that we have going in this country follows the major policy of the other big but dying economy which is the US. It is symptomatic of economic decline when the only policy that seems reasonable is one of monetary expansion brought on by printing of money to finance government and consumer deficits - because banks find it not lucrative to fund industries.

With a loose monetary policies, we know that the value of money (both domestic and external) declines and this leads to increase the suffering of the ordinary people as they go about their daily business of living. This suffering causes a loss of confidence in the government and potentially a change in government.

To reverse the process, therefore, the following would seem appropriate, in decreasing order:
1. Refocus the economy on investment and growth, with redistribution built automatically into the income and wealth tax system. Remove ad hoc redistributive policies.
2. Tighten monetary policy. In the language more comfortable with central bankers - bring about gradually a monetary policy that is not as loose as before but at the same time make sure that the reversal in policy will not be detrimental to the lending activities and growth of the banks and without jeopardising the smooth operations of the banking and financial system.

Wednesday, November 18, 2009

The Sins of Economics & The Death Of Money

Kurtzman may be a bit simplistic as shown in his optimism that the electronic financial system can just reset itself and life will go on as usual.

Not quite, if Japan's seminal experiment with money in the 1980s has anything to learn - not for Malaysia and other Asian economies in the 1990s anyway, nor even the source of all troubles, the US in recent years for that matter.

I do not think that it is the electronisation of money that the cause of all the trouble in the world today. ICT is also a tool, and it will be akin to arguing that the telephone is a major source of problem in the world in the last half century - although we will not deny that it has no appreciable impact on the way the world functions.

It is the people behind the money policy who has not mastered their economics to see beyond the old theories and to realise how the old ideas are impacting reality and how the new reality is now behaving differently from the old. It is not rational expectations, but an increasing order of expectations - how we expect to react to what people will react when something they expect is expected to happen.

The sins of economics is that we know too much, that we have dissected the matrix we have created for ourselves - markets, money, specialisation and economies of scale, and trade - and are fully exploiting them until they have lost their value.

This debasement is the death of money and the economy as we know it.

Tuesday, November 17, 2009

The Death Of Money

I have had an old copy of this book for a long long time because the title fascinated me. Now, it all seems so prophetic.

It's nice to get to read the author's updated view here copied below.

Has The Death of Money Been Greatly Exaggerated?
An Interview with Joel Kurtzman
Written By: RU Sirius
Date Published: March 19, 2009

In 1994, Joel Kurtzman — at that time a columnist and the business editor for the New York Times — wrote an alarming book titled The Death of Money: How the Electronic Economy Has Destabilized the World's Market and Created Financial Chaos. Kurtzman reported that the digitization, or virtualization, of capital was causing a disconnect from reality that threatened financial anarchy… with possible positive and/or negative results.

Given the current market crisis, I thought I'd catch up with Kurtzman. Does he believe that recent events reflect the changes he warned us about back in the mid-'90s? Is money drawing its last breath while you withdraw the last of your savings? Or is something else afoot?

Joel Kurtzman is currently Executive Director of the Milken Institute's SAVE program, focusing on energy security, climate change and alternative energy.

h+: Joel, you wrote a book about the emerging electronic economy back in 1994 titled The Death Of Money. Are we reaping the harvest of the electronic economy now, or is the current crisis about something else?

JOEL KURTZMAN: In 1994, as I went around the world interviewing people for The Death of Money, few people really understood the power of electronically linking the world's capital markets together. Computers were not ubiquitous; the internet was nascent; and no one had invented the Blackberry. But one thing that did emerge at that time was that the mobility of money would proceed in a nearly unregulated manner and that volatility would increase. Back then, I examined all the data and saw that as markets connected, volatility rose. The curious thing, however, was this: As market volatility rose, the frequency of recession fell. It was as if the markets had become something of a shock absorber for the real economy.

What do I mean by that? In many ways, for example, some of the forces that put upward pressure on inflation now are channeled into market investments. If we did not have these massive, globally connected markets, the price of real assets would rise as money is created. Now, all that rises — with some exceptions — is the price of stocks and bonds. But those shock absorbers have their limits. In the last few years, the irresponsible use of products like collateralized loan obligations have broken down the shock absorbers. And, while it will take a little time for the system to "reset," it will reset.
In 1994, I speculated that globally connected capital markets could make the entire world rich by making capital available anywhere to anyone with a good idea and a little bit of skill. That fact has proven to be true. Since 1994, many billions of people have risen from poverty into the middle class. If China or India did not have access to global capital they would be growing at 1 or 2 percent a year, not 9 or 10 percent a year.

h+: In that book you also wrote, "Every three days a sum of money passes through the fiber-optic network underneath New York equal to the entire yearly output of all of America's companies and its entire workforce. And every two weeks the equivalent of the annual product of the world passes through the network of New York — trillions and trillions of ones and zeros representing all the toil, sweat and guile from all of humanity's efforts." How deep is the disconnect between the movement of conceptual money and the creation of actual wealth on the ground?

JK: We've seen something interesting happen. In 1994, I talked about the divorce between the financial economy (money) and products like stocks, bonds and derivatives on the one hand; and the real economy of goods and services on the other. In the interim period, there has been something of reconciliation. Companies like Southwest Airlines routinely use complex hedging strategies to protect themselves against price spikes and valleys with regard to fuel costs. Manufacturing companies, like Boeing and Airbus, use these same strategies to protect themselves against currency risks from managing a global supply chain while pricing their products in dollars. That's how the financial economy has reconciled with the real economy.
On the other end, with the rise of private equity, the real economy has benefited from the financial economy. Many firms that were public have become privately owned. In the world of finance, that's like taking the racecar off the track in the middle of the race to have the pit crew work on it. Once the tires are switched, the oil is changed and the car is gassed up, the car goes back on the track. In private equity, public companies are bought by private firms where they are repaired and made more competitive. When that's done, they're sold back to the public. Private equity resembles the pit crew. That's kind of a rapprochement between the financial world and the real world. So, in my view, the disconnect has narrowed.

h+: In your response to my first question, you wrote, "I speculated that globally connected capital markets could make the entire world rich by making capital available anywhere to anyone with a good idea and a little bit of skill." I'd say we're not quite there yet, but it sounds like the theory of "The Long Boom." Is there perhaps a longer boom in the future? Is there the possibility of a sort of post-scarcity market with almost no ceiling?
Since everyone's watching everyone else, and because we're all connected, it's likely that once a recovery begins it will proceed quickly.

JK: Nothing moves in an uninterrupted direction forever. Least of all the markets. The markets dance an up and down polka. However, while they're dancing, they trend in a specific direction and the markets are trending up. They trend upward for a number of reasons, including the fact that money doesn't hold its value for very long. Inflation always looms. Since the markets absorb a lot of inflation's effect, they tend upward. That trend will continue unless greed becomes so pervasive that the system breaks down.

h+: How long do you think the system will take to "reset"?

JK: The financial system is not backed by anything real. It's only backed by the confidence we have in the system itself. It's the old circular argument. That's because money has been transformed into information and cut off from anything real, like gold, silver or wheat. Because money is information it is a blend made up partly of ideas and partly of sentiment. Investors are like detectives who come across clues, piece them together, and when they think the pieces fit they become wildly exuberant at having done so. In the midst of this crisis, investors are sniffing around, looking at the pieces and trying to see how they fit. Once they think they see a pattern, their emotions will take over and the markets will climb. Whoever glimpses the pattern first will make the most money. How long will it take? If a market tumbles at night in Asia, it is often followed a few hours later by a tumble in New York. In other words, since everyone's watching everyone else, and because we're all connected, it's likely that once a recovery begins it will proceed quickly.

The interesting thing with these markets is that we're all one — the people who were conservative and prudent have been hurt as badly as the fool who was overly-leveraged.
All the traditional risk models blew apart. Diversification — the cornerstone of good risk management — means nothing when everything goes down. But no risk manager was ever taught that everything would go down at once. Nobel Prizes were awarded to people who said just the opposite.

The Economics Of Sin

There has always been a major concern over sin in the world, especially from the religious point of view since the time when man (and woman) held his world in great mystery. What about the economics of sin?

Sin is not a term in economics because economic science sees itself to be "objective" and does not pass "value judgement" on the world (economists leave that to the priests). So long as sin is a product where there is a market, then the standard laws of supply and demand come in.

Sin may just be another term for addiction which causes a person to spin out of control and therefore a danger to society and himself, and that negative impact is sin.

Sin is therefore anything that may be self-destruct, for individual as well as society.

In the world of addiction, the economic laws says that the market will supply as much as there is demand - and the perennial demand that comes out of addiction is good for the market, as it will ensure that GDP growth will sustain. Will it?

Keynesian revelation stipulates that demand must be made effective with purchasing power, for that demand to be real. The addict knows that and he will go out and secure the power to purchase the addiction.

As he is likely to be out of the mainstream, in the case of petty addicts, then he is likely to engage in activities which his neighbours are likely to feel insecure about - so those activities are called crimes, and a professional gang called the police is hired to control him and, when nabbed, locked him away or teach him a lesson.

But if sin is in the mainstream of economic activities - as Rosa Luxemburg or Joan Robinson would say as in the case of the addiction for (unnatural) wealth - then the global economy could be gearing itself for a total disaster, such as the destruction of the natural environment in return for paper or electronic which is thought to be money. Would it?

The laws of economics say that when the natural environment is sufficiently sized down, the scarcity of supply will rise the market price for natural products so much that the demand for natural products will be drastically cut down. In time, artificial substitutes will be found, and the whole of mankind will then subsist on artificial materials - do we then get plastic people?

Interesting, because, then human beings will ease to be what we know human beings to be today - natural, pink and soft. Human beings, as Darwin will say, have evolved into what could be termed as post-homosapiens.

In the world of post-homosapiens, the world will be a barren concretised environment with its plastic leaves and fragrantless flowers. Post-humans exist, not wishing to die, aimlessly accumulating electronic digits for happiness. When they die, they will empty those digits into the pockets of the collectors called hospitals which pretend to cure, but in fact merely dispense.

The economics of sin is therefore quite dynamic, and could bring about a paradigm which post-human cannot imagine what humans do. Does it matter?

Probably not.

Sunday, November 15, 2009

Debate vs Criticism

One of the key ingredients of creativty and innovation is the willingness to offer - as well as to accept - an alternate viewpoint, however ridiculous that alternate viewpoint appear at the time. Without this alternative viewpoint, we have nothing but the same old view which we are comfortable about.

To create and maintain a healthy atmosphere of debate, there must always be that courtesy and respect that one party bestows on the other party. Without that basic courtesy and respect, we shall reduce ourselves to nothing but hooligans who think that those who shout the loudest and have the strongest muscles will win the end; indeed, hooligans have won but there are some of us who may wish to contribute to society but engaging with each other at a more civil manner.

The purpose of debate is to arrive at the truth - whatever we may imagine truth to be.

Most of the time, we do not know the truth. So, we examine each other's arguments to make sure that we do not end up in circular argument - using logic to justify a prejudice.

It is easy to be inadvertently prejudiced but of the paradigm that we are caught - caught in The Matrix, so to speak.

We should therefore watch our thoughts and guard our mouths - lest we fall into the senselessness of a barking dog.

Of course, to aid debate, we may wish to point out errors in logic or unconscious prejudice that we find in other's arguments - from our own perspective. A criticism becomes constructive in this manner.

If there is no room for alternate views or arguments, then all that we are doing in blogs is nothing but reinforcing old prejudices. That is dangerous.

Sunday, November 8, 2009

Improving Education: The China Perspective

China is reported to have sacked its Education Minister last Saturday for slowness to bring about improvement to the education system, as evidenced by corruption involving construction of education facilities, the high unemployment rate among graduates, the dilution of marks, the selling of degrees and rampant plagiarism.

China's rocket scientist, who died on October 31, was said to have complained to the top leadership before his death over his disatisfaction with the education system as it failed to produce students who can think.

This got me into rethinking the problems of the education system in Malaysia.

1. It looks to me that the language has become a major distraction from the real issue - of teaching students who can think, and be creative and innovative.

2. Without this new creative force being generated by the system, Malaysia is likely to be burdened by a body of its citizenry who is unable to get itself out of its quandry - and thus tightening the rope around the neck of the future of the nation.

3. We know the first pre-requisite for creativity and innovation is open-mindedness.

If we fail to keep our minds open, we will together be stuck with our old ideas - which includes preserving as much as we can our old habits and traditions.

Our situation is worse: the vernacular hammered in by the religion imperative.

4. Of course, there is always the fear of losing one's sense of identity. This can be done by improving one's confidence in oneself by raising one's sense of self-worth - without having to resort to outward show and paraphernalia - such as degrees, awards, and titles.

6. We must learn to think for ourselves, and encourgage our children to think for themselves. To think, we must ask questions - even if there are no answers. If an answer is already available, there is no need to think - because there is no problem and no issue.

5. To help us to think, we need accurate information. There is now so much disinformation - opinions masquerading as information, and information masquerading as truth.

6. It is the unwillingness to accept the status quo, and a preparedness to reach out for the impossible and the ideal and give us the passion to live our lives meaningfully. Otherwise, we are only looking for a job before we fear death.


I wish to offer some comments for those who have been short-changed by the education system as per my last post.

i. I understand the anguish and the hurt for not getting what you want for your children. Do not let that episode turn your emotion from the positive to the negative.

ii. Though easier said than those, adversity can be an opportunity as necessity is the mother of invention - or innovation. I find that it is only when we subject to the most severe constraint or handicap that we are the most creative.

iii. Education is free - though one has to pay for a degree or some qualification - which is nothing more than external authentification.

iv. In economics, we consider the role of qualifications as a screening process - for those who want to participate in the mainstream. For those who do not, their real education is in the living.

v. At the end of the day, the ultimate cannot be a house and a car; it must be self-realisation and self-contentment. Don't be distracted by the mirage.

vi. One must learn to keep one's mind expansive, and one's heart true.