Money and banking | Independent Indian: Work & Life of Dr Subroto Roy

“I have a student called Suby Roy…”: Reflections on Frank Hahn (1925-2013), my master in economic theory

January 31, 2013 — drsubrotoroy

1. “What was relatively weak at LSE was general economic theory. We were good at deriving the Best Linear Unbiased Estimator but left unsatisfied with our grasp of the theory of value that constituted the roots of our discipline. I managed a First and was admitted to Cambridge as a Research Student in 1976, where fortune had Frank Hahn choose me as a student. That at the outset was protection from the communist cabal that ran “development economics” with whom almost all the Indians ended up. I was wholly impecunious in my first year as a Research Student, and had to, for example, proof-read Arrow and Hahn’s General Competitive Analysis for its second edition to receive 50 pounds sterling from Hahn which kept me going for a short time. My exposure to Hahn’s subtle, refined and depthless thought as an economist of the first rank led to fascination and wonderment, and I read and re-read his “On the notion of equilibrium in economics”, “On the foundations of monetary theory”, “Keynesian economics and general equilibrium theory” and other clear-headed attempts to integrate the theory of value with the theory of money — a project Wicksell and Marshall had (perhaps wisely) not attempted and Keynes, Hicks and Patinkin had failed at.

Hahn insisted a central question was to ask how money, which is intrinsically worthless, can have any value, why anyone should want to hold it. The practical relevance of this question is manifest. India today in 2007 has an inconvertible currency, vast and growing public debt financed by money-creation, and more than two dozen fiscally irresponsible State governments without money-creating powers. While pondering, over the last decade, whether India’s governance could be made more responsible if States were given money-creating powers, I have constantly had Hahn’s seemingly abstruse question from decades ago in mind, as to why anyone will want to hold State currencies in India, as to whether the equilibrium price of those monies would be positive. (Lerner in fact gave an answer in 1945 when he suggested that any money would have value if its issuer agreed to collect liabilities in it — as a State collects taxes – and that may be the simplest road that bridges the real/monetary divide.)

Though we were never personal friends and I did not ingratiate myself with Hahn as did many others, my respect for him only grew when I saw how he had protected my inchoate classical liberal arguments for India from the most vicious attacks that they were open to from the communists. My doctoral thesis, initially titled “A monetary theory for India”, had to be altered due to paucity of monetary data at the time, as well as the fact India’s problems of political economy and allocation of real resources were more pressing, and so the thesis became “On liberty and economic growth: preface to a philosophy for India”. When no internal examiner could be found, the University of Cambridge, at Hahn’s insistence, showed its greatness by appointing two externals: C. J. Bliss at Oxford and T. W. Hutchison at Birmingham, former students of Hahn and Joan Robinson respectively. My thesis received the most rigorous and fairest imaginable evaluation from them…”

2. “Frank Hahn believed in throwing students in at the deep end — or so it seemed to me when, within weeks of my arrival at Cambridge as a 21 year old Research Student, he insisted I present my initial ideas on the foundations of monetary theory at his weekly seminar.

I was petrified but somehow managed to give a half-decent lecture before a standing-room only audience in what used to be called the “Keynes Room” in the Cambridge Economics Department. (It helped that a few months earlier, as a final year undergraduate at the LSE, I had been required to give a lecture at ACL Day’s Seminar on international monetary economics. It is a practice I came to follow with my students in due course, as there may be no substitute in learning how to think while standing up.) I shall try to publish exactly what I said at my Hahn-seminar when I find the document; broadly, it had to do with the crucial problem Hahn had identified a dozen years earlier in Patinkin’s work by asking what was required for the price of money to be positive in a general equilibrium, i.e. why do people everywhere hold and use money when it is intrinsically worthless. Patinkin’s utility function had real money balances appearing along with other goods; Hahn’s “On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy” in Theory of Interest Rates (1965), was the decisive criticism of this, where he showed that Patinkin’s formulation could not ensure a non-zero price for money in equilibrium. Hence Patinkin’s was a model in which money might not be held and therefore failed a vital requirement of a monetary economy. The announcement of my seminar was scribbled by a young Cambridge lecturer named Oliver Hart, later a distinguished member of MIT and Harvard University.”

3. Then there was Sraffa…I saw him many a time, in the Marshall Library… He would smile very broadly at me and without saying anything indicate with his hand to invite me to his office.. I fled in some fear… It was very stupid of me of course… Joan Robinson cornered me once and took me into the office she shared with EAG… She came at me for an hour or so wishing to supervise me, I kept declining politely… saying I was with Frank Hahn and wished to work on money… “What does Frankie know about India?” she said… I said I did not know but he did know about monetary theory and that was what I needed for India; I also said I did not think much about the Indian Marxists she had supervised… and mentioned a prominent name… she said about him, “Yes most of what he does can go straight into the dustbin”…

4. “I had been attracted to Cambridge partly by its old reputation for philosophy, especially that of Wittgenstein. But I met no worthwhile philosophers there until a few months before I was to leave for the United States in 1980, when I chanced upon the work of Renford Bambrough. Hahn had challenged me with the question, “how are you so sure your value judgements promoting liberty blah-blah are better than those of Chenery and the development economists?” It was a question that led inevitably to ethics and its epistemology — when I chanced upon Bambrough’s work, and that of his philosophical master, John Wisdom, the immense expanse of metaphysics (or ontology) opened up as well. “Then felt I like some watcher of the skies, When a new planet swims into his ken; Or like stout Cortez when with eagle eyes, He star’d at the Pacific…””

5. “I went to Virginia because James M. Buchanan was there, and he, along with FA Hayek, were whom Hahn decided to write on my behalf. Hayek said he was too old to accept me but wrote me kind and generous letters praising and hence encouraging my inchoate liberal thoughts and arguments. Buchanan was welcoming and I learnt much from him and his colleagues about the realities of public finance and democratic politics, which I quickly applied in my work on India…” Hahn told me he did not know Buchanan but he did know Hayek well and that his wife Dorothy had been an original member of the Mont Pelerin Society in 1947 or 1948. Hence I am amused reading a prominent NYU “American Austrian” say about Frank’s passing “I do think economics would have been better off if the Arrow-Debreu-Hahn approach had not been taken so seriously by the profession. I think it turned out to be an intellectual straight-jacket that prevented the discussion of valuable outside-the-box ideas”, and am tempted to paraphrase the closing lines of Tractatus — “Whereof one cannot speak, thereof one must be silent/About what one can not speak, one must remain silent” — to read “Of that of which we are ignorant, we should at least try not to gas about…” Hahn and Hayek were friends, from when Hayek taught at the London School of Economics in Robbins’ seminar, and Hahn was Robbins’ doctoral student.

6. “The Hawaii project manuscript contained inter alia a memorandum by Milton Friedman done at the request of the Government of India in November 1955, which had been suppressed for 34 years until I published it in May 1989. Milton and Rose Friedman refer to this in their memoirs Two Lucky People (Chicago 1998). Peter Bauer had told me of the existence of Friedman’s document during my doctoral work at Cambridge under Frank Hahn in the late 1970s, as did N. Georgescu-Roegen in America. Those were years in which Brezhnev still ruled in the Kremlin, Gorbachev was yet to emerge, Indira Gandhi and her pro-Moscow advisers were ensconced in New Delhi, and not even the CIA had imagined the Berlin Wall would fall and the Cold War would be over within a decade. It was academic suicide at the time to argue in favour of classical liberal economics even in the West. As a 22-year-old Visiting Assistant Professor at the Delhi School of Economics in 1977, I was greeted with uproarious laughter of senior professors when I spoke of a possible free market in foreign exchange. Cambridge was a place where Indian economists went to study the exploitation of peasants in Indian agriculture before returning to their friends in the well-known bastions of such matters in Delhi and Calcutta. It was not a place where Indian (let alone Bengali) doctoral students in economics mentioned the unmentionable names of Hayek or Friedman or Buchanan, and insisted upon giving their works a hearing. My original doctoral topic in 1976 “A monetary theory for India” had to be altered not only due to paucity of monetary data at the time but because the problems of India’s political economy and allocation of resources in the real economy were far more pressing. The thesis that emerged in 1982 “On liberty and economic growth: preface to a philosophy for India” was a full frontal assault from the point of view of microeconomic theory on the “development planning” to which everyone routinely declared their fidelity, from New Delhi’s bureaucrats and Oxford’s “development” school to McNamara’s World Bank with its Indian staffers. Frank Hahn protected my inchoate liberal arguments for India; and when no internal examiner could be found, Cambridge showed its greatness by appointing two externals, Bliss at Oxford and Hutchison at Birmingham, both Cambridge men.”

7. “I have a student called Suby Roy…” Frank sends me to America in 1980 to work with Jim Buchanan… One letter from him was all it took…

And then five years later in 1985 he calls me “probably the outstanding young Hayekian”, says I had brought “a good knowledge of economics and of philosophy to bear on the literature on economic planning”, had “a good knowledge of economic theory” and that my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds” — all that to me has been a special source of delight.

We did not meet often after I left Cambridge but he wrote very kindly always, and finally said, hearing of my travails and troubles and adventures, “well you are having an interesting life…”…

In America, I once met Robert M Solow in a hotel elevator as we were on a panel at a conference together; I introduced myself as Hahn’s student… “Aren’t you lucky?” said Solow with a smile…and he was right… I was lucky…

I said of Milton Friedman that he had been “the greatest economist after John Maynard Keynes”; Milton’s critic, Frank Hahn, may have been the greatest economic theorist of modern times.

Frank Hahn (1925-2013)

Towards Making the Indian Rupee a Hard Currency of the World Economy: An analysis from British times until the present day

November 11, 2012 — drsubrotoroy

(Another) Memo to Dr Kaushik Basu

April 16, 2010 — drsubrotoroy

From Facebook:

Subroto Roy says to Kaushik: Dear Kaushik, Buffer-stock interventions are *microeconomic* in nature, and won’t do to control the *macroeconomic* phenomenon that is inflation. Get government accounting straight (and clean), try to raise government productivity *drastically* and try to *understand* the fiscal situation and *hence* the monetary situation. Feel free to email or phone. Cordially, Suby

A New Drachma? Thinking further on the need for a new Greek domestic currency to revive trade: Is the Greek/German Eurozone problem the mathematical dual of Gresham’s Law?

March 24, 2010 — drsubrotoroy

From Facebook:

Professor Nicholas Economides was a 1976 batch-mate of mine at the LSE. My view on Greece appears different. In my view, a transition to a new Drachma will be drastic but will not be any more catastrophic than the present trap Greece has put itself in.

The current path makes a fetish of the fiscal side when the problem at root has been monetary, arising from a purported monetary union, a *superficial* monetary union being created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences.

Money has two main functions, being a medium of exchange and a store of value; the Euro has become too (implicitly) expensive for Greeks to be an effective medium of exchange, while the threat of a Greek default makes the Euro a risky store of value for Germans, Dutch et al. Greeks would have been hoarding Euros, reducing the velocity of circulation, and causing domestic trade to turnover more slowly and hence damaging national income; at the same time, others would have been wondering about a flight to safety outside the Euro. Introducing a soft inconvertible domestic money in Greece would allow the medium of exchange function to be fulfilled and revive domestic trade and income; it would have to be accompanied by exchange and import controls, leaving the Euro as a hard currency for external transactions. The present route being followed of trying to improve Greece’s fiscal situation by compulsion may worsen the situation without any new equilibrium path being anywhere near to be found.

The aim is to have a soft flexible inconvertible domestic currency *which facilitates, indeed stimulates, the turnover of domestic trade*, and allows equilibrium domestic relative prices to be found and adjusted towards. There would have to be a

(a) clamping down overnight on capital exports followed by forex rationing;
(b) closing the trade borders and imposing import controls (smuggling is inevitable);
(c) deciding a new price for the Drachma, say something like 500 or 1000 to the Euro (the aim is for equilibrium domestic relative prices to be adjusted towards and for domestic trade to turnover properly and expeditiously and indeed stop its collapse);
(d) exchanging all forex/Euro-denominated financial assets held by domestic residents to New Drachma-denominations at the new rate automatically;
(e) Euro-denominated liabilities incurred by domestic residents remain Euro-denominated: if it is the Government, they can negotiate how much or all if it they will repay over time; if it is private, private assets may be converted to pay it and/or there will be individual defaults or delays (restructuring) or write-offs.
(f) Exchanging all cash forex/Euro held by domestic residents to New Drachmas, through “licensed authorised dealers” as well as e.g. by ordering all commercial establishments to give New Drachma change in transactions.

Would Greece have “left the Euro”? Yes and No. It would not be part of the Euro Area but the New Drachma would be a Euro-standard currency where the Government guaranteed to buy up all Euro held by domestic residents at the fixed price in exchange for New Drachmas and held its forex reserves in Euros.

I have spent decades arguing *against* all this in the Indian case but have to say it is what Greece may need now, for a period of adjustment of half a dozen or so years.

Is the Greek/German Eurozone problem the mathematical dual of Gresham’s Law?
by Subroto Roy on Monday, 17 October 2011 at 16:13 ·

Money according to economic theory has two main functions, namely, being a medium of exchange and a store of value; I have been saying that I think the Euro has become too (implicitly) expensive for Greeks to be an effective medium of exchange, while the threat of a Greek default would make the Euro a risky store of value for Germans, Danes et al. If I am right, Greeks would have been hoarding Euros, reducing the velocity of circulation, and causing domestic trade to turnover more slowly and hence damaging national income; at the same time, the Germans, Danes et al would have been wondering about a flight to safety outside the Euro. Some young mathematical economist may take my idea and develop it it intelligently as the *dual* problem to Gresham’s law http://en.wikipedia.org/wiki/Gresham%27s_law inasmuch as weak fiscal positions are causing, through a common money, stronger fiscal positions to weaken…

Addendum Oct 25 2011
My guess has been the Euro has become a de facto hard currency for Greeks, who will then hoard it and slow the velocity of circulation, damaging the turnover of normal domestic trade and hence damaging national income; i.e. it has become too expensive as a currency to properly fulfill the medium of exchange function of money in Greece; at the same time, Germans, Dutch and others in fiscally strong economies relatively have to account for the added risk of Greek infirmity and hence find the Euro less of a store of value than otherwise, causing incentives to flee to other denominations. Introducing a soft inconvertible domestic money in Greece would allow the medium of exchange function to be fulfilled and revive domestic trade and income; it would have to be accompanied by exchange and import controls, leaving the Euro as a hard currency for external transactions. The present route being followed of trying to improve Greece’s fiscal situation by compulsion may well worsen the situation without any new equilibrium path being anywhere near to be found.

Thinking further on the need for a new Greek domestic currency to revive trade
by Subroto Roy on Friday, 16 September 2011 at 07:35 ·

Subroto Roy: Re “it is still not clear what will actually happen”, what will happen is there will be an inevitable recognition that the introduction of the Euro was premature, probably irreversible, and likely to be catastrophic as it unwinds.

Edward Hugh Yes, well…. and apart from that little detail Suby, what else do you forsee. I absolutely agree, by the way, that these madmen (and women) have taken the global economy to the brink of disaster through their inability to listen.

Maria Tadd When words like catastrophic are used, they obviously send fear into the hearts of many. Suby and Ed, how do you envision the fall out to look like?

Subroto Roy There has to be a clear way out for a currency to exit; that has never been thought out beforehand; creating a monetary union is the *final* step from a free trade area to a customs union to an economic union to a monetary union. A purported monetary union, or rather a *superficial* monetary union was created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences. Now Greece needs, as I have said over two years, an inexpensive inconvertible domestic money which allows domestic trade and savings to take place normally; the Euro would have to become a hard currency for external use.

Edward Hugh Do you mean like what has been happening in Croatia Suby?
Subroto Roy I am afraid I have to admit ignorance of Europe’s facts, what I am working on is my (quite sound) knowledge of monetary economics acquired from Hahn, Friedman, Walters, ACL Day, Griffths, Hicks via Miller, etc. Thinking about Greece overnight: if the Euro has become a de facto hard currency there, its velocity of circulation will fall as people tend to hoard it, causing domestic transactions & trade and hence national income to fall too; hence further the need for an inexpensive domestic currency (under capital controls) for domestic trade and transactions to be revived.

(Capital controls imply import restrictions and the rationing of foreign exchange so Greeks will not be big tourists in the rest of the world for a while but what the heck they have so much to see in their own country.)

From Facebook Oct 3 2011:
Subroto Roy:

“What I have said for two years now is that Greece needs to introduce a soft inconvertible domestic money to facilitate domestic trade and revive growth; it would have to be accompanied by import controls and forex rationing with the Euro becoming a hard currency in Greece for external transactions. Why? Because the Euro has probably become a de facto hard currency for Greeks who would then tend to hoard it, slowing velocity of circulation and causing domestic transactions to be reduced. (At the same time, Germans, Danes and others have an incentive to leave the Euro for the safety of some other hard currency in view of a possible Greek default.) Money has two main functions, being a store of value and a medium of exchange. In present circumstances, the Euro is becoming a dubious store of value for the Germans et al while becoming too scarce to be a proper medium of exchange for the Greeks. All this is good standard monetary economics, which no one in the ECB, IMF, financial journalism etc somehow seems to be able to recall. Instead they have made a fetish of the fiscal side, and that is destined to neither address the root problem nor to bring civil peace….”

My “Reverse Euro” Model of June 1998, and my writings on a new money for Greece: letter to the Wolfson Economics Prize donors by Subroto Royon Thursday, 20 October 2011 at 18:51 ·

Hello,
In June 1998, I gave an invited lecture at the Institute of Economic Affairs on a “Reverse Euro” model for India, i.e., on how India could and should consider creating (under certain conditions) more than a dozen state-monies to coexist with a national currency too in the interests of a better fisc and some slight pretence to monetary integrity. In doing so, I also expressed my very grave foreboding about what the Euro was intended to be doing the following year in actual practice in Europe; I remember visiting a prominent British Euro-optimist too and making my argument in contrast about the Euro’s arrival.

Subsequently, Milton Friedman and I corresponded too about my idea, and he found merit in it in describing an exit route for, he said, Italy for example, if that country needed such an exit route given its fiscal condition to depart from the Euro in due course. I also talked briefly about the subject at an invited lecture at the Reserve Bank of India in April 2000, as well as elsewhere.

Over the last two years, I have (and I think was the first to do so) suggested Greece needs a New Drachma, and how this should be gone about. This has been outlined by me with many economists informally by email, as well as discussed at Facebook at some length.

I have little doubt what I am saying is broadly right — in the sense that it is the most consistent with the formal body of economic theory known as monetary economics. I was taught monetary economics very well in the mid 1970s at the LSE by, for example, ACL Day, Alan Walters, Brian Griffiths, Marcus Miller (a student of JR Hicks) and others which came to be followed by my doctoral dissertation at Cambridge under Frank Hahn, and postdoctoral work in America with Jim Buchanan. Plus Milton Friedman became a friend and stood for me as an expert witness in a US federal court (the only time he ever did that)! My most recent work is a book edited with John Clark titled Margaret Thatcher’s Revolution: How it Happened and What it Meant published by Continuum in 2005 — that has an essay relevant to this subject commissioned by us and done by Patrick Minford of Cardiff.

So I do plan to write something for your prize but whatever I do write will not be worth the vast sum of money you are offering — in fact, I would say you need to break it up into little bits in due course and parcel it out to the most fruitful ideas. The fox knows many things but the hedgehog knows one big thing… This is a fox problem, not a hedgehog one. Perhaps you should commission a journal or a multi-essay volume or a set of volumes or monographs rather than hand out one big cheque to someone who will not deserve it. (And please say no more about the moneys the Bank of Sweden gives away every year in the name of the advancement of knowledge in economics…)

The problem you have raised is a fundamental one and should have been raised decades ago, not merely by Eurosceptics in the occasional lecture or newspaper article but in many formal academic doctoral theses and journals all over Europe, long before the Euro came to be introduced — and note that the jump from the unification of Germany (with the 1:1 DM:Ostmark problem) was less than a decade before that. That did not happen. So now your belated initiative is most welcome, better late than never, better something than nothing.

Do let me know please what else I need to know to send in my theoretical thoughts on this.

Cordially

Suby Roy

From Facebook

February 21 2012

My idea has been far better (because it is based on standard monetary economics which the ECB, IMF etc bureaucrats appear to have all forgotten or never learnt) …

[Devaluation refers to exchange-rates. There are no exchange-rates, that is precisely the problem; exchange-rates are prices, and as such market signals. By getting rid of them, market signals were lost. The point I am making in my notes is that there is still an *implicit* shadow exchange-rate if you like, so the Euro being used in Greece actually has a different local price in terms of real goods and services than the same Euro being used in Germany!]

Hans Suter: A Drachma at a discount of 40% would certainly push tourism by a 20% ? That would be a 3 to 4% jump of GDP.)

Subroto Roy: A New Drachma can be at 0.1 of a Euro, or less. But at least *local* trade and business will be revived and slowly national income will grow. The Greeks will feel free and self-confident and sovereign. Yes they cannot buy any more BMWs or tour Paris or Italy any more. But they can go and visit the Taj Mahal and the Pyramids perhaps. [And they can take 100 years to repay their Euro debts instead of 50 years...]

Subroto Roy hears “If the Baltics can, then why not Greece?”, and says the Baltics are the Baltics, God Bless them, Greece is Greece… I have no idea about the Baltics. The closest I got to them was an Estonian friend in Helsinki many years ago. In Greece what I am saying is that the money that is being used, the Euro, is no longer a natural money, and for that matter, it never was a natural money — money and banking evolve naturally out of trade and commerce, and to truck, barter and exchange are natural human propensities. Creating a monetary union is the *final* step from a free trade area to a customs union to an economic union to a monetary union. A purported monetary union, or rather a *superficial* monetary union was created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences. The Euro has been an artificial money that eradicated the vital market signalling function that exchange-rates played (since exchange-rates are prices). A new inconvertible soft domestic money for Greece would allow domestic transactions to turnover properly once more and hence revive trade and national income. Greece could still be “in” the Eurozone nominally in the sense of having a fixed exchange-rate with the Euro which would be used for external trade. But there would have to be capital controls and import controls and foreign exchange rationing. At least for a while, probably a long while. Greece’s Euro debt would take 100 years instead of 50 years to repay. But at least the Greeks would feel free and sovereign and self-confident again, and adjust to their domestic economic realities in peace.

From Facebook May 14 2012
Diran Majarian
“The big issue here is how to deal with the debt overhang after the drachma transition since this must apply to both assets and liabilities.”

Subroto Roy The New Drachma has to be an inconvertible soft currency and Greece has to have import controls and capital export controls. Euro denominated assets held by domestic residents become Drachma-denominated (at a fixed, not a market-determined rate, e.g. 1:500 or 1:1000); Euro-denominated liabilities incurred by domestic residents remain Euro-denominated: if it is the Government, they can negotiate how much or all if it they will repay over time; if it is private, private assets may be converted to pay it and/or there will be individual defaults or delays (restructuring) or write-offs.

May 14 2012
The famous Professor Wilhelm Buiter (Cambridge BA 1971, Yale PhD 1975) has said this? “The instant before Greece exits it (somehow) introduces a new currency (the New Drachma or ND, say). Assume for simplicity that at the moment of its introduction the exchange rate between the ND and the euro is 1 for 1. This currency then immediately depreciates sharply vis-à-vis the euro (by 40 percent seems a reasonable point estimate). All pre-existing financial instruments and contracts under Greek law are redenominated into ND at the 1 for 1 exchange rate. What this means is that, as soon as the possibility of a Greek exit becomes known, there will be a bank run in Greece and denial of further funding to any and all entities, private or public, through instruments and contracts under Greek law. Holders of existing euro-denominated contracts under Greek law want to avoid their conversion into ND and the subsequent sharp depreciation of the ND. The Greek banking system would be destroyed even before Greece had left the euro area”…

Excuse me? This from the Chief Economist at Citi bank and “Professor of European Political Economy” at my alma mater, the London School of Economics and Political Science? What a load of rubbish Professor Buiter! Whom did you learn your monetary economics from? OK, ok, I should be polite: what makes you think a 1:1 exchange-rate should be fixed? Why not 1:500? Or 1:1000? The aim is to have a soft flexible inconvertible domestic currency *which facilitates, indeed stimulates, the turnover of domestic trade*, and allows equilibrium domestic relative prices to be found and adjusted towards. And why should Greece default on its Euro debt?! It might merely take a little longer to repay it. The change in currency is a conceptually distinct problem from that of credit-worthiness. Here is what I have said instead over two years, and for free:

Reintroducing the New Drachma would require

(a) clamping down overnight on capital exports followed by forex rationing;
(b) closing the trade borders and imposing import controls;
(c) deciding a new price for the Drachma, I would say something like 500 or 1000 to the Euro (the aim is for equilibrium domestic relative prices to be adjusted towards and for domestic trade to turnover properly and expeditiously and indeed stop its collapse);
(d) exchanging all forex/Euro-denominated financial assets held by domestic residents to New Drachma-denominations at the new rate automatically;
(e) exchanging all cash forex/Euro held by domestic residents to New Drachmas, through “licensed authorised dealers” as well as e.g. by ordering all commercial establishments to give New Drachma change in transactions. Would Greece have “left the Euro”? Yes and No. It would not be part of the Euro Area but the New Drachma would be a Euro-standard currency where the Government guaranteed to buy up all Euro held by domestic residents at the fixed price in exchange for New Drachmas and held its forex reserves in Euros.

A New Drachma?
From Facebook:
April 29 2010:
Subroto Roy thinks a New Drachma is inevitable sooner or later but remains deeply puzzled at the possible ways it may get reintroduced. The examples of such monetary reforms are all long gone from memory, in the immediate aftermath of WWII. It seems clear the Euro will become an increasingly scarce currency not suitable for fulfilling the normal medium of exchange function in domestic Greek transactions and will become a rationed hard currency under capital controls for external transactions only. It may already be hard or impossible to restrain a capital flight, perhaps underway. How will the actual transition be made? Perhaps by allowing Greek government debt denominated in a new local money, call it the New Drachma, to become tradeable? I said in my *Reverse Euro* model for India lecture in June 1998 at London’s IEA that the Eurozone could end up looking less like America’s monetary union than India’s.

April 8 2010:
Subroto Roy, reading “It is hard to know how to interpret this large decline in deposits”, says “Not really. The Euro is becoming a *scarce hard currency* in Greece, i.e., it is becoming too expensive to use Euros to satisfy Greece’s transactions demand for money, the medium of exchange function, hence Greece has an increasing need for a new local currency which will satisfy that function while the Euro is retained for use in Greece’s international transactions”.

Subroto Roy thinks the only sustainable long-term solution may be the reintroduction of a New Drachma, which will need time to stabilize behind a period of foreign exchange controls and rationing. The DM/FFr-based Euro would become a hard currency relative to a New Drachma.

March 24 2010:
Subroto Roy expects the US, Britain, ANZ and everyone else in the IMF who is not in the Eurozone may legitimately ask why the effective subsidy of Greece by its Eurozone partners should be transferred to the rest of the world.
Subroto Roy thinks the Europeans have enough clout in the IMF to, say, insist some of their own IMF-directed resources be directed towards Greece specifically, which would spell the unravelling of the IMF if it became a general habit.

Subroto Roy says “I had a very productive few months in 1993 as a high-level consultant working for Hubert Neiss at the IMF (consultants are, or at least were, very rare at the IMF unlike at the World Bank etc) when I came to understand a little of how the place works (leaving aside all the theory). The French Managing Director is a politician and not an economist or even a central banker, and I am sure France and Germany can swing some IMF money towards Greece. But of course, the IMF can by definition give no *monetary* or exchange-rate advice to Greece because there is no sovereign monetary authority in Greece any more. Hence all it can do is add the same fiscal (and political) advice and conditions as the rest of the Eurozone countries have done plus make the piggy bank larger with some IMF money. It may work once, but if France and Germany then say, right, Portugal, Spain, Italy are next in line, that is the end of the IMF, because its European members may as well be asked to pull out altogether. On the other hand, my radical advice to the IMF might have been to propose to help Greece to reintroduce the drachma and re-establish a sovereign monetary authority of its own, which would take IMF advice and expertise as a New Drachma would take time to stabilize and there would be a period of capital controls on foreign exchange transactions.”

Subroto Roy gave a Jun ’98 lecture at London’s IEA on why India should have a *Reverse-Euro* model: eg 16 major states have their own (domestic) monies with a national rupee coexisting too & free currency markets everywhere. I said I feared a Eurozone may end up *looking like India* rather than the US in this. India has papered over wild fiscal mismanagement by the States by even wilder fiscal mismanagement by the Union!

Subroto Roy says Europe could have been a confederation & an economic union for practical purposes without individual monetary sovereignties being lost. E.g., the drachma or peso or escudo or punt or lira could each have chosen to appropriately link to some combination of the DM, FFR, sterling etc. And a Europe-wide Euro from an ECB could have coexisted as well.

Subroto Roy finds Mr Constanzo mention Gresham’s Law, and says, “Certainly there might have been currency competition in Europe, and some of the smaller currencies may have chosen to go to *that* Euro — but DM would not have done, and would have been an alternative to it.”

Subroto Roy thought imposing a single newly invented money on different economies a bit like imposing a single newly invented language (like Esperanto) on different peoples.

Subroto Roy says India has papered over the wild fiscal mismanagement by the States by even wilder fiscal mismanagement by the Union!

Subroto Roy thinks the effective subsidy French farmers et al were getting from Germany in pre-Euro days all came to be subsumed within Euro-economics; an alternative would have been to *leave* DM as it was, & perhaps FFR too, & to have introduced a Euro for smaller economies to use (presumably to save transactions costs);*that* Euro could have been linked to the DM etc. The Germans would have been happy & the problems avoided.

Subroto Roy says German unification hit the Germans badly enough and they seem hardly in any mood to keep on playing Sugar-Daddy to everyone else while still having to defer to the putative victors of WWII (France and Britain) for political leadership.

“On the blissful innocence of the RBI” (2009), plus “A Small Challenge to the RBI’s Governor Subbarao”(2010)

December 11, 2009 — drsubrotoroy

From Facebook:

Subroto Roy can only sigh at the fact that while he has had to struggle for 35 years trying to grasp and then apply serious monetary economics to India’s circumstances, the RBI Governor & his four Deputy Governors appear blissfully innocent of all Hicks, Tobin, Friedman, Cagan et al yet exude confidence enough to “Waffle Away!”

Finance Minister Mukherjee deserves a cheer for connecting with economics (though half a cheer gets subtracted)

November 15, 2009 — drsubrotoroy

From Facebook today

Independent India’s Finance Ministers have never in 62 years referred to economic theory or the history of economic thought until Mr Mukherjee delivered the 4th Kadirgamar Memorial Lecture in Colombo yesterday, making the following academic claim:
“As students of economics would understand, economic theory is an evolutionary process and undergoes change with every major crisis. The classical theory gave way to Keynesian economics after the Great Depression of 1930s. Thereafter, there were post-Keynesian and monetarist approaches to economic problems during 1960s to 90s. The present crisis, which has also been called Great Recession, would be another watershed in the evolution of economics and is expected to bring about radical retooling of the theory. The crisis has, in the first place, conclusively established that the pursuit of individual goals do not necessarily lead to public good. Adam Smith’s ‘invisible hand’ cannot guarantee allocation of resources efficiently.”

I might rather count this as intellectual progress to the extent that it at least allows the Government of India’s economists the possibility of moving away from politically-induced dissimulation and instead begin to connect with where I was 25 years ago in my May 1984 monograph published by London’s Institute of Economic Affairs (leave aside my 1976-82 doctoral thesis under Professor Frank Hahn at Cambridge “On liberty and economic growth: preface to a philosophy for India”). As for the Finance Minister saying “The Indian economy has shown remarkable resilience to the crisis because the financial system had no exposure to the toxic assets”, I am afraid he has left unsaid that this is because (a) the rupee is not a hard currency; and (b) India’s banks hold plenty of domestic assets that are “toxic”.

Subroto Roy

Posted in Academic economics, Academic research, America's mortgage crisis, Economic Policy, Economic Theory, India's Government economists, India's 1991 Economic Reform, India's Banking, India's currency history, India's Economic History, India's Economy, India's Macroeconomics, India's Monetary & Fiscal Policy, India's Public Finance, Institute of Economic Affairs, Macroeconomics, Monetary Theory, Money and banking. Leave a Comment »

How to fight government corruption whether on Earth or Mars

November 6, 2009 — drsubrotoroy

From Facebook:

Subroto Roy believes — partly from personal experience — that there is only one really sustainable way to fight government corruption whether in Afghanistan, Pakistan, India, the UK, the USA, Russia, China or Mars: tough and clean government accounting and audit processes allied with an uncorrupted press/media. And without clean government accounting, incidentally, all public finance and hence almost all monetary policy becomes meaningless.

Protected: The point is not about a PhD but deception about it

August 12, 2009 — drsubrotoroy

Protected: The Case of the Missing Princeton PhD Thesis

August 7, 2009 — drsubrotoroy

Posted in Academic economics, Academic fraud, Academic freedom, Academic research, American academia, Fraud, India's NCAER, India's Monetary & Fiscal Policy, India's Reserve Bank, Mendacity, Monetary Theory, Money and banking, Power-elites and nomenclatura, Princeton University, Princeton University Economics Department, Professional ethics. Enter your password to view comments.

Mistaken Macroeconomics: An Open Letter to Prime Minister Dr Manmohan Singh (12 June 2009, addendum 7 March 2013)

June 12, 2009 — drsubrotoroy

From Facebook 7 March 2013
Dr Manmohan Singh is again talking about growth-rates, so I must again say what I said in 2009…

12 June 2009
The Hon’ble Dr Manmohan Singh, MP, Rajya Sabha

Prime Minister of India

Respected Pradhan Mantriji:

In September 1993 at the residence of the Indian Ambassador to Washington, I had the privilege of being introduced to you by our Ambassador the Hon’ble Siddhartha Shankar Ray, Bar-at-Law. Ambassador Ray was kind enough to introduce me saying the 1991 “Congress manifesto had been written on (my laptop) computer” – a reference to my work as adviser on economic and other policy to the late Rajiv Gandhi in his last months. I presented you a book Foundations of India’s Political Economy: Towards an Agenda for the 1990s created and edited by myself and WE James at the University of Hawaii since 1986 — the unpublished manuscript of that book had reached Rajivji by my hand when he and I first met on September 18 1990. Tragically, my pleadings in subsequent months to those around him that he seemed to my layman’s eyes vulnerable to the assassin went unheeded.

When you and I met in 1993, we had both forgotten another meeting twenty years earlier in Paris. My father had been a long-time friend of the late Brahma Kaul, ICS, and the late MG Kaul, ICS, who knew you in your early days in the Government of India. In the late summer of 1973, you had acceded to my father’s request to advise me about economics before I embarked for the London School of Economics as a freshman undergraduate. You visited our then-home in Paris for about 40 minutes despite your busy schedule as part of an Indian delegation to the Aid-India Consortium. We ended up having a tense debate about the merits (as you saw them) and demerits (as I saw them) of the Soviet influence on Indian economic “planning”. You had not expected such controversy from a lad of 18 but you were kindly disposed and offered when departing to write a letter of introduction to Amartya Sen, then teaching at the LSE, which you later sent me and which I was delighted to carry to Professor Sen.

I may add my father, back in 1973 in Paris, had predicted to me that you would become Prime Minister of India one day, and he, now in his 90s, is joined by myself in sending our warm congratulations at the start of your second term in that high office.

The controversy though that you and I had entered that Paris day in 1973 about scientific economics as applied to India, must be renewed afresh!

This is because of your categorical statement on June 9 2009 to the new 15^th Lok Sabha:

“I am convinced, since our savings rate is as high as 35%, given the collective will, if all of us work together, we can achieve a growth-rate of 8%-9%, even if the world economy does not do well.” (Statement of Dr Manmohan Singh to the Lok Sabha, June 9 2009)

I am afraid there may be multiple reasons why such a statement is gravely and incorrigibly in error within scientific economics. From your high office as Prime Minister in a second term, faced perhaps with no significant opposition from either within or without your party, it is possible the effects of such an error may spell macroeconomic catastrophe for India.

As it happens, the British Labour Party politician Dr Meghnad Desai made an analogous statement to yours about India when he claimed in 2006 that China

“now has 10.4% growth on a 44 % savings rate… ”

Indeed the idea that China and India have had extremely high economic growth-rates based on purportedly astronomical savings rates has become a commonplace in recent years, repeated endlessly in international and domestic policy circles though perhaps without adequate basis.

1. Germany & Japan

What, at the outset, is supposed to be measured when we speak of “growth”? Indian businessmen and their media friends seem to think “growth” refers to something like nominal earnings before tax for the organised corporate sector, or any unspecified number that can be sold to visiting foreigners to induce them to park their funds in India: “You will get a 10% return if you invest in India” to which the visitor says “Oh that must mean India has 10% growth going on”. Of such nonsense are expensive international conferences in Davos and Delhi often made.

You will doubtless agree the economist at least must define economic growth properly and with care — what is referred to must be annual growth of per capita inflation-adjusted Gross Domestic Product. (Per capita National Income or Net National Product would be even better if available).

West Germany and Japan had the highest annual per capita real GDP growth-rates in the world economy starting from devastated post-World War II initial conditions. What were their measured rates?

West Germany: 6.6% in 1950-1960, falling to 3.5% by 1960-1970 falling to 2.4% by 1970-1978.

Japan: 6.8 % in 1952-1960 rising to 9.4% in 1960-1970 falling to 3.8 % in 1970-1978.

Thus in recent decades only Japan measured a spike in the 1960s of more than 9% annual growth of real per capita GDP. Now India and China are said to be achieving 8%-10 % and more year after year routinely!

Perhaps we are observing an incredible phenomenon of world economic history. Or perhaps it is just something incredible, something false and misleading, like a mirage in the desert.

You may agree that processes of measurement of real income in India both at federal and provincial levels, still remain well short of the world standards described by the UN’s System of National Accounts 1993. The actuality of our real GDP growth may be better than what is being measured or it may be worse than what is being measured – from the point of view of public decision-making we at present simply do not know which it is, and to overly rely on such numbers in national decisions may be unwise. In any event, India’s population is growing at near 2% so even if your Government’s measured number of 8% or 9% is taken at face-value, we have to subtract 2% population growth to get per capita figures.

2. Growth of the aam admi’s consumption-basket

The late Professor Milton Friedman had been an invited adviser in 1955 to the Government of India during the Second Five Year Plan’s formulation. The Government of India suppressed what he had to say and I had to publish it 34 years later in May 1989 during the 1986-1992 perestroika-for-India project that I led at the University of Hawaii in the United States. His November 1955 Memorandum to the Government of India is a chapter in the book Foundations of India’s Political Economy: Towards an Agenda for the 1990s that I and WE James created.

At the 1989 project-conference itself, Professor Friedman made the following astute observation about all GNP, GDP etc growth-numbers that speaks for itself:

“I don’t believe the term GNP ought to be used unless it is supplemented by a different statistic: the rate of growth of the average consumption basket consumed by the ordinary individual in the country. I think GNP rates of growth can give very misleading information. For example, you have rapid rates of growth of GNP in the Soviet Union with a declining standard of life for the people. Because GNP includes monuments and includes also other things. I’m not saying that that is the case with India; I’m just saying I would like to see the two figures together.”

You may perhaps agree upon reflection that not only may our national income growth measurements be less robust than we want, it may be better to be measuring something else instead, or as well, as a measure of the economic welfare of India’s people, namely, “the rate of growth of the average consumption basket consumed by the ordinary individual in the country”, i.e., the rate of growth of the average consumption basket consumed by the aam admi.

It would be excellent indeed if you were to instruct your Government’s economists and other spokesmen to do so this as it may be something more reliable as an indicator of our economic realities than all the waffle generated by crude aggregate growth-rates.

3. Logic of your model

Thirdly, the logic needs to be spelled out of the economic model that underlies such statements as yours or Meghnad Desai’s that seek to operationally relate savings rates to aggregate growth rates in India or China. This seems not to have been done publicly in living memory by the Planning Commission or other Government economists. I have had to refer, therefore, to pages 251-253 of my own Cambridge doctoral thesis under Professor Frank Hahn thirty years ago, titled “On liberty and economic growth: preface to a philosophy for India”, where the logic of such models as yours was spelled out briefly as follows:

Let

K_t be capital stock

Y_t be national output

I_t be the level of real investment

S_t be the level of real savings

By definition

I_t = K _t+1 – K_t

By assumption

K_t = k Y_t 0 < k < 1

S_t = sY_t 0 < s <1

In equilibrium ex ante investment equals ex ante savings

I_t = S_t

Hence in equilibrium

sY_t = K _t+1 – K_t

s/k = g

where g is defined to be the rate of growth (Y _t+1-Y_t)/Y_{t .}

The left hand side then defines the “warranted rate of growth” which must maintain the famous “knife-edge” with the right hand side “natural rate of growth”.

Your June 9 2009 Lok Sabha statement that a 35% rate of savings in India may lead to an 8%-9% rate of economic growth in India, or Meghnad Desai’s statement that a 44% rate of savings in China led to a 10.4% growth there, can only be made meaningful in the context of a logical economic model like the one I have given above.

[In the open-economy version of the model, let M_tbe imports, E_t be exports, F_t net capital inflows.

Assume

M_t= aI_t + bY_t 0 < a, b < 1

E_t= E for all t

Balance of payments is

B_t = M_t – E_t– F_t

In equilibrium I_t = S_t + B_t

F_t = (s+b) Y_t – (1-a) I_t - E is a kind of “warranted” level of net capital inflow.]

You may perhaps agree upon reflection that building the entire macroeconomic policy of the Government of India merely upon a piece of economic logic as simplistic as the

s/k = g

equation above, may spell an unacceptable risk to the future economic well-being of our vast population. An alternative procedural direction for macroeconomic policy, with more obviously positive and profound consequences, may have been that which I sought to persuade Rajiv Gandhi about with some success in 1990-1991. Namely, to systematically seek to improve towards normalcy the budgets, financial positions and decision-making capacities of the Union and all state and local governments as well as all public institutions, organisations, entities, and projects in general, with the aim of making our domestic money a genuine hard currency of the world again after seven decades, so that any ordinary resident of India may hold and trade precious metals and foreign exchange at his/her local bank just like all those glamorous privileged NRIs have been permitted to do. Such an alternative path has been described in “The Indian Revolution”, “Against Quackery”, “The Dream Team: A Critique”, “India’s Macroeconomics”, “Indian Inflation”, etc.

4. Gross exaggeration of real savings rate by misreading deposit multiplication

Specifically, I am afraid you may have been misled into thinking India’s real savings rate, s, is as high as 35% just as Meghnad Desai may have misled himself into thinking China’s real savings rate is as high as 44%.

Neither of you may have wanted to make such a claim if you had referred to the fact that over the last 25 years, the average savings rate across all OECD countries has been less than 10%. Economic theory always finds claims of discontinuous behaviour to be questionable. If the average OECD citizen has been trying to save 10% of disposable income at best, it appears prima facie odd that India’s PM claims a savings rate as high as 35% for India or a British politician has claimed a savings rate as high as 44% for China. Something may be wrong in the measurement of the allegedly astronomical savings rates of India and China. The late Professor Nicholas Kaldor himself, after all, suggested it was rich people who saved and poor people who did not for the simple reason the former had something left over to save which the latter did not!

And indeed something is wrong in the measurements. What has happened, I believe, is that there has been a misreading of the vast nominal expansion of bank deposits via deposit-multiplication in the Indian banking system, an expansion that has been caused by explosive deficit finance over the last four or five decades. That vast nominal expansion of bank-deposits has been misread as indicating growth of real savings behaviour instead. I have written and spoken about and shown this quite extensively in the last half dozen years since I first discovered it in the case of India. E.g., in a lecture titled “Can India become an economic superpower or will there be a monetary meltdown?” at Cardiff University’s Institute of Applied Macroeconomics and at London’s Institute of Economic Affairs in April 2005, as well as in May 2005 at a monetary economics seminar invited at the RBI by Dr Narendra Jadav. The same may be true of China though I have looked at it much less.

How I described this phenomenon in a 2007 article in The Statesman is this:

“Savings is indeed normally measured by adding financial and non-financial savings. Financial savings include bank-deposits. But India is not a normal country in this. Nor is China. Both have seen massive exponential growth of bank-deposits in the last few decades. Does this mean Indians and Chinese are saving phenomenally high fractions of their incomes by assiduously putting money away into their shaky nationalized banks? Sadly, it does not. What has happened is government deficit-financing has grown explosively in both countries over decades. In a “fractional reserve” banking system (i.e. a system where your bank does not keep the money you deposited there but lends out almost all of it immediately), government expenditure causes bank-lending, and bank-lending causes bank-deposits to expand. Yes there has been massive expansion of bank-deposits in India but it is a nominal paper phenomenon and does not signify superhuman savings behaviour. Indians keep their assets mostly in metals, land, property, cattle, etc., and as cash, not as bank deposits.”

An article of mine in 2008 in Business Standard put it like this:

“India has followed in peacetime over six decades what the US and Britain followed during war. Our vast growth of bank deposits in recent decades has been mostly a paper (or nominal) phenomenon caused by unlimited deficit finance in a fractional reserve banking system. Policy makers have widely misinterpreted it as indicating a real phenomenon of incredibly high savings behaviour. In an inflationary environment, people save their wealth less as paper deposits than as real assets like land, cattle, buildings, machinery, food stocks, jewellery etc.”

If you asked me “What then is India’s real savings rate?” I have little answer to give except to say I know what it is not – it is not what the Government of India says it is. It is certainly unlikely to be anywhere near the 35% you stated it to be in your June 9 2009 Lok Sabha statement. If the OECD’s real savings rate has been something like 10% out of disposable income, I might accept India’s is, say, 15% at a maximum when properly measured – far from the 35% being claimed. What I believe may have been mismeasured by you and Meghnad Desai and many others as indicating high real savings is actually the nominal or paper expansion of bank-deposits in a fractional reserve banking system induced by runaway government deficit-spending in both India and China over the last several decades.

5. Technological progress and the mainsprings of real economic growth

So much for the g and s variables in the s/k = g equation in your economic model. But the assumed constant k is a big problem too!

During the 1989 perestroika-for-India project-conference, Professor Friedman referred to his 1955 experience in India and said this about the assumption of a constant k:

“I think there was an enormously important point… That was the almost universal acceptance at that time of the view that there was a sort of technologically fixed capital output ratio. That if you wanted to develop, you just had to figure out how much capital you needed, used as a statistical technological capital output ratio, and by God the next day you could immediately tell what output you were going to achieve. That was a large part of the motivation behind some of the measures that were taken then.”

The crucial problem of the sort of growth-model from which your formulation relating savings to growth arises is that, with a constant k, you have necessarily neglected the real source of economic growth, which is technological progress!

I said in the 2007 article referred to above:

“Economic growth in India as elsewhere arises not because of what politicians and bureaucrats do in capital cities, but because of spontaneous technological progress, improved productivity and learning-by-doing on part of the general population. Technological progress is a very general notion, and applies to any and every production activity or commercial transaction that now can be accomplished more easily or using fewer inputs than before.”

In “Growth and Government Delusion” published in The Statesman last year, I described the growth process more fully like this:

“The mainsprings of real growth in the wealth of the individual, and so of the nation, are greater practical learning, increases in capital resources and improvements in technology. Deeper skills and improved dexterity cause output produced with fewer inputs than before, i.e. greater productivity. Adam Smith said there is “invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many”. Consider a real life example. A fresh engineering graduate knows dynamometers are needed in testing and performance-certification of diesel engines. He strips open a meter, finds out how it works, asks engine manufacturers what design improvements they want to see, whether they will buy from him if he can make the improvement. He finds out prices and properties of machine tools needed and wages paid currently to skilled labour, calculates expected revenues and costs, and finally tries to persuade a bank of his production plans, promising to repay loans from his returns. Overcoming restrictions of religion or caste, the secular agent is spurred by expectation of future gains to approach various others with offers of contract, and so organize their efforts into one. If all his offers ~ to creditors, labour, suppliers ~ are accepted he is, for the moment, in business. He may not be for long ~ but if he succeeds his actions will have caused an improvement in design of dynamometers and a reduction in the cost of diesel engines, as well as an increase in the economy’s produced means of production (its capital stock) and in the value of contracts made. His creditors are more confident of his ability to repay, his buyers of his product quality, he himself knows more of his workers’ skills, etc. If these people enter a second and then a third and fourth set of contracts, the increase in mutual trust in coming to agreement will quickly decline in relation to the increased output of capital goods. The first source of increasing returns to scale in production, and hence the mainspring of real economic growth, arises from the successful completion of exchange. Transforming inputs into outputs necessarily takes time, and it is for that time the innovator or entrepreneur or “capitalist” or “adventurer” must persuade his creditors to trust him, whether bankers who have lent him capital or workers who have lent him labour. The essence of the enterprise (or “firm”) he tries to get underway consists of no more than the set of contracts he has entered into with the various others, his position being unique because he is the only one to know who all the others happen to be at the same time. In terms introduced by Professor Frank Hahn, the entrepreneur transforms himself from being “anonymous” to being “named” in the eyes of others, while also finding out qualities attaching to the names of those encountered in commerce. Profits earned are partly a measure of the entrepreneur’s success in this simultaneous process of discovery and advertisement. Another potential entrepreneur, fresh from engineering college, may soon pursue the pioneer’s success and start displacing his product in the market ~ eventually chasers become pioneers and then get chased themselves, and a process of dynamic competition would be underway. As it unfolds, anonymous and obscure graduates from engineering colleges become by dint of their efforts and a little luck, named and reputable firms and perhaps founders of industrial families. Multiply this simple story many times, with a few million different entrepreneurs and hundreds of thousands of different goods and services, and we shall be witnessing India’s actual Industrial Revolution, not the fake promise of it from self-seeking politicians and bureaucrats.”

Technological progress in a myriad of ways and discovery of new resources are important factors contributing to India’s growth today. But while India’s “real” economy does well, the “nominal” paper-money economy controlled by Government does not. Continuous deficit financing for half a century has led to exponential growth of public debt and broad money, and, as noted, the vast growth of nominal bank-deposits has been misinterpreted as indicating unusually high real savings behaviour when it in fact may just signal vast amounts of government debt being held by our nationalised banks. These bank assets may be liquid domestically but are illiquid internationally since our government debt is not held by domestic households as voluntary savings nor has it been a liquid asset held worldwide in foreign portfolios.

What politicians of all parties, especially your own and the BJP and CPI-M since they are the three largest, have been presiding over is exponential growth of our paper money supply, which has even reached 22% per annum. Parliament and the Government should be taking honest responsibility for this because it may certainly portend double-digit inflation (i.e., decline in the value of paper-money) perhaps as high as 14%-15% per annum, something that is certain to affect the aam admi’s economic welfare adversely.

6. Selling Government assets to Big Business is a bad idea in a potentially hyperinflationary economy

Respected PradhanMantriji, the record would show that I, and really I alone, 25 years ago, may have been the first among Indian economists to advocate the privatisation of the public sector. (Viz, “Silver Jubilee of Pricing, Planning and Politics: A Study of Economic Distortions in India”.) In spite of this, I have to say clearly now that in present circumstances of a potentially hyperinflationary economy created by your Government and its predecessors, I believe your Government’s present plans to sell Government assets may be an exceptionally unwise and imprudent idea. The reasoning is very simple from within monetary economics.

Government every year has produced paper rupees and bank deposits in practically unlimited amounts to pay for its practically unlimited deficit financing, and it has behaved thus over decades. Such has been the nature of the macroeconomic process that all Indian political parties have been part of, whether they are aware of it or not.

Indian Big Business has an acute sense of this long-term nominal/paper expansion of India’s economy, and acts towards converting wherever possible its own hoards of paper rupees and rupee-denominated assets into more valuable portfolios for itself of real or durable assets, most conspicuously including hard-currency denominated assets, farm-land and urban real-estate, and, now, the physical assets of the Indian public sector. Such a path of trying to transform local domestic paper assets – produced unlimitedly by Government monetary and fiscal policy and naturally destined to depreciate — into real durable assets, is a privately rational course of action to follow in an inflationary economy. It is not rocket-science to realise the long-term path of rupee-denominated assets is downwards in comparison to the hard-currencies of the world – just compare our money supply growth and inflation rates with those of the rest of the world.

The Statesman of November 16 2006 had a lead editorial titled Government’s land-fraud: Cheating peasants in a hyperinflation-prone economy which said:

“There is something fundamentally dishonourable about the way the Centre, the state of West Bengal and other state governments are treating the issue of expropriating peasants, farm-workers, petty shop-keepers etc of their small plots of land in the interests of promoters, industrialists and other businessmen. Singur may be but one example of a phenomenon being seen all over the country: Hyderabad, Karnataka, Kerala, Haryana, everywhere. So-called “Special Economic Zones” will merely exacerbate the problem many times over. India and its governments do not belong only to business and industrial lobbies, and what is good for private industrialists may or may not be good for India’s people as a whole. Economic development does not necessarily come to be defined by a few factories or high-rise housing complexes being built here or there on land that has been taken over by the Government, paying paper-money compensation to existing stakeholders, and then resold to promoters or industrialists backed by powerful political interest-groups on a promise that a few thousand new jobs will be created. One fundamental problem has to do with inadequate systems of land-description and definition, implementation and recording of property rights. An equally fundamental problem has to do with fair valuation of land owned by peasants etc. in terms of an inconvertible paper-money. Every serious economist knows that “land” is defined as that specific factor of production and real asset whose supply is fixed and does not increase in response to its price. Every serious economist also knows that paper-money is that nominal asset whose price can be made to catastrophically decline by a massive increase in its supply, i.e. by Government printing more of the paper it holds a monopoly to print. For Government to compensate people with paper-money it prints itself by valuing their land on the basis of an average of the price of the last few years, is for Government to cheat them of the fair present-value of the land. That present-value of land must be calculated in the way the present-value of any asset comes to be calculated, namely, by summing the likely discounted cash-flows of future values. And those future values should account for the likelihood of a massive future inflation causing decline in the value of paper-money in view of the fact we in India have a domestic public debt of some Rs. 30 trillion (Rs. 30 lakh crore) and counting, and money supply growth rates averaging 16-17% per annum. In fact, a responsible Government would, given the inconvertible nature of the rupee, have used foreign exchange or gold as the unit of account in calculating future-values of the land. India’s peasants are probably being cheated by their Government of real assets whose value is expected to rise, receiving nominal paper assets in compensation whose value is expected to fall.”

Shortly afterwards the Hon’ble MP for Kolkata Dakshin, Km Mamata Banerjee, started her protest fast, riveting the nation’s attention in the winter of 2006-2007. What goes for government buying land on behalf of its businessman friends also goes, mutatis mutandis, for the public sector’s real assets being bought up by the private sector using domestic paper money in a potentially hyperinflationary economy. If your new Government wishes to see real assets of the public sector being sold for paper money, let it seek to value these assets not in inconvertible rupees that Government itself has been producing in unlimited quantities but perhaps in forex or gold-units instead!

In the 2004-2005 volume Margaret Thatcher’s Revolution: How it Happened and What it Meant, edited by myself and Professor John Clarke, there is a chapter by Professor Patrick Minford on Margaret Thatcher’s fiscal and monetary policy (macroeconomics) that was placed ahead of the chapter by Professor Martin Ricketts on Margaret Thatcher’s privatisation (microeconomics). India’s fiscal and monetary or macroeconomic problems are far worse today than Britain’s were when Margaret Thatcher came to power. We need to get our macroeconomic problems sorted before we attempt the microeconomic privatisation of public assets.

It is wonderful that your young party colleague, the Hon’ble MP from Amethi, Shri Rahul Gandhi, has declined to join the present Government and instead wishes to reflect further on the “common man” and “common woman” about whom I had described his late father talking to me on September 18 1990. Certainly the aam admi is not someone to be found among India’s lobbyists of organised Big Business or organised Big Labour who have tended to control government agendas from the big cities.

With my warmest personal regards and respect, I remain,

Cordially yours

Subroto Roy, PhD (Cantab.), BScEcon (London)

Kolkata

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How tightly will organised Big Business be able to control economic policies this time?

May 26, 2009 — drsubrotoroy

The power of organised Big Business over New Delhi’s economic policies (whether Congress-led or BJP-led) was signalled by the presence in the audience at Rashtrapati Bhavan last week of several prominent lobbyists when Dr Manmohan Singh and his senior-most Cabinet colleagues were being sworn-in by the President of India. Why were such witnesses needed at such an auspicious national occasion?

Organised Big Business (both private sector and public sector) along with organised Big Labour (whose interests are represented most ably by New Delhi’s official communist parties like the CPI-M and CPI), are astutely aware of how best to advance their own economic interests; this usually gets assisted nicely enough through clever use of our comprador English-language TV, newspaper and magazine media. Shortly after the election results, lobbyists were all over commercial TV proposing things like FDI in insurance and airports etc– as if that was the meaning of the Sonia-Rahul mandate or were issues of high national priority. A typical piece of such “pretend-economics” appears in today’s business-press from a formerly Leftist Indian bureaucrat: “With its decisive victory, the new Manmohan Singh government should at last be able to implement the required second generation reforms. Their lineaments (sic) are well known and with the removal of the Left’s veto, many of those stalled in the legislature as well as those which were forestalled can now be implemented. These should be able to put India back on a 9-10 per cent per annum growth rate…”

Today’s business-press also reports that the new Government is planning to create a fresh “Disinvestment Ministry” and Dr Singh’s chief economic policy aide is “a frontrunner among the names short-listed to head the new ministry” with Cabinet rank.

Now if any enterprising doctoral student was to investigate the question, I think the evidence would show that I, and I alone – not even BR Shenoy or AD Shroff or Jagdish Bhagwati — may have been the first among Indian economists to have argued in favour of the privatisation of India’s public sector. I did so precisely 25 years ago in Pricing, Planning and Politics: A Study of Economic Distortions in India, which was so unusual for its time that it attracted the lead editorial of The Times of London on the day it was published May 29 1984, and had its due impact on Indian economic policy then and since, as has been described elsewhere here. In 1990-1991 while with Rajiv Gandhi, I had floated an idea of literally giving away shares of the public sector to the public that owned it (as several other countries had been doing at that time), specifically perhaps giving them to the poorest panchayats in aid of their development. In 2004-2005, upon returning to Britain after many years, I helped create the book Margaret Thatcher’s Revolution: How it Happened and What it Meant, and Margaret Thatcher if anyone was a paragon of privatisation.

That being said, I have to say I think a new Indian policy of creating a Ministry to privatise India’s public sector is probably a very BAD idea indeed in present circumstances — mainly because it will be driven by the interests of the organised Big Business lobbies that have so profoundly and subtly been able to control the New Delhi Government’s behaviour in recent decades.

Such lobbyist control is exercised often without the Government even realising or comprehending its parameters. For example, ask yourself: Is there any record anywhere of Dr Manmohan Singh, in his long career as a Government economist and then as a Rajya Sabha MP, having ever proposed before 2004-2005 that nuclear reactors were something vitally important to India’s future? And why do you suppose the most prominent Indian business lobby spent a million dollars and registered itself as an official lobbyist in Washington DC to promote the nuclear deal among American legislators? Because Big Business was feeling generous and altruistic towards the “energy security” of the ordinary people of India? Hardly. Indian Big Business calculates and acts in its own interests, as is only to be expected under economic assumptions; those interests are frequently camouflaged by their lobbyist and media friends into seeming to be economic policy for the country as a whole.

Now our Government every year produces paper rupees and bank deposits in practically unlimited amounts to pay for its practically unlimited deficit financing, and it has behaved thus over decades. Why we do not hear about this at all is because the most prominent Government economists themselves remain clueless — sometimes by choice, mostly by sheer ignorance — about the nature of the macroeconomic process that they are or have been part of. (See my “India’s Macroeconomics”, “The Dream Team: A Critique” etc elsewhere here). As for the Opposition’s economists, the less said about the CPI-M’s economists the better while the BJP, poor thing, has absolutely no economists at all!

Briefly speaking, Indian Big Business has acquired an acute sense of this long-term nominal/paper expansion of India’s economy, and as a result acts towards converting wherever possible its own hoards of paper rupees and rupee-denominated assets into more valuable portfolios for itself of real or durable assets, most conspicuously including hard-currency denominated assets, farm-land and urban real-estate, and, now, the physical assets of the Indian public sector. Such a path of trying to transform local domestic paper assets – produced unlimitedly by Government monetary and fiscal policy and naturally destined to depreciate — into real durable assets, is a privately rational course of action to follow in an inflationary economy. It is not rocket-science to realise the long-term path of the Indian rupee is downwards in comparison to the hard-currencies of the world – just compare our money supply growth and inflation rates with those of the rest of the world.

The Statesman of November 15 2006 had a lead editorial titled Government’s land-fraud: Cheating peasants in a hyperinflation-prone economy. It said:

Mamata Banerjee started her famous protest fast-unto-death in Kolkata not long afterwards, riveting the nation’s attention in the winter of 2006-2007.

What goes for the government buying land on behalf of its businessman friends also goes, mutatis mutandis, for the public sector’s real assets being bought up by the private sector using domestic paper money in a potentially hyperinflationary economy. If Dr Singh’s new Government wishes to see real public sector assets being sold, let the Government seek to value these assets not in inconvertible rupees which the Government itself has been producing in unlimited quantities but rather in forex or gold-units instead!

Today’s headline says “Short of cash, govt. plans to revive disinvestment ministry”. Big Business’s powerful lobbies will suggest that real public assets must be sold (to whom? to organised Big Business of course!) in order to solve the grave fiscal problems in an inflationary economy caused precisely by those grave fiscal problems! What I said in 2002 at IndiaSeminar may still be found to apply: I said the BJP’s privatisation ideas “deserve to be condemned…because they have made themselves believe that the proceeds of selling the public sector should merely go into patching up the bleeding haemorrhage which is India’s fiscal and monetary situation… (w)hile…Congress were largely responsible for that haemorrhage to have occurred in the first place.”

If the new Government would like to know how to proceed more wisely, they need to read and grasp, in the book edited by myself and Professor John Clarke in 2004-2005, the chapter by Professor Patrick Minford on Margaret Thatcher’s fiscal and monetary policy (macroeconomics) before they read the chapter by Professor Martin Ricketts on Margaret Thatcher’s privatisation (microeconomics). India’s fiscal and monetary or macroeconomic problems are far worse today than Britain’s were when Thatcher came in.

During the recent Election Campaign, I contrasted Dr Singh’s flattering praise in 2005 of the CPI-M’s Buddhadeb Bhattacharjee with Sonia Gandhi’s pro-Mamata line in 2009 saying the CPI-M had taken land away from the poor. This may soon signal a new fault-line in the new Cabinet too on economic policy with respect to not only land but also public sector privatisation – with Dr Singh’s pro-Big Business acolytes on one side and Mamata Banerjee’s stance in favour of small-scale unorganised business and labour on the other. Party heavyweights like Dr Singh himself and Sharad Pawar and Pranab Mukherjee will weigh in one side or the other with Sonia being asked in due course to referee.

I personally am delighted to see the New Rahul Gandhi deciding not to be in Government and to instead reflect further on the “common man” and “common woman” about whom I had described his father talking to me on September 18 1990 at his home. Certainly the “aam admi” is not someone to be found among India’s organised Big Business or organised Big Labour nor their paid lobbyists in the big cities.

Subroto Roy, Kolkata

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India’s incredibly volatile inflation rate!

March 20, 2009 — drsubrotoroy

Some months ago India’s inflation rate was said to be the highest it has been for decades and now today, right on cue, it is said to be the lowest it has been for decades! Today’s business press says Dr Manmohan Singh’s chief economic policy aide has apparently immediately expressed his keenness to see an even further purported “fiscal stimulus package” (aka pork-barrel politics prior to an election).

For myself, I have long given up on the credibility of such stuff emanating from our capital’s supposed policy-makers — putting it down, generally speaking, to what I consider and what I have called “New Delhi’s intellectual and moral bankruptcy”.

Here are two simple crude alternative ways to measure India’s (long-term trend) inflation-rate:

1. Take the Money-Supply Growth Rate, say 22% per annum, subtract from it the Growth of Real National Income, say 7%, get, hmmmm, 15%.

2. Find C&AG data for a series of several years; read off nominal expenditure on a dozen major heads of government bureaucracy (like “Central Secretariat”); calculate an average rate of growth of nominal expenditure on bureaucratic departments. On an assumption that Government of India bureaucracies, especially useless unproductive ones in New Delhi, seek to maintain their real consumption-levels, that growth of nominal expenditure reflects their beliefs about the actual change in the cost of living or decline in the value of money. Oddly enough, quick calculations of that amount to, hmmmm, 15% again!

For those who prefer to believe what emanates from New Delhi’s pretentious economists wallowing in their own ignorance, I wonder, as I said a couple of years ago on The Statesman’s frontpage, might I interest you in a marble structure in Agra, or perhaps a steel bridge over the Hooghly River, very famous, like Brooklyn Bridge itself….?

Subroto Roy, Kolkata

Can President Obama resist the financial zombies (let alone slay them)? His economists need to consult Dr Anna J Schwartz

February 14, 2009 — drsubrotoroy

The wonders of the Internet continue to surprise (and yes Virginia, there was a world before SMS and before the Internet too). In early January, in context of India’s Satyam fraud (of a size of perhaps 1 or perhaps 2 billion dollars), I referred here to what seemed to me the likelihood of Satyam becoming a zombie company and I said “we in India have many such zombies walking around in the organised business sector”. I drew attention to Andrew Beattie’s astute definition of zombies and other such ghoulish phenomena in the financial world, and also referred to John Stepek’s excellent if brief November 2008 analysis “How zombie companies suck the life from an economy”. Today I find Ms Arianna Huffington has made reference to Mr Martin Wolf’s reference a couple of days ago to zombie companies and to his statement that President Obama needs to “Admit reality, restructure banks and, above all, slay zombie institutions at once.” Ms Huffington has agreed, though of course all this slaying may be easier said than done. (It is better that zombies not be created in the first place.)

Mr Wolf has pointedly asked a question that many around the world may have half-thought about but not articulated: “Has Barack Obama’s presidency already failed?” It would be a grave and appalling state of affairs if it has, within less than a month of entering office. I am grateful to find in Ms Huffington’s article a reference to an October 2008 Wall Stret Journal interview of Dr Anna Jacobson Schwartz, perhaps the most respected voice in monetary economics today. There have been numerous people claiming to have predicted America’s financial crisis but none may have as much credibility as Dr Schwartz. Six years ago, in a National Bureau of Economic Research study dated November 2002, “Asset Price Inflation and Monetary Policy”,Working Paper 9321 she had said with utmost clarity: “It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders’ portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans….”

Most poignantly too, Dr Schwartz was present when Ben Bernanke said in a 2002 speech honouring the late Milton Friedman “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” Dr Schwartz told the Wall Street Journal ‘”This was [his] claim to be worthy of running the Fed”. “He was ‘familiar with history. He knew what had been done.’ But perhaps this is actually Mr. Bernanke’s biggest problem. Today’s crisis isn’t a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. ‘I don’t see that they’ve achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job.’”

President Obama’s economists need to urgently consult Anna J Schwartz.

Subroto Roy, Kolkata

Postscript: My own brief views on the subject are at “October 1929? Not!” dated September 18 2008, and “America’s divided economists” dated October 26 2008. The latter article suggested that playing the demographic card and inducing a wave of immigration into the United States may be the surest way to move the housing demand-curve firmly upwards.

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“A Dialogue in Macroeconomics” 1989 etc: sundry thoughts on US economic policy discourse

January 30, 2009 — drsubrotoroy

I have said here recently that some of the wisest advice President Obama or any leader anywhere can receive is that contained in Oliver Cromwell’s famous words “Think it possible you may be mistaken”.

This seems especially significant in context of new American macroeconomic and financial policies. Mr Steve Clemons reports today there may be less intellectual diversity in the new President’s economic team than is possible or desirable; if so, conversation may become stifled and a greater propensity towards groupthink may arise, hence a greater likelihood of mistakes.

It is possible the directions that different people might like to see the conversation extended are different, and that would be a good sign of course! For example, someone might think a Barro or a Mishkin could be the right addition of intellectual diversity, whereas others might suppose that to be the wrong direction towards more “market fundamentalism”. But it would be a pity if the economic conversation within the new Administration came to be artificially or ideologically circumscribed in any direction.

Certainly I believe macroeconomic policy-discourse in the United States or elsewhere needs to proceed to a recognition of the existence of JM Keynes’s original concept of “involuntary unemployment” as well as to ask whether the actual unemployment happens to be or not be of this sort. (It may be “frictional” or “structural” or “voluntary” or “seasonal” etc, not the involuntary unemployment Keynes had meant.) Furthermore, even if significant involuntary unemployment is identified, it needs to be asked whether government policy can be expected to improve or worsen outcomes. The argument must be made either way, and, in John Wisdom’s phrase, “Argument must be heard”.

“A Dialogue in Macroeconomics” which was Chapter 8 of my 1989 book Philosophy of Economics (Routledge, Library of Congress HB 72.R69) may provide some useful ballast. The saga that followed the book’s publication left me unable to write about the US economy anymore, except briefly in 1992 and 1994-95 in Washington and New York, read only by a few friends. Now in late 2008, I have published “October 1929? Not!” and “America’s divided economists” which may be of interest too, and which are republished below as well.

I have also added a couple of sundry points from an international perspective that I pointed to last September-October, namely

(i) foreign central banks might have been left holding more bad US debt than might be remembered, and dollar depreciation and an American inflation seem to be inevitable over the next several years;

(ii) all those bad mortgages and foreclosures could vanish within a year or two by playing the demographic card and inviting in a few million new immigrants into the United States; restoring a worldwide idea of an American dream fueled by mass immigration may be the surest way for the American economy to restore itself.

Subroto Roy

from Philosophy of Economics Routledge 1989

“Chapter 8.
A Dialogue in Macroeconomics

OUR next example is of quite a different sort, namely, the academic debate which has occurred in macroeconomics and monetary theory since Keynes’s General Theory of Employment, Interest and Money. This has of course received a great amount of attention, with innumerable commentaries having been written by many scores of protagonists and moderators around the world. Only a brief and highly simplified summary of these many conversations can be attempted here, within our limited objective of illustrating once more how it may be possible for critical discussion to be seen to proceed freely and yet objectively in economics. In the previous chapter we were fortunate to have had an actual conversation to consider; here our method shall have to be one of constructing a model of a conversation. In honour of Plato, we might name our conversants Athenian and Stranger.

ATHENIAN Tell me, have you perhaps been following the discussions among macroeconomists? I shall be interested to know what you take their present state to be.

STRANGER Indeed I have, though of course it is not possible or worthwhile to follow all of what has been said. But yes I have followed some of it, and certainly we can make it a topic of conversation.

ATHENIAN Please begin.

STRANGER Very well. Shall we do so in ‘36 with the publication of Keynes’s book? Rightly or wrongly, this must be considered a watershed in the history of modern economics, if only because most economists since have had either to admit its arguments in some measure or define and explain their disagreement. You’ll remember at one time it was said by many that Keynes had fathered a revolution in economic science.

ATHENIAN Except Chicago and the Austrians.

STRANGER Quite so. Now more recently a renewal of neoclassical thought has been under way, and many doubts have been raised about the keynesian consensus, so much so that some of the main questions of the thirties seem in modern form to continue to be at issue today.

ATHENIAN The more things change, the more they stay the same! But when you say Keynes has been a central figure, I take it you mean only that he has been among the most influential and most discussed and nothing more. It is not to preclude judgement on the merits of his book, which is itself of very uneven clarity. Besides there has been too much idolatry and hagiography.

STRANGER Yes, there is so often a rush to belief and worship. There may have been less if Keynes had survived longer. Yet I should say the broad aim of the work is not hard to see. Keynes himself clearly believes that he is starting a revolution — going so far as to suggest a comparison with contemporary physics. The first chapter says the book aims to provide a “general” theory, which will explain the traditional model as a “limiting” case. The second chapter says the theory of value has been hitherto concerned with the allocation of given resources between competing ends; Keynes is going to explain how the actual level of employment comes to be what it is.

ATHENIAN And so begs the question?

STRANGER Or does traditional theory? That seems to be at the heart of it.

ATHENIAN Go on.

STRANGER The theory will be of the short run in Marshall’s sense of taking capital as a fixed factor. Traditional theory is said to postulate about the labour market (i) that the real wage equals the marginal product of labour, so there is an assumption of profit maximization by competitive producers giving rise to a short run demand curve for labour; and (ii) that the utility of the wage at a given level of employment equals the marginal disutility of that amount of employment; i.e., the real wage is just sufficient to induce the volume of labour which is actually forthcoming. So it can account for unemployment due to temporary miscalculations, or intermittent demand, or the refusal or inability of labour to accept a job at a given wage due to legislation or social practices or collective bargaining or obstinacy, or merely a rational choice of leisure — i.e., it can account for frictional and voluntary unemployment but not for what Keynes wants to call involuntary unemployment. What it can suggest is either such things as improvements in foresight, information, organization and productivity, or a lowering of the real wage. But Keynes’s critique will not have to do with such causes of the contemporary unemployment; instead the population is said to be seldom “doing as much work as it would like to do on the basis of the current wage…. More labour would, as a rule, be forthcoming at the existing money wage if it were demanded.” But it is not being demanded, and it is not being demanded because there has been a shortfall of “effective demand”. That is why there is as much unemployment as there is.

ATHENIAN Or so Keynes claims. And he would take it the neoclassical view would be that it must be the real wage is too high; it is only because the real wage has not fallen by enough that unemployment continues.

STRANGER Right. To which there are two observations. The first has to do with the actual attitude of workers towards the money wage and the real wage respectively. The traditional supply function of labour is a function of the latter; Keynes claims that at least within a certain range it must be workers are concerned more with the former.

ATHENIAN How so?

STRANGER By the interesting and perhaps plausible claim that workers are found to withdraw labour if the money wage falls but do not seem to do the same if the price level rises. A real wage reduction caused by a fall in the money wage and the same real wage reduction caused by an increase in prices seem to have different effects on labour supply. “Whether logical or illogical, experience shows that this is how labour in fact behaves.” And he cites U. S. data for ‘32 to say labour did not refuse reductions in the money wage nor did the physical productivity of labour fall yet the real wage fell and unemployment continued. “Labour is not more truculent in the depression than in the boom — far from it.”

ATHENIAN And the second observation?

STRANGER This may be of more interest. “Classical theory assumes that it is always open to labour to reduce its real wage by accepting a reduction in its money wage… [it] presumes that labour itself is in a position to decide the real wage for which it works…” Keynes does not find a traditional explanation why prices tend to follow wages, and suggests it could be because the price level is being supposed to be determined by the money supply according to the quantity theory. Keynes wants to dispute the proposition “that the general level of real wages is directly determined by the character of the wage bargain…. For there may be no method available to labour as a whole whereby…. [it] can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs.” Hence he arrives at his central definition of involuntary unemployment: if the real wage falls marginally as a consequence of the price level rising with the money wage constant, and there is greater employment demanded and supplied in consequence, the initial state was one of involuntary unemployment.

ATHENIAN You are saying then that Keynes’s intent is to establish the existence of involuntary unemployment?

STRANGER At least a major part of the intent yes. To make the concept meaningful, to argue that it refers to a logical possibility, and also that much of the actual unemployment of the time may be falling under it, and is a result of lack of “effective demand”.

ATHENIAN The neoclassicals have been said to be cavalier about fluctuations in economic activity, when in fact Wicksell and Marshall and Thornton, let alone Hawtrey or Hayek as Keynes’s own critics, certainly had profound enough theories of the cycle. Before we go further, I think we should remind ourselves of what they actually said.

STRANGER Very well.

ATHENIAN Would you agree that can be summarized, then as now, as the quantity theory of money married to the theory of general equilibrium?

STRANGER Though it may be better to speak of divorce perhaps rather than marriage, in view of the dichotomy.

ATHENIAN From Smith to Mill, political economists broadly agree the role of government should extend and be restricted to such activities as defence, civil protection, the rule of law, the provision of public goods, education, the encouragement of competition, and so on. The traditional agenda does not as a rule include direct activity to restrain or otherwise change the natural course of trade, production, or consumption, and certainly no theory of what today is called macroeconomic policy. Underlying it is a broad belief that the competitive pursuit of private welfare within the necessary and minimal framework of the institutions of government, will result in tolerable social outcomes, and any further activity may be counterproductive. The State is after all endogenous to the economy, without any resources to its own name.

STRANGER The minimal state, though not so minimal perhaps as we sometimes think.

ATHENIAN The main function of money is seen to be that of facilitating real transactions. Hence the main component of the demand for money is the transactions demand, and the broad objective of monetary policy is the maintenance of the stability of the price of money. But this is recognized to be something elusive in practice, and fluctuations in economic activity are expected to occur in spite of the best intentions of the monetary authorities.

STRANGER How so?

ATHENIAN Well we might imagine two or three distinct but related markets: one for real investment and savings determined by intertemporal preferences, resources, and technologies; one a market for investment and savings defined in terms of money; one a short term credit market. The market for real investment and savings is, as it were, unobservable to the naked eye. Yet it drives the second and third markets for nominal savings and investment in which we actually participate. Monetary equilibrium requires the observable money rates of interest to equal the unobservable real rate of return on the market for physical capital. In particular, the real or natural rate of interest determined in the equilibrium of the first market is not, and perhaps ultimately cannot be, affected by nominal or monetary disturbances in the second or third markets.

STRANGER Why call it “natural”?

ATHENIAN In the sense it is a function of the real data of intertemporal preferences, resources, and technologies being what they are. If these data changed it should be expected to change too. But given these data, it would be the rate at which intertemporal constrained maximizations by individual agents resulted in planned present consumption equaling planned present production at the same time as planned future consumption equaled planned future production.

STRANGER In other words, real planned savings equal real planned investment.

ATHENIAN Exactly. It is the real interest rate, or rather the whole structure of own-rates and cross-rates at various terms, which is the key price signal for macroeconomic equilibrium.

STRANGER “Natural” seems to me to carry a physiocratic connotation. A better nomenclature would replace it with something else — perhaps “equilibrium real rate” or just “walrasian” rate.

ATHENIAN Very well, though I for one do not bias myself against the physiocrats! Now consider how a simple business cycle might occur on wicksellian lines. From a position of full real and monetary equilibrium, an expansion of credit has its first effect on the banks, increasing reserves and inducing more lending for reserve/deposit ratios to be restored, and so lowering the loan rate. But customers are only able to perceive a lowering of this nominal rate of interest and cannot know the equilibrium real rate has not changed. As far as households know, the relative price of present consumption has fallen and there is an incentive for greater consumption and lesser savings. As far as businesses know, the relative price of the future good has risen, and there is an incentive for greater investment. Inventories are run down, and markets for both consumer goods and capital goods are stimulated and show signs of excess demand. But if there was a walrasian equilibrium initially, then the economy will now show signs of inflation; with a gold standard, there would be increased demand for imports and an external drain of reserves, and even perhaps an internal drain if there was a panic and a run on the banks. The loan rate will have to rise once more to reign in reserves, but if the rate is now raised too high relative to the still unchanged real rate, there would be the makings of a recession.

STRANGER Your point being that economists before Keynes had recognized the decentralized economy may be fluctuating continually.

ATHENIAN Surely they had done so quite fully. A first set of causes such as wars, disasters, discoveries and migrations would change the real data of the economy, while a second set would be monetary disturbances like the failure of the authorities to adequately follow the dictates of the real data of the economy, i.e., failure to observe the equilibrium real rate of interest. It may even be intrinsic to the problem that they must fail in the attempt to observe, let aside compute, the equilibrium real rate warranted at a given time by the structure of the real data.

STRANGER Hence the conclusion that they cannot hope to do better than establish a climate of monetary and fiscal stability, such as by declaring a long term policy and staying with it.

ATHENIAN Exactly. Private economic agents already face endemic uncertainty with respect to changes in the real data, and must be assumed to not want more added by government policy. You appear to have seen my point nicely.

STRANGER Very well. But you have jumped ahead as this kind of a conclusion sounds very modern to me. You made me stop all the way back at Keynes’s notion of effective demand!

ATHENIAN As I said, the more things change, the more they stay the same.

STRANGER Let us go back a little. I think we may be able to rejoin our initial route at a point which may bring us close to where we seem to have come by the route you have taken. Specifically suppose we go back to the question of the money wage and the real wage, and of the real wage being “too high”.

ATHENIAN That has been interpreted a number of ways, has it not?

STRANGER Yes it has. One would be to say Keynes was merely simple minded and assumed money illusion on the part of workers. Another would be to say Keynes assumed a short run context of fixed prices, so it would not make a difference whether labour happened to be concerned with changes in the real or the money wage. Yet a third would be to say Keynes, whether he realized it or not, had come upon a recondite truth about the sort of complex monetary economy in which we live — namely, that when transactions are quoted and made in a monetary economy, it may become difficult ipso facto for the walrasian equilibrium to be achieved. Even workers might fully recognize the real wage to be too high and be prepared to work more at a lower wage, but be unable to signal this willingness to potential employers.

ATHENIAN So involuntary unemployment becomes another sort of equilibrium outcome.

STRANGER Exactly. Not only of labour but of machines too, along with the unintended holding of inventories. It is as if firms would have sold what they had planned to if only workers had the income to buy it, which they would have done if only they had been able to sell as much labour they had planned to, which they would have done if only there had been an effective demand for it, which there would have been if firms had not cut back on production because they found themselves unable to sell what they had planned to sell. A kind of vicious circle, due to pessimistic and self-fulfilling expectations all around.

ATHENIAN An unhappy solution to a non-cooperative game you might say.

STRANGER Quite so. Keynes does not deny there may be a monetary route out of the impasse. A wage deflation would eventually lead to price deflation, raising the real value of money holdings, so via liquidity preference lead to an increased demand for bonds, raising their price and lowering money interest rates, which through the investment function would lead eventually to increased effective demand. But the fiscal route may be more direct and quicker in its effect on expectations. Trying to deflate across the board in the face of what seem to be excess supplies of goods and labour might be counterproductive, causing unexpected transfers from debtors to creditors and precipitating bankruptcies. Instead: “Government investment will break the vicious circle. If you can do that for a couple of years, it will have the effect, if my diagnosis is right, of restoring business profits more nearly to normal, and if that can be achieved then private enterprise will be revived. I believe you have first of all to do something to restore profits and then rely on private enterprise to carry the thing along….”

ATHENIAN A shot in the arm for enterprise in the hope of breaking the pessimism. But Keynes was hardly alone in such thinking.

STRANGER Quite true.

ATHENIAN And he certainly seemed to treat the opinions of others without due respect, which is to say he may have exaggerated the significance of his own. Hinting that he was the Einstein of economics set an especially bad example. Only the other day one eminence was comparing himself to Newton, and another was calling his friend Shakespeare. It will be Joyce and Pasternak next!

STRANGER Flattery and nepotism are common weaknesses, my friend. Like the rush to belief and worship.

ATHENIAN Besides you would have to assume the government to be outside the game, and only so being able to see the problem which private agents could not from inside the game. That may be too large an assumption, don’t you think?

STRANGER Yes it may. Yet it seems to me pump-priming was a possible solution being offered to a temporary problem. Many of the controversies may have come about because it became institutionalized, because discretionary fiscal policy became a permanent part of the government agenda.

ATHENIAN And a more direct route out was available too, was it not? With wealth placed in the consumption function directly, a deflation would increase the real value and affect effective demand directly. We would not have to wait for the roundabout effects through so-called liquidity preference.

STRANGER Which in a way brings us back to a central pillar of traditional theory: with given real data and given velocity of circulation, desired holding of real money balances will roughly be constant. In particular the demand for real money balances should not be seen as a function of the interest rate.

ATHENIAN The real rate or the monetary rate?

STRANGER For neoclassicals certainly the real; Keynes does not seem clear.

ATHENIAN There may lie a problem.

STRANGER The title of the book says “Employment, Interest, and Money”. No question employment is real and money is money — interest is the bridge. If you ask me to bet I would say Keynes’s agents make real responses to signals expressed as they must be in a large economy in monetary terms.

ATHENIAN Perhaps we ought to move on. Tell me, if you think Keynes’s book rightly or wrongly ranks as the most influential document of the last fifty years, would you agree it is Friedman’s address on the role of monetary policy which must rank second to it if not on a par with it?

STRANGER Certainly there can be few competitors.

ATHENIAN Well then, it appears to me the net effect of Friedman’s critique has been a restoration of the wicksellian theory and a banishment of the keynesian theory.

STRANGER Friedman of course makes his approach via a critique of the Phillips’ Curve.

ATHENIAN Yes, but it is Wicksell whom he acknowledges in advancing the notion of a natural rate of unemployment, one which has been “ground out by the walrasian system of general equilibrium equations” — in other words, one which happens to be consistent with the structure of the real data of the economy at a particular time.

STRANGER Though again we may as well speak of walrasian instead of natural.

ATHENIAN A monetary policy which tried to peg unemployment at lower than such a rate (if such a rate could be determined, which it cannot) is likely to be counterproductive. The initial effect of an expansionary policy on a walrasian equilibrium may be to increase real output. Workers assume the increase to reflect an increase in the unobservable real demand for their services, and hence they expect a higher real wage. Businesses see the same and assume it to reflect an increase in the unobservable real demand for their goods. But given there was no real excess demand in the first place for either labour or goods, the effect outside anything but the short run will be a return to the initial structure of real wages, and the temporary decline in unemployment is reversed to the walrasian rate at higher prices. If the government tries to maintain unemployment at less than the walrasian rate, it will have to concede — indeed it will have caused — accelerating inflation without any real fall in unemployment.

STRANGER And vice versa perhaps, so there would be a kind of knife-edge.

ATHENIAN Now your remark about Friedman making his approach via the Phillips Curve seems to me interesting. We may have been too hasty to make a comparison with the debate in the thirties. For the world suffers a very real and severe shock between Keynes’s book and the keynesian consensus, which is the Second World War itself.

STRANGER I am not sure I follow.

ATHENIAN Well think of the consensus afterwards on the need for macroeconomic policy — it is actually Tinbergen’s notion of a “policy-maker” which is married to what seems to be Phillips’s finding of a trade-off between inflation and unemployment. It becomes the role of the macroeconomist to advise the politician on how to minimize social disutility from inflation and unemployment subject to the Phillips Curve. Macroeconomics becomes a so-called “policy science”. Give your expert economist your social utility function, and he will tell you where to slide to on your Phillips Curve.

STRANGER The available instruments being money supply and tax rates. That is what I meant in saying Keynes’s idea became institutionalized.

ATHENIAN It seems to me this consensus is born out of the War.

STRANGER How so?

ATHENIAN Well just think of the structural problems of the time: demobilization of large armies, reconstruction, all the displaced peoples, and so on. What are democratic governments to do? Say to their voters, right, thank you very much, now could you please go home quietly? What could have been expected except an Employment Act? Governments were going to help their returning citizens find work, or at least it would have seemed irresponsible if they had not said they were going to.

STRANGER You are saying then that Friedman may have been arguing against a new orthodoxy, grown out of what might have been a sensible idea.

ATHENIAN Exactly. The world is a very different place now than in 1945, in ‘45 than in ‘33, in ‘33 than in 1914. Real shocks every time. It may be a grave mistake for us to look for a unique and universal theory which is supposed to explain all particular circumstances, all of history.

STRANGER Reminds me of the historical school.

ATHENIAN Why not? Again I hold no prejudice against them! Anyhow, consider that Lucas and others have followed Friedman to argue it is a mistake to formulate the problem as Tinbergen had done, with unemployment as a target in a social utility function along with inflation. If it ought to be assumed that people will not continually make the same mistakes in predicting policy, then a systematic employment policy is going to be discovered quickly enough and rendered either ineffective or counterproductive. This idea too has its origins in Wicksell. Examining an opinion that inflation might stimulate enterprise and free debtors, Wicksell says: “It need only be said that if this fall in the value of money is the result of our own deliberate policy, or indeed can be anticipated and foreseen, then these supposed beneficial effects will never occur, since the approaching rise in prices will be taken into account in all transactions by reasonably intelligent people.”

STRANGER Wicksell said that?

ATHENIAN Precisely that.

STRANGER It does sound very modern.

ATHENIAN Now Lucas speaks of how the advice that economists give should be limited only to “the well understood and empirically substantiated propositions of monetary economics, discouragingly modest as these may be.” What can we take him to mean? It seems to me he is sharing Friedman’s scepticism of the possibilities which had been claimed for macroeconomics by the keynesian consensus. And that surely has been a healthy scepticism, befitting good economists.

STRANGER As I said, there is so often a rush to belief.

ATHENIAN Which is really disastrous when combined with the craving for power.

STRANGER But the question remains, does it not, as to which propositions of monetary economics are to be considered “well understood and empirically substantiated”. I cannot help think the propositions taken to be well understood and empirically substantiated in Chicago may be very different from those taken to be well understood and empirically substantiated in Cambridge, or for that matter, those in the U. S. from those in Europe.

ATHENIAN I don’t see any difficulty in this. For first, it would have been granted there are propositions in economics which can be well understood and empirically substantiated. And that must be counted as progress! For something cannot be well understood if it cannot be understood at all, and where there is the possibility of understanding there must be the possibility of objective knowledge as well. And second, why should we not say the most appropriate task of economic theory or analytical economics is simply one of clarification and elucidation of the conceptual basis of economic thinking and expression? All theory ultimately is, or ought to be, “Critique of Language”. When we are faced with a particular and concrete problematic situation, the theorist is to whom we turn for conceptual guidance and criticism. If instead you take the role of the theorist to be one of searching the universe for grand and general and absolute and abstract truths, which need to be discovered before we can say anything about some concrete set of particulars, then it seems to me you will be either struck dumb by a total and debilitating scepticism or become very shrill in your dogmatism or alternate wildly between the two. To me it seems unimportant ultimately to whose flag one shows allegiance, or indeed that allegiance to any flag must be shown.

STRANGER It seems again I will not disagree. But you have sketched the critique of Friedman and Lucas and indeed the ghost of Wicksell addressed to the dogmas of the keynesian orthodoxy. And I have agreed with you this has been a healthy criticism of the sort we should expect economists to provide. But there has been serious question too of the framework used by Friedman and Lucas, hasn’t there? I am thinking especially of Tobin and Hahn.

ATHENIAN Tobin has done much to add clear and reasonable thinking about Keynes — his suggestion that a certain amount of inflation may be the only way to bring down real wages towards their walrasian rates in complex monetary economics is especially interesting; it shows how wide the common ground can be upon which the debate may occur. But you will have to tell me what Hahn’s criticisms have been. I have always found them too abstract and too caustic.

STRANGER That they tend to be, but don’t let that deter you. As I see it, Hahn argues somewhat as follows. We should grant Friedman and Lucas two important points: first, the government is itself a large economic agent whose actions and announced plans enter the calculations of private agents; secondly, erratic changes in monetary policy away from a steady k% rule may have perverse effects “by confusing signals of relative scarcity with those that arose from the monetary policy”. Also, we may accept that the assumptions sufficient for a full walrasian equilibrium with rational expectations suffice for the absence of any persistent involuntary unemployment by Keynes’s definition. But Hahn would say this may not be the relevant empirical description.

ATHENIAN In what way?

STRANGER Well for one thing the pricing axiom or the recontracting assumption of stability theory remains unexplained. It is possible traders will face quantity constraints, and this often seems so in markets for labour and credit. We may simply find prices not moving in the direction of excess demand even when a quantity constraint happens to be binding. The structure of wages may be “neither fixed, nor arbritrary, nor inflexible; it is what it is because given conjectures, no agent finds it advantageous to change it.” Moreover, it may not be plausible to suppose there will be convergence after arbitrary displacements back towards a stable equilibrium, because the conditions for stability are very stringent and uniqueness of equilibrium may also need to be postulated. Furthermore, it may be quite unsatisfactory to treat money in models which are isomorphic to the Arrow-Debreu model, because in such a world there is no logical use for money, so there must be some essential features of reality which have failed to be features of the model.

ATHENIAN You don’t think Patinkin’s integration was adequate?

STRANGER For many practical purposes perhaps, but certainly not to full logical satisfaction. If you put real money balances into the utility function and treat money just about like any other good, you have to be prepared to accept a possible equilibrium in which the price of money is zero. Lastly, if there are internal debts denominated in money as there are in fact, you may not assume equiproportional changes in all prices will not have real effects, unless you are prepared to assume away redistributions between creditors and debtors, which you can do only under another assumption that all households have parallel and linear Engel curves through the origin. Hahn’s line of argument is admittedly abstract, but you will have to admit it raises some fundamental questions.

ATHENIAN Another example we might say of the healthy scepticism of the theorist. It seems my turn to agree with you. But we can imagine replies too can we not?

STRANGER What do you have in mind?

ATHENIAN Well to argue there can be unemployment which is involuntary is not to have argued that an employment policy can be expected to remove it. This seems a premise and conclusion too frequently confounded by both keynesians and their critics, with disastrous consequences. Then, Buchanan would argue that a more thorough characterization needs to be given of the making of government policy, especially when it is proposed to supplant the market outcome. Policies are after all proposed, enacted, and put into effect by actual people — all of whom may need to be assumed to be pursuing private rewards as well in the course of their public duties. The relevant description for the economist needs to be one including this further fact that actual proposals of public policy can embody the private interests of the proposers too.

STRANGER Making it that much more difficult to determine what is in the public interest in a given case.

ATHENIAN Exactly. And so reinforcing the case for predictability and an orderliness in the framework of government.

STRANGER But we have been talking now for quite long enough my friend. I seem to feel a fear too that we have not gained anything at all in our discussions.

ATHENIAN Don’t be so pessimistic! Surely the point of reconstructing such conversations as we have done is not to hold absolutely to the matters raised in them. You and I after all have been making summary and highly simplified and unauthorized interpretations. I take the point of it to have been clarifying our thoughts, and perhaps to show ourselves how discussion can proceed between economists of different schools of thought. Arguments might come to a halt for any of a number of reasons, but they needn’t be supposed to have any logical or necessary end. Too often we let people retreat into different dogmatic positions, fostering the belief that each is starting from some set of absolute axioms ultimately irreconcilable with those of the other. We may need to keep insisting instead that the pursuit of knowledge and understanding is an open-ended activity with potentially indefinite limits. It yields conclusive results but has no absolute end. You or I might call a halt and retire from it, but that will not mean it cannot or will not continue without us.

STRANGER Perhaps so. But you are younger than I, and I have become tired by all these thrusts and parries. Besides, there has been the enjoyment of conversation itself.”

October 1929? Not! by Subroto Roy / First published in Business Standard September 18, 2008

“Lehman Brothers filing for bankruptcy protection, Merrill Lynch taken over by Bank of America, Fannie Mae and Freddie Mac and now AIG being nationalised by the US Government, Bear Stearns getting a government bailout, many thousands of low-quality loans going bad … Does it all add up to an American financial crisis in the autumn of 2008 comparable to that in the autumn of 1929? Even Alan Greenspan himself has gone on record on TV saying it might.

But there are overriding differences. Most important, the American economy and the world economy are both incomparably larger today in the value of their capital stock, and there has also been enormous technological progress over eight decades. Accordingly, it would take a much vaster event than the present turbulence — say, something like an exchange of multiple nuclear warheads with Russia causing Manhattan and the City of London to be destroyed — before there was a return to something comparable to the 1929 Crash and the Great Depression that followed.

Besides, the roots of the crises are different. What happened back then? In 1922, the Genoa Currency Conference wanted to correct the main defect of the pre-1914 gold standard, which was freezing the price of gold while failing to stabilise the purchasing power of money. From 1922 until about 1927, Benjamin Strong of the Federal Reserve Bank of New York adopted price-stabilisation as the new American policy-objective. Britain was off the gold standard and the USA remained on it. The USA, as a major creditor nation, saw massive gold inflows which, by traditional gold standard principles, would have caused a massive inflation. Governor Strong invented the process of “sterilisation” of those gold inflows instead and thwarted the rise in domestic dollar prices of goods and services.

Strong’s death in 1928 threw the Federal Reserve System into conflict and intellectual confusion. Dollar stabilisation ended as a policy. Surplus bank money was created on the release of gold that had been previously sterilised.

The traditional balance between bulls and bears in the stock-market was upset. Normally, every seller of stock is a bear and every buyer a bull. Now, amateur investors appeared as bulls attracted by the sudden stock price rises, while bears, who sold securities, failed to place their money into deposit and were instead lured into lending it as call money to brokerages who then fuelled these speculative bulls. As of October 22, 1929 about $4 billion was the extent of such speculative lending when Chase National Bank’s customers called in their money.

Chase National had to follow their instructions, as did other New York banks. New York’s Stock Exchange could hardly respond to a demand for $4 billion at a short notice and collapsed. Within a year, production had fallen by 26 per cent, prices by 14 per cent, personal income by 14 per cent, and the Greatest Depression of recorded history was in progress — involuntary unemployment levels in America reaching 25 per cent.

That is not, by any reading, what we have today. Yes, there has been plenty of bad lending, plenty of duping shareholders and workers and plenty of excessive managerial payoffs. It will all take a large toll, and affect markets across the world.

But it will be a toll relative to our plush comfortable modern standards, not those of 1929-1933. In fact, modern decisionmakers have the obvious advantage that they can look back at history and know what is not to be done. The US and the world economy are resilient enough to ride over even the extra uncertainty arising from the ongoing presidential campaign, and then some.”

III

America’s divided economists by Subroto Roy First published in Business Standard October 26, 2008

“Future doctoral theses about the Great Tremor of 2008 will ask how it was that the Fed chief, who was an academic economist, came to back so wholeheartedly the proposals of the investment banker heading the US Treasury. If Herbert Hoover and FDR in the 1930s started something called fiscal policy for the first time, George W Bush’s lameduck year has marked the total subjugation of monetary policy.

In his 1945 classic, History of Banking Theory, the University of Chicago’s Lloyd Mints said: “No reorganisation of the Federal Reserve System, while preserving its independence from the Treasury, can offer a satisfactory agency for the implementation of monetary policy. The Reserve banks and their branches should be made agencies of the Treasury and all monetary powers delegated by Congress should be given to the Secretary of the Treasury…. It is not at all certain that Treasury control of the stock of money would always be reasonable… but Treasury influence cannot be excluded by the creation of a speciously independent monetary agency that cannot have adequate powers for the performance of its task…” Years later, Milton Friedman himself took a similar position suggesting legislation “to end the independence of the Fed by converting it into a bureau of the Treasury Department…”(see, for example, Essence of Friedman, p 416).

Ben Bernanke’s Fed has now ended any pretence of the monetary policy’s independence from the whims and exigencies of executive power. Yet Dr Bernanke’s fellow academic economists have been unanimous in advising caution, patience and more information and reflection upon the facts. The famous letter of 122 economists to the US Congress was a rare statement of sense and practical wisdom. It agreed the situation was difficult and needed bold action. But it said the Paulson-Bernanke plan was an unfair “subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.”

Besides, the plan was unclear and too far-reaching. “Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards…. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.”

The House’s initial bipartisan “backbench revolt” against “The Emergency Economic Stabilisation Act of 2008” (ESSA) followed this academic argument and rejected the Bernanke Fed’s advice. Is there an “emergency”, and if so what is its precise nature? Is this “economic stabilisation”, and if so, how is it going to work? The onus has been on Dr Bernanke and his staff to argue both, not merely to assert them. Even if the House “held its nose” and passed the measure for now, the American electorate is angry and it is anybody’s guess how a new President and Congress will alter all this in a few months.

Several academic economists have argued for specific price-stabilisation of the housing market being the keystone of any large, expensive and risky government intervention. (John McCain has also placed this in the political discussion now.) Roughly speaking, the housing supply-curve has shifted so far to the right that collapsed housing prices need to be dragged back upward by force. Columbia Business School economists Glenn Hubbard and Chris Mayer, both former Bush Administration officials, have proposed allowing “all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25 per cent…. close to where mortgage rates would be today with normally functioning mortgage markets….Lower interest rates will mean higher overall house prices…” Yale’s Jonathan Koppell and William Goetzmann have argued very similarly the Treasury “could offer to refinance all mortgages issued in the past five years with a fixed-rate, 30-year mortgage at 6 per cent. No credit scores, no questions asked; just pay off the principal of the existing mortgage with a government check. If monthly payments are still too high, homeowners could reduce their indebtedness in exchange for a share of the future price appreciation of the house. That is, the government would take an ownership interest in the house just as it would take an ownership interest in the financial institutions that would be bailed out under the Treasury’s plan.”

Beyond the short run, the US may play the demographic card by inviting in a few million new immigrants (if nativist feelings hostile to the outsider or newcomer can be controlled, especially in employment). Bad mortgages and foreclosures would vanish as people from around the world who long to live in America buy up all those empty houses and apartments, even in the most desolate or dismal locations. If the US’s housing supply curve has moved so far to the right that the equilibrium price has gone to near zero, the surest way to raise the equilibrium price would be by causing a new wave of immigration leading to a new demand curve arising at a higher level.

Such proposals seek to address the problem at its source. They might have been expected from the Fed’s economists. Instead, ESSA speaks of massive government purchase and control of bad assets “downriver”, without any attempt to face the problem at its source. This makes it merely wishful to think such assets can be sold for a profit at a later date so taxpayers will eventually gain. It is as likely as not the bad assets remain bad assets.

Indeed the University of Chicago’s Casey Mulligan has argued there is a financial crisis involving the banking sector but not an economic one: “We’re not entering a second Great Depression.” The marginal product of capital remains high and increasing “far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money…. So, if you are not employed by the financial industry (94 per cent of you are not), don’t worry. The current unemployment rate of 6.1 per cent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 per cent.”

Dr Bernanke has been a close student of A Monetary History of the United States in which Milton Friedman and Anna J Schwartz argued that the Fed inadvertently worsened the Great Contraction of 1929-1933 by not responding to Congress. Let not future historians find that the Fed, at the behest of the Treasury Secretary, worsened the Great Tremor of 2008 by bamboozling Congress into hasty action.”

Would not a few million new immigrants solve America’s mortgage crisis?
October 10, 2008 — drsubrotoroy | Edit

America was at its best when it was open to mass immigration, and America is at its worst when it treats immigrants with racism and worse (for seeming “uppity”).

All those bad mortgages and foreclosures could vanish within a year or two by playing the demographic card and inviting in a few million new immigrants into the United States. They would pour in from China, Vietnam, Thailand, Philippines, Indonesia, Mexico, South America, South Africa, Nigeria, Egypt, Israel, Poland, Romania, Hungary, Belarus, Ukraine, Russia, Uzbekistan, Kazakhstan, India, Sri Lanka, Bangladesh, and yes, Pakistan too, and more. They would happily buy up all those empty houses and apartments, even in all those desolate dismal locations. If the USA’s housing supply curve has moved so far to the right that the equilibrium price has gone to near zero, the surest way to raise the equilibrium price would be by causing a new wave of immigration leading to a new demand curve arising at a higher level. But yes, nativist feelings of racism towards the outsider or the newcomer would have to be controlled especially in employment — racists after all are often rather “sub-prime” themselves and hence unable to accept characters who may be “prime” or at least less “sub-prime” from foreign immigrant communities. Restoring a worldwide idea of an American dream fuelled by mass immigration may be the surest way for the American economy to restore itself.

122 Sensible American economists

September 26, 2008 — drsubrotoroy | Edit

“$700 billion comes to more than, uhhhm, $6,000 per income taxpayer in the USA.

I was glad to see the sensible letter of 122 American economists to US legislators regarding the Paulson-Bernanke plan to address America’s financial crisis.

Somehow, I have an inkling that foreign central banks have been left holding more bad US debt than might be remembered — which would explain the embarrassment of Messrs Paulson and Bernanke vis-a-vis their foreign counterparts… Dollar depreciation and an American inflation seem to be inevitable over the next several years.”

Posted in America's housing market, America's impatience, America's mortgage crisis, American academia, American democracy, American financial crises, American politics, Anna Schwartz, Benjamin Strong, Corporate Finance, Corporate fraud, Corporate Governance, Economic Policy, Economic Theory, Economic Theory of Interest, Economic Theory of Value, Economics of Exchange Rates, Economics of housing markets, Economics of Public Finance, Economics of real estate valuation, Economics of Unemployment, Federal Reserve Bank of New York, Federal Reserve Banks, Financial markets, Frank Hahn, Gold standard, Government Budget Constraint, James M Buchanan, John Maynard Keynes, John Wisdom, Macroeconomics, Milton Friedman, Monetary Theory, Money and banking, New York Stock Exchange, Obama Administration, October 1929 New York Stock Market Crash, Oliver Cromwell, Public Choice/Public Finance, US economy, US in World Trade, US Monetary and Fiscal Policy, US protectionism. Leave a Comment »

America’s divided economists

October 26, 2008 — drsubrotoroy

America’s divided economists

Subroto Roy

First published in Business Standard 26 October 2008

http://www.business-standard.com

Future doctoral theses about the Great Tremor of 2008 will ask how it was that the Fed chief, who was an academic economist, came to back so wholeheartedly the proposals of the investment banker heading the US Treasury. If Herbert Hoover and FDR in the 1930s started something called fiscal policy for the first time, George W Bush’s lameduck year has marked the total subjugation of monetary policy.

In his 1945 classic, History of Banking Theory, the University of Chicago’s Lloyd Mints said: “No reorganisation of the Federal Reserve System, while preserving its independence from the Treasury, can offer a satisfactory agency for the implementation of monetary policy. The Reserve banks and their branches should be made agencies of the Treasury and all monetary powers delegated by Congress should be given to the Secretary of the Treasury…. It is not at all certain that Treasury control of the stock of money would always be reasonable… but Treasury influence cannot be excluded by the creation of a speciously independent monetary agency that cannot have adequate powers for the performance of its task…” Years later, Milton Friedman himself took a similar position suggesting legislation “to end the independence of the Fed by converting it into a bureau of the Treasury Department…”(see, for example, Essence of Friedman, p 416).

Ben Bernanke’s Fed has now ended any pretence of monetary policy’s independence from the whims and exigencies of executive power. Yet Dr Bernanke’s fellow academic economists have been unanimous in advising caution, patience and more information and reflection upon the facts. The famous letter of 122 economists to the US Congress was a rare statement of sense and practical wisdom. It agreed the situation was difficult and needed bold action. But it said the Paulson-Bernanke plan was an unfair “subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.”

Dr Bernanke has been a close student of A Monetary History of the United States in which Milton Friedman and Anna J Schwartz argued that the Fed inadvertently worsened the Great Contraction of 1929-1933 by not responding to Congress. Let not future historians find that the Fed, at the behest of the Treasury Secretary, worsened the Great Tremor of 2008 by bamboozling Congress into hasty action.

Posted in Accounting and audit, America's housing market, America's mortgage crisis, American academia, American democracy, American financial crises, American history, American politics, Anna Schwartz, asymmetric information, Banking, Ben Bernanke, Dynamic competition, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Interest, Economic Theory of Value, Economics of Exchange Rates, Economics of housing markets, Economics of Public Finance, Economics of real estate valuation, Economics of Unemployment, Federal Reserve Bank of New York, Federal Reserve Banks, Financial markets, Government accounting, Government Budget Constraint, Great Tremor of 2008, International immigration, Lehman Brothers crisis, Macroeconomics, Milton Friedman, Monetary Theory, Money and banking, October 1929 New York Stock Market Crash, Political cynicism, Political Economy, Pork-barrel politics, Professional ethics, Public Choice/Public Finance, Public property waste fraud, United States Congress, University of Chicago, US economy, US Federal Reserve System, US in World Trade, US Monetary and Fiscal Policy, US Presidential Election, US Republicans and Democrats, USA, United States, USA, United States polity, World History. 1 Comment »

Monetary Integrity and the Rupee

September 28, 2008 — drsubrotoroy

Monetary Integrity and the Rupee: Three British Raj relics have dominated our macroeconomic policy-making

First published in Business Standard 28 September 2008

Taxation via inflation “does not require detailed legislation, and can be administered very simply. All that it requires is to spend newly created notes. The resulting inflation automatically imposes a tax on cash balances by depreciating the value of money”. Philip Cagan said this in a pioneering 1956 study of hyperinflations worldwide. Britain’s Hugh Dalton observed how government deficits could be met by “use of the printing press to manufacture legal tender paper money” to pay government creditors either directly “with new paper money specially printed for the purpose” or indirectly “out of loans to itself from the Central Bank”. Milton Friedman and Anna Schwartz pointed to America’s wartime resort to inflation.

Government debt held by a central bank quickly filters through to appear as an asset in balance-sheets of commercial banks, causing expansion of bank-lending and hence of bank-deposits and broad money. After the attack on Pearl Harbour, the US Treasury could get from the Federal Reserve or commercial banks “any funds that it needed beyond those secured by taxation and by borrowing from non-bank sources”. America’s wartime banking system became “a mechanism for providing funds to finance government expenditure” — deposits grew because “bank buying of government securities increases bank deposits”.

In RF Harrod’s words: “There is a well-known aphorism that ‘bank loans create deposits’…. if the central bank has an increase of assets, whether through a gold inflow or its own increase of ‘lending’ (including the purchase of bills or bonds), some commercial bank will have an increase of assets of equal amount, in the form of claims on the central bank (deposits at it or notes issued by it) and an increase of deposit liabilities of equal amount to its customers”.

India has followed in peacetime over six decades what the USA and Britain followed during war. Our vast growth of bank-deposits in recent decades has been mostly a paper (or nominal) phenomenon caused by unlimited deficit-finance in a fractional reserve banking system. Policy-makers have widely misinterpreted it as indicating a real phenomenon of incredibly high savings behaviour. In an inflationary environment, people save their wealth less as paper deposits than as real assets like land, cattle, buildings, machinery, food-stocks, jewellery etc.

Almost 50% of annual public revenues in real terms may have been arising from inflationary finance in recent decades. To take a specific example, during Dr Manmohan Singh’s tenure as Finance Minister, Union Government expenditure net of operational income was some Rs. 1.3 trillion (Rs 1.3 lakh crore) in 1994-1995. Some Rs. 675 billion (1 bn= 100 crore) was raised from all taxation that year, Rs 183 billion from direct taxes. The remaining Rs. 620.8 billion was borrowed on behalf of future generations of citizens using the Government of India’s credit. What is termed “Gross Fiscal Deficit” is this additional or marginal annual borrowing — it adds itself to the ongoing stock of public debt every year and has been continually monetised insofar as our mostly nationalized banking system annually comes to hold government securities to that additional amount.

India’s inflation-history shows a first phase from the 1870s until the Second World War when money prices fluctuated in response to real shocks, positive and negative, domestic and international. E.g., the US Civil War and First World War caused demand surges for Indian manufactures like cotton textiles and steel railway-tracks, while the Great Depression saw Indian prices crashing with world prices.

During the Second World War, money prices in India rose at their fastest rate ever, caused by deliberate British policy to pay for war expenditure by printing money. The British resort to inflationary wartime finance saw the highest money supply growth rates in India ever to occur to date. This pattern came to be adopted and institutionalised by independent India’s socialist authorities, so there has been a third phase of steady inflationary finance from the 1950s until today, along with negative shocks like military and civil conflicts, droughts and oil price-rises, as well as happier developments like technological progress leading to growth of real income (see graph).

Two more relics from the wartime British Raj continue to dominate Indian macroeconomic policy to this day. One is unlimited spending on vast standing armies — our supposed adversary itself being a political remnant of the Raj with similar macroeconomic problems to ourselves. India’s army has some 19 divisions facing Pakistan, Pakistan’s army has 19 divisions facing India!

The other relic has been the Indian rupee becoming inconvertible as a world money ever since import quotas were imposed across the Sterling Area in 1940-1942. Lack of convertibility has made all government finance in India unlike that in modern Western economies. US government bonds are held freely in foreign portfolios so a Swiss household or Japanese bank may trade these as they please. Bond prices vary inversely with interest-rates, and yield curves would be attempted to be defined reflecting the maturity-structure and state of expectations. Competitive arbitrage in international capital markets may succeed in ensuring government debt is priced accurately.

A central bank with a convertible currency sells debt to raise monetary interest rates and attract capital flows, buys up its debt to lower rates and cause capital outflows. Money growth unwarranted by real growth depreciates the currency under floating exchange rates; a partial export of inflation occurs under fixed-rates. Debt instruments are liquid near-moneys, and it is because US Government debt has been liquid that debt instruments of its sub-sovereign divisions like States or municipalities are almost as liquid. If sovereign debt is not liquid, nor will be sub-sovereign debt.

In India, bank assets may be liquid domestically but are illiquid internationally. Government debt is not held by domestic households as voluntary savings nor has it been a liquid asset held worldwide in foreign portfolios. The same holds *a fortiori* for debt issued by more than two dozen State Governments. “Mutual funds” created in recent years do contain government debt on modern principles of portfolio-selection but amounts involved are small. The Rupee achieving monetary integrity after more than six decades of governmental misuse would be indicated only when any ordinary Indian resident can freely hold or trade India’s money for foreign moneys or precious metals as he/she pleases. India’s economy and money can begin to move towards coherence and integrity only when we put to rest the three relics from the wartime British Raj which we unthinkingly have allowed to dominate our macroeconomic policy-making ever since.

The Excel graphs built on my data were made into a nice picture by Business Standard but seem to have been removed from their website, and hence are reproduced here now for the first time today, Oct 2, 2011:

122 sensible American economists

September 26, 2008 — drsubrotoroy

$700 billion comes to more than, uhhhm, $6,000 per income taxpayer in the USA.

I was glad to see the sensible letter of 122 American economists to US legislators regarding the Paulson-Bernanke plan to address America’s financial crisis.

Subroto Roy

Posted in American academia, American financial crises, Banking, Ben Bernanke, Economic Policy, International monetary economics, Lehman Brothers crisis, Macroeconomics, Monetary Theory, Money and banking, US Federal Reserve System, US in World Trade, US Monetary and Fiscal Policy. Leave a Comment »

October 1929? Not!

September 18, 2008 — drsubrotoroy

October 1929? Not!
by Subroto Roy

First published in Business Standard, Editorial Page, 18 September 2008 www.business-standard.com

Lehman Brothers filing for bankruptcy protection, Merrill Lynch taken over by Bank of America, Fannie Mae and Freddie Mac and now AIG being nationalised by the US Government, Bear Stearns getting a government bailout, many thousands of low-quality loans going bad … Does it all add up to an American financial crisis in the autumn of 2008 comparable to that in the autumn of 1929? Even Alan Greenspan himself has gone on record on TV saying it might.

Reddy’s reckoning

August 10, 2008 — drsubrotoroy

Reddy`s reckoning
Where should India’s real interest rate be relative to the world?
Business Standard 10 August 2008

The Governor of the Reserve Bank of India has made a curious, possibly fallacious remark.
continued at

Posted in Banking, Economic Policy, Economic Theory of Interest, India's Government economists, India's Capital Markets, India's Economic History, India's Economy, India's inflation, India's Monetary & Fiscal Policy, India's Reserve Bank, Inflation, Interest rates, Macroeconomics, Monetary Theory, Money and banking. Leave a Comment »

Growth of Real Income, Money & Prices in India 1869-2008

July 28, 2008 — drsubrotoroy

I have warned against a “monetary meltdown” in India for more than a decade and a half now. I said it to Rajiv Gandhi (who listened with care and respect) and after he was gone I have said it to Government economists in India, to IMF/World Bank bureaucrats in Washington, to academic audiences in India and the UK and to India’s general newspaper reading public.

Obviously I hope such a meltdown does not come about. But inflation, or the decline in the value of money, presently is in double-digits even by the Government’s own admission. (As a general rule, I think the decline in the value of money has been higher by several percent than what the Government says at any given time.) Hence I am publishing again some results of my macroeconomic research on India over the years. You are free to use them and communicate with me about them but please acknowledge them properly and do not steal.

The first graph of 1869-2004 data was published in print to accompany my Growth and Government Delusion in The Statesman February 22, 2008; it had also accompanied other similar articles, e.g. The Dream Team: A Critique in January 2006. The second graph of 1935-2008 data was published in print to accompany my article Indian Inflation in The Statesman of April 22 2008.

Subroto Roy

Hutton and Desai: United in Error

December 14, 2007 — drsubrotoroy

Hutton and Desai: United in Error
Subroto Roy

In an engaging debate in Prospect Magazine about a year ago, republished at China Digital Times, Will Hutton and Meghnad Desai have made the same cardinal error: they have assumed (like almost everyone else who has considered China’s or India’s recent macroeconomics) that savings rates are some astronomical figure.

Typical official fallacies in both countries include thinking that clever bureaucratic use of such high savings rates can and does cause high growth. In fact, real growth arises not because of what politicians and bureaucrats do but because of spontaneous technological progress, improved productivity and learning-by-doing of the general population ~ mostly despite not because of an exploitative parasitic State.

Here is Hutton on this issue: “China’s economic growth is based on the state channelling vast under-priced savings into huge investment … How much longer can China’s state-owned banks carry on directing billions of dollars of savings into investments that produce tiny or even negative returns…” (italics added)

Here is Desai: “China has achieved rapid growth with a policy of under-consumption and over-saving… China… now has 10.4 per cent growth on a 44 per cent savings rate….” (italics added)

What has been mismeasured as high savings in China and India is actually the expansion of bank-deposits in a fractional reserve banking system induced by runaway government deficit-spending.

On the basis of Indian evidence, I said this in public for the first time at Patrick Minford’s seminar on monetary economics at Cardiff and a week later at the IEA London in the spring of 2005 in a lecture titled “Can India become a superpower or will there be a monetary meltdown?” My recent general articles in The Statesman “The Dream Team: A Critique”, “Fallacious Finance”, “Against Quackery” etc speak a little more of this in the Indian case. What little I have seen of Chinese evidence indicates a similar phenomenon at work.

I said in 2005:”New technological progress in a myriad of ways, as well as the discovery of new resources… are all important factors contributing to real economic growth in India today. While the real side of the economy does well, the “nominal” economy, within the Government’s control, displays disconcerting trends. Continual deficit financing for half a century has led to exponential growth of public debt and broad money. The vast growth of time-deposits in banks may have been misinterpreted as indicating a real phenomenon such as unusual savings behaviour when it is more likely to be a nominal phenomenon resulting from increasing amounts of government debt being held by the largely nationalised banking sector. (The same may be true of China).”

As for growth-rates, before anyone at all waffles on about China’s and India’s allegedly high growth-rates, it is best to bring to mind a little hard evidence from other countries eg Germany and Japan where growth was starting from devastated post-War initial conditions:

West Germany: 6.6% in 1950-1960, falling to 3.5% by 1960-1970, and 2.4% by 1970-1978. Japan: 6.8% in 1952-1960; 9.4% in 1960-1970, 3.8% in 1970-1978.

China and India sustaining 8%, 9%, 10% annual growth of per capita real GDP for years on end? Naaaaah. Or rather, if you believe that, you will believe anything.

Posted in Academic research, Accounting and audit, China, China's Economy, Economic Theory of Growth, Germany, Growth rates (economic), India's Economy, India's Monetary & Fiscal Policy, Institute of Economic Affairs, Japan, Macroeconomics, Monetary Theory, Money and banking, Patrick Minford. Leave a Comment »

Fallacious Finance: Congress, BJP, CPI-M et al may be leading India to hyperinflation

March 5, 2007 — drsubrotoroy

Fallacious Finance: Congress, BJP, CPI-M et al may be leading India to hyperinflation

Subroto Roy

First published in The Statesman, March 5 2007 Editorial Page Special Article www.thestatesman.net

It seems the Dream Team of the PM, Finance Minister, Mr. Montek Ahluwalia and their acolytes may take India on a magical mystery tour of economic hallucinations, fantasies and perhaps nightmares. I hasten to add the BJP and CPI-M have nothing better to say, and criticism of the Government or of Mr Chidambaram’s Budget does not at all imply any sympathy for their political adversaries. It may be best to outline a few of the main fallacies permeating the entire Governing Class in Delhi, and their media and businessman friends:

1. “India’s Savings Rate is near 32%”. This is factual nonsense. Savings is indeed normally measured by adding financial and non-financial savings. Financial savings include bank-deposits. But India is not a normal country in this. Nor is China. Both have seen massive exponential growth of bank-deposits in the last few decades. Does this mean Indians and Chinese are saving phenomenally high fractions of their incomes by assiduously putting money away into their shaky nationalized banks? Sadly, it does not. What has happened is government deficit-financing has grown explosively in both countries over decades. In a “fractional reserve” banking system (i.e. a system where your bank does not keep the money you deposited there but lends out almost all of it immediately), government expenditure causes bank-lending, and bank-lending causes bank-deposits to expand. Yes there has been massive expansion of bank-deposits in India but it is a nominal paper phenomenon and does not signify superhuman savings behaviour. Indians keep their assets mostly in metals, land, property, cattle, etc., and as cash, not as bank deposits.

2. “High economic growth in India is being caused by high savings and intelligently planned government investment”. This too is nonsense. Economic growth in India as elsewhere arises not because of what politicians and bureaucrats do in capital cities, but because of spontaneous technological progress, improved productivity and learning-by-doing on part of the general population. Technological progress is a very general notion, and applies to any and every production activity or commercial transaction that now can be accomplished more easily or using fewer inputs than before. New Delhi still believes in antiquated Soviet-era savings-investment models without technological progress, and some non-sycophant must tell our top Soviet-era bureaucrat that such growth models have been long superceded and need to be scrapped from India’s policy-making too. Can politicians and bureaucrats assist India’s progress? Indeed they can: the telecom revolution in recent years was something in which they participated. But the general presumption is against them. Progress, productivity gains and hence economic growth arise from enterprise and effort of ordinary people — mostly despite not because of an exploitative, parasitic State.

3. “Agriculture is a backward sector that has been retarding India’s recent economic growth”. This is not merely nonsense it is dangerous nonsense, because it has led to land-grabbing by India’s rulers at behest of their businessman friends in so-called “SEZ” schemes. The great farm economist Theodore W. Schultz once quoted Andre and Jean Mayer: “Few scientists think of agriculture as the chief, or the model science. Many, indeed, do not consider it a science at all. Yet it was the first science – Mother of all science; it remains the science which makes human life possible”. Centuries before Europe’s Industrial Revolution, there was an Agricultural Revolution led by monks and abbots who were the scientists of the day. Thanks partly to American help, India has witnessed a Green Revolution since the 1960s, and our agriculture has been generally a calm, mature, stable and productive industry. Our farmers are peaceful hardworking people who should be paying taxes and user-fees normally but should not be otherwise disturbed or needlessly provoked by outsiders. It is the businessmen wishing to attack our farm populations who need to look hard in the mirror – to improve their accounting, audit, corporate governance, to enforce anti-embezzlement and shareholder protection laws etc.

4. “India’s foreign exchange reserves may be used for ‘infrastructure’ financing”. Mr Ahluwalia promoted this idea and now the Budget Speech mentioned how Mr Deepak Parekh and American banks may be planning to get Indian businesses to “borrow” India’s forex reserves from the RBI so they can purchase foreign assets. It is a fallacy arising among those either innocent of all economics or who have quite forgotten the little they might have been mistaught in their youth. Forex reserves are a residual in a country’s balance of payments and are not akin to tax revenues, and thus are not available to be borrowed or spent by politicians, bureaucrats or their businessman friends — no matter how tricky and shady a way comes to be devised for doing so. If anything, the Government and RBI’s priority should have been to free the Rupee so any Indian could hold gold or forex at his/her local bank. India’s vast sterling balances after the Second World War vanished quickly within a few years, and the country plunged into decades of balance of payments crisis – that may now get repeated. The idea of “infrastructure” is in any case vague and inferior to the “public goods” Adam Smith knew to be vital. Serious economists recommend transparent cost-benefit analyses before spending any public resources on any project. E.g., analysis of airport/airline industry expansion would have found the vast bulk of domestic airline costs to be forex-denominated but revenues rupee-denominated – implying an obvious massive currency-risk to the industry and all its “infrastructure”. All the PM’s men tell us nothing of any of this.

5. “HIV-AIDS is a major Indian health problem”. Government doctors privately know the scare of an AIDS epidemic is based on false assumptions and analysis. Few if any of us have met, seen or heard of an actual incontrovertible AIDS victim in India (as opposed to someone infected by hepatitis-contaminated blood supplies). Syringe-exchange by intravenous drug users is not something widely prevalent in Indian society, while the practise that caused HIV to spread in California’s Bay Area in the 1980s is not something depicted even at Khajuraho. Numerous real diseases do afflict Indians – e.g. 11 children died from encephalitis in one UP hospital on a single day in July 2006, while thousands of children suffer from “cleft lip” deformity that can be solved surgically for 20,000 rupees, allowing the child a normal life. Without any objective survey being done of India’s real health needs, Mr Chidamabaram has promised more than Rs 9.6 Billion (Rs 960 crore) to the AIDS cottage industry.

6. “Fiscal consolidation & stabilization has been underway since 1991”. There is extremely little reason to believe this. If you or I borrow Rs. 100,000 for a year, and one year later repay the sum only to borrow the same again along with another Rs 40,000, we would be said to have today a debt of Rs. 140,000 at least. Our Government has been routinely “rolling over” its domestic debt in this manner (in the asset-portfolios of the nationalised banking system) but displaying and highlighting only its new additional borrowing in a year as the “ Fiscal Deficit” (see graph, also “Fiscal Instability”, The Sunday Statesman, 4 February 2007). More than two dozen State Governments have been doing the same though, unlike the Government of India, they have no money-creating powers and their liabilities ultimately accrue to the Union as well. The stock of public debt in India may be Rs 30 trillion (Rs 30 lakh crore) at least, and portends a hyperinflation in the future. Mr Chidambaram’s announcement of a “Debt Management Office” yet to be created is hardly going to suffice to avert macroeconomic turmoil and a possible monetary collapse. The Congress, BJP, CPI-M and all their friends shall be responsible.

Posted in Academic research, Banking, Big Business and Big Labour, BJP, China, China's macroeconomics, China's savings rate, China's Economy, Communists, Congress Party, Deposit multiplication, Economic Policy, Economic quackery, Economic Theory of Growth, Economics of exchange controls, Economics of Public Finance, Economics of real estate valuation, Finance, Financial Management, Financial markets, Financial Repression, Foreign exchange controls, Governance, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's credit markets, India's Government economists, India's interest rates, India's savings rate, India's stock and debt markets, India's agriculture, India's Agriculture & Food, India's balance of payments, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's corporate finance, India's corporate governance, India's currency history, India's Democracy, India's Economic History, India's Economy, India's Exports, India's farmers, India's Finance Commission, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's grassroots activists, India's Health/Medicine, India's Industry, India's inflation, India's Labour Markets, India's Land, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's peasants, India's political lobbyists, India's Polity, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, India's Union-State relations, Inflation, Interest group politics, Macroeconomics, Manmohan Singh, Mendacity in politics, Monetary Theory, Money and banking, Paper money and deposits, Political cynicism, Political Economy, Political mendacity, Public Choice/Public Finance, Redeposits, Unorganised capital markets. 3 Comments »

Our Policy Process: Self-Styled “Planners” Have Controlled India’s Paper Money For Decades

February 20, 2007 — drsubrotoroy

Our Policy Process:

Self-Styled “Planners” Have Controlled India’s Paper Money For Decades

By Subroto Roy

First published in The Statesman, Editorial Page Special Article, Feb 20 2007, www.thestatesman.net

Three agencies of the Executive Branch of our Government have controlled the country’s fiscal and monetary processes. The most glamorous is the Planning Commission, a nominated agency of the Government of the day without constitutional status but which has informally charged itself with articulating national and provincial preferences on public spending. It has overshadowed in impact and prestige the Finance Ministry or Treasury, which normally would design the budget, raise taxes, run the fiscal machinery and be accountable to Parliament (the Legislative Branch) via the person of the Finance Minister. In turn, the Finance Ministry owns and controls the Reserve Bank, effectively placing India’s paper money and bank deposits at the discretion of New Delhi’s purported “economic planners”.

In addition, the Finance Commission is charged with articulating a suitable allocation of public resources between the Union and States, setting some medium-term parameters of federal finance. And the Comptroller & Auditor General is supposed to assess effectiveness of Government behaviour: the “high independent statutory authority..… who sees on behalf of the Legislature that … money expended was legally available for and applied to the purpose or purposes to which it has been applied.” “Audit … is the main instrument to secure accountability of the Executive to the Legislature …. The fundamental object of audit is to secure real value for the taxpayer’s money” (Indian Government Accounts & Audit, 1930).

Weakness of Parliament

In parliamentary government, the whole Executive Branch is accountable to and the agent of the Legislative Branch. But the utter weakness of our Parliament over decades has led its institutions, including the C&AG, to be run roughshod over by the Government of the day. The Finance Commission, being a temporary and transient body, can hardly take on the entrenched bureaucracy the Planning Commission has become.

This unconstitutional subservience of policy-making to the Planning Commission began when the first planners said on December 7 1952: “The raison d’etre of a planned economy is the fullest mobilisation of available resources and their allocation so as to secure optimum results …. There is no doubt that the RBI, which is a nationalised institution, will play its appropriate part in furthering economic development along agreed lines”. When Jawaharlal Nehru as free India’s first prime minister chose to himself lead the “Second Plan”, the fate of India’s paper money was sealed. “Insofar as government expenditure is financed by central bank credit, there is a direct increase in currency in circulation”. That May 14 1956 statement marked the last mention for the next 43 years of India’s money during the process of articulating India’s public expenditure priorities.

The Reserve Bank has indeed behaved “along agreed lines”. While superficially presiding over currency, banking and foreign exchange, it has been legally and practically a department (with some 75,000 employees today) of the Finance Ministry. Since the vast bulk of customer deposits are held by nationalized banks owned and managed by the Finance Ministry, India has had practically a “one-tier” banking system on the old USSR model.

The “Ninth” and “Tenth” Planning Commissions included not only Prime Minister Atal Behari Vajpayee but also his Finance and Foreign Ministers as members. It was not our Reserve Bank but such persons, including the prominent official (now in post-retirement service) Montek Singh Ahluwalia, who declared on April 5 1999 in the “Ninth Five Year Plan” that a “viable monetary posture” was “to accept an average inflation rate in the region of 7 per cent per annum, which would justify a growth rate of money supply (base money) of 16 per cent per annum”. Recent money supply growth rates under the Sonia-Manmohan Congress have been near 19%-21%, and inflation properly measured may be well above 10%.

In Western countries, it would be normal procedure for an acceptable level of inflation to be decided upon, followed by monetary and fiscal targets being set in view of what is statistically expected by way of real economic growth, since growth is mainly a result not of Government behaviour but of spontaneous technological progress and increase in productivity. By contrast, our “planning” process has allowed unconstrained fiscal expenditure to emerge out of chaotic and unconstrained nationwide politics on the sure-fire assumption that budget deficits are going to be “paid for” by money-printing (and hence by invisible taxation of the paper assets of an unknowing public).

For a PM and Finance Minister to sign off on fiscal-monetary targets during the “planning” process commits the entire Executive Branch to it. Reversing or even critically discussing such intentions would require nothing less than a Parliamentary Vote of No-Confidence, which itself would require public dissemination of economic models and data exclusively available to the Executive Branch, whether or not the Executive Branch is aware of it. Public exhortations and rhetoric then follow from politicians, bureaucrats and their businessman friends as to how much real growth needs to occur in order for inflation not to be above a given level!

The cart is thus squarely placed in front of and not behind the buffalo. If exhortations are not met by reality it is typically said ~ in bureaucrat-speak that avoids accountability ~ “slippages” occurred due to outside factors like rainfall, American business cycles or perhaps, now, global warming and AIDS.

Indeed because the upside-down nature of this process has likely not been grasped even by politicians, bureaucrats and establishment economists participating in it, let aside Parliament or the public, it hardly seems a conscious or deliberate “macroeconomic policy” at all, but rather an outcome of habitual, ritualistic routines taking place year after year for decades. And India’s financial press and TV media, instead of soberly seeking facts, have tended merely to flatter top politicians and bureaucrats, as is the wont of businessmen to do.

War finance, not peace

The structure of incentives and information has become such that no one in government, academia, international credit-rating agencies or elsewhere, is able to effectively point out that fiscal intentions expressed in a “Plan” may be infeasible, inflationary or generally unwise. This includes the IMF and World Bank who lead India’s creditors in Western financial markets, and whose staff are generally uninterested in the countries they work on except to make sure loans received are large and repayments timely (as their personal livelihoods depend on such factors). But a brave anonymous squeak can be found hidden in thousands of pages of “Tenth Plan” verbiage dated December 21 2002 ~ that it is all being “financed almost entirely by borrowing …. India’s public finance inherits the consequence of fiscal mismanagement in the past.” Efforts of one recent Governor to carve out a modern independent role for the Reserve Bank have apparently gone in vain, and he too has been co-opted as a Government spokesman in retirement.

The Bank of England could at one time “theoretically lend the full amount” the British Government was authorized to spend by the UK Parliament (Hirsch). For decades, the RBI has been required by our Government to do almost that in practice (see graph). During the Second World War, the US Government was assured its Central Bank “could and would see that the Treasury was supplied with all the money that it needed for war finance … beyond those secured by taxation and by borrowing from non-bank sources” (Chandler). India’s politicians and bureaucrats have given us macroeconomic processes that pretend our country has since Independence remained at war ~ when in fact we have been mostly at peace.

Posted in asymmetric information, Atal Behari Vajpayee, Banking, Economic Policy, Economic Theory, Economics of Public Finance, Expertise and democracy, Government accounting, Government Budget Constraint, Government of India, Growth rates (economic), India's Big Business, India's Government economists, India's Banking, India's Budget, India's bureaucracy, India's Constitution, India's currency history, India's Economic History, India's Economy, India's Finance Commission, India's Government Budget Constraint, India's Government Expenditure, India's History, India's inflation, India's Lok Sabha, India's Macroeconomics, India's Monetary & Fiscal Policy, India's Parliament, India's political lobbyists, India's Polity, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, India's Union-State relations, Macroeconomics, Money and banking, Political Economy. Leave a Comment »

Milton Friedman: A Man of Reason, 1912-2006

November 22, 2006 — drsubrotoroy

A Man of Reason
Milton Friedman (1912-2006)

First published in The Statesman, Perspective Page Nov 22 2006 www.thestatesman.net

Milton Friedman, who died on 16 November 2006 in San Francisco, was without a doubt the greatest economist after John Maynard Keynes. Before Keynes, great 20th century economists included Alfred Marshall and Knut Wicksell, while Keynes’s contemporaries included Irving Fisher, AC Pigou and many others. Keynes was followed by his younger critic FA Hayek, but Hayek is remembered less for his technical economics as for his criticism of “socialist economics” and contributions to politics. Milton Friedman more than anyone else was Keynes’s successor in economics (and in applied macroeconomics in particular), in the same way David Ricardo had been the successor of Adam Smith. Ricardo disagreed with Smith and Friedman disagreed with Keynes, but the impact of each on the direction and course both of economics and of the world in which they lived was similar in size and scope.

Friedman’s impact on the contemporary world may have been largest through his design and advocacy as early as 1953 of the system of floating exchange-rates. In the early 1970s, when the Bretton Woods system of adjustable fixed exchange-rates collapsed and Friedman’s friend and colleague George P. Shultz was US Treasury Secretary in the Nixon Administration, the international monetary system started to become of the kind Friedman had described two decades earlier. Equally large was Friedman’s worldwide impact in re-establishing concern about the frequent cause of macroeconomic inflation being money supply growth rates well above real income growth rates. All contemporary talk of “inflation targeting” among macroeconomic policy-makers since the 1980s has its roots in Friedman’s December 1967 presidential address to the American Economic Association. His main empirical disagreement with Keynes and the Keynesians lay in his belief that people held the intrinsically worthless tokens known as “money” largely in order to expedite their transactions and not as a store of value – hence the “demand for money” was a function mostly of income and not of interest rates, contrary to what Keynes had suggested in his 1930s analysis of “Depression Economics”. It is in this sense that Friedman restored the traditional “quantity theory” as being a specific theory of the demand for money.

Friedman’s main descriptive work lay in the monumental Monetary History of the United States he co-authored with Anna J. Schwartz, which suggested drastic contractions of the money supply had contributed to the Great Depression in America. Friedman made innumerable smaller contributions too, the most prominent and foresighted of which had to do with advocating larger parental choice in the public finance of their children’s school education via the use of “vouchers”. The modern Friedman Foundation has that as its main focus of philanthropy. The emphasis on greater individual choice in school education exemplified Friedman’s commitments both to individual freedom and the notion of investment in human capital.

Friedman had significant influences upon several non-Western countries too, most prominently India and China, besides a grossly misreported episode in Chile. As described in his autobiography with his wife Rose, Two Lucky People (Chicago 1998), Friedman spent six months in India in 1955 at the Government of India’s invitation during the formulation of the Second Five Year Plan. His work done for the Government of India came to be suppressed for the next 34 years. Peter Bauer had told me during my doctoral work at Cambridge in the late 1970s of the existence of a Friedman memorandum, and N. Georgescu-Roegen told me the same in America in 1980, adding that Friedman had been almost insulted publicly by VKRV Rao at the time after giving a lecture to students on his analysis of India’s problems.

When Friedman and I met in 1984, I asked him for the memorandum and he sent me two documents. The main one dated November 1955 I published in Hawaii on 21 May 1989 during a project on a proposed Indian “perestroika” (which contributed to the origins of the 1991 reform through Rajiv Gandhi), and was later published in Delhi in Foundations of India’s Political Economy: Towards an Agenda for the 1990s, edited by myself and WE James.

The other document on Mahalanobis is published in The Statesman today for the first time, though there has been an Internet copy floating around for a few years. The Friedmans’ autobiography quoted what I said in 1989 about the 1955 memorandum and may be repeated: “The aims of economic policy (in India) were to create conditions for rapid increase in levels of income and consumption for the mass of the people, and these aims were shared by everyone from PC Mahalanobis to Milton Friedman. The means recommended were different. Mahalanobis advocated a leading role for the state and an emphasis on the growth of physical capital. Friedman advocated a necessary but clearly limited role for the state, and placed on the agenda large-scale investment in the stock of human capital, encouragement of domestic competition, steady and predictable monetary growth, and a flexible exchange rate for the rupee as a convertible hard currency, which would have entailed also an open competitive position in the world economy… If such an alternative had been more thoroughly discussed at the time, the optimal role of the state in India today, as well as the optimum complementarity between human capital and physical capital, may have been more easily determined.”

A few months before attending my Hawaii conference on India, Friedman had been in China, and his memorandum to Communist Party General Secretary Zhao Ziyang and two-hour dialogue of 19 September 1988 with him are now classics republished in the 1998 autobiography. Also republished there are all documents relating to Friedman’s six-day academic visit to Chile in March 1975 and his correspondence with General Pinochet, which speak for themselves and make clear Friedman had nothing to do with that regime other than offer his opinion when asked about how to reduce Chile’s hyperinflation at the time.

My association with Milton has been the zenith of my engagement with academic economics, with e-mails exchanged as recently as September. I was a doctoral student of his bitter enemy yet for over two decades he not only treated me with unfailing courtesy and affection, he supported me in lonely righteous battles: doing for me what he said he had never done before, which was to stand as an expert witness in a United States Federal Court. I will miss him much though I know that he, as a man of reason, would not have wished me to.

Subroto Roy

Posted in Academic economics, Academic research, Adam Smith, Alfred Marshall, American academia, American financial crises, American history, Anna Schwartz, Asia and the West, Banking, China, China's macroeconomics, China's Economy, China's History, Communist China, Crash of 1929, David Ricardo, Economic Policy, Economic Theory, Economic Theory of Value, Economics of education, Economics of Exchange Rates, FA Hayek, Federal Reserve Bank of New York, Federal Reserve Banks, Financial markets, Frank Hahn, Freedom, Friedman Foundation, George P Shultz, Government Budget Constraint, Government of India, Great Depression, India's 1991 Economic Reform, India's Economy, India's Monetary & Fiscal Policy, Inflation, Inflation targeting, Jawaharlal Nehru, John Maynard Keynes, Keynesian economics, Macroeconomics, Microeconomics, Milton Friedman, Monetary Theory, Money and banking, PC Mahalanobis, Peter Bauer, Political Economy, Rajiv Gandhi, Richard Nixon, University of Chicago, University of Hawaii, US economy, US Federal Reserve System, US Monetary and Fiscal Policy, USA, United States, Wall Street financial crises. 1 Comment »

Indian Money and Credit

August 6, 2006 — drsubrotoroy

Indian Money & Credit
by
Subroto Roy
First published in The Sunday Statesman, August 6 2006, Editorial Page Special Article, www.thestatesman.net

One rural household may lend another rural household 10 kg or 100 kg of grain or seed for a short time. When it does, it expects to receive back a little more than the amount lent ~ even if that little amount is in services or in plain goodwill among friends or neighbours. That extra amount is “real interest”, and the percentage of its value relative to the whole is the “real rate of interest”. So if 10 kg of grain are lent for two weeks and 11 kg are returned, an implicit real rate of interest of 10 per cent has been paid over that short period. The future is always less valuable than the present in the sense that 10 kg of grain today is worth something more than the prospect of the same 10 kg of grain tomorrow.

But loans may be made in terms of money rather than real units of grain, thus the change in the value of money over the period of the loan becomes relevant. If a loan of Rs 100,000 is made by a bank to a borrower for one year at a simple interest rate of 13 per cent per annum, and the value of money then declines at 8 per cent over the year, the debtor is paying real interest of just about 13 per cent-8 per cent = 5 per cent. The Yale economist Irving Fisher described how this monetary rate of interest equals the real rate of interest plus the rate of monetary inflation, while the great Swedish economist Knut Wicksell predicted inflation if the monetary rate fell below the real rate, and vice versa.

And there is another consideration too. A new cycle-rickshaw costs about Rs 5,000. A rickshaw driver who does not own his own machine has to pay the owner of the rickshaw a fixed rental of about Rs 15 per day. Now a government policy may want to see more cycle-rickshaw drivers owning their own machines, and allocate bank-credit accordingly. But some fraction of the drivers are alcoholics and hence are bad credit-risks, while others are industrious, have strong family lives and are good credit-risks. If a creditor is unable to distinguish between who is an alcoholic and who is not, credit terms will tend towards subsidising the alcoholic and taxing the industrious.

On the other hand, a creditor who knows each debtor individually will also know their credit-risks, and price individual loans to them accordingly. India’s credit markets, both rural and urban, have been segmented always into “formal” and “informal”, and remain so despite (or perhaps because of) much government intervention in recent decades.

Banks and the Reserve Bank of India operate in formal financial markets, but the informal credit market is where the real action is. For example, a mosaic-machine used in the construction business costs Rs 15,000 brand new and gets to be rented out at the rate of Rs 150 per day.

Someone with access to formal sector bank loans at say 13 per cent per annum, might borrow the Rs 15,000, buy a machine, rent it out, break-even within a few months and make a whopping profit afterwards. Everyone would thus hunger after subsidised formal sector bank loans, and these would be rationed quickly and then come to be allocated to people known to bank officials (like their own friends and relatives).

Rates of return on capital, i.e. real profits, are and always have been massively high in India, and that is what is to be expected because capital, both machinery and finance, is relatively scarce as a factor of production. Rates of return on labour, i.e. real wages, are on the other hand relatively low in India thanks to our vast population. For these reasons we have had for three centuries foreigners coming to India to invest their capital in enterprise and make a profit, while Indians have emigrated all over the world from Fiji to Britain to America in search of higher wages.

Now all of this is very elementary reasoning well known to serious monetary economists, yet it seems to have always escaped India’s monetary and fiscal decision-makers. For example, just the other day, the Finance Minister said in Parliament that all rural banks had been instructed to lend farmers credit at a 7 per cent (monetary) rate of interest, and failure to do so would lead to punishment. By the rickshaw example (in fact many cycle-rickshaw drivers are also marginal farmers), the FM did not wish to, and of course cannot in practice, distinguish between good and bad credit-risks among the recipients of such loans. If the value of money is declining by, say, 8 per cent per annum, a 7 per cent monetary rate is equivalent to a minus 1 per cent real rate. i.e., the FM would have done some Humpty Dumpty economics and caused the future prospect of holding Rs 1,000 tomorrow to be more and not less valuable than the certainty of holding Rs 1,000 today. It is inevitable there will be credit-rationing when credit is so massively subsidised, so the typical borrowing farmer will get some little fraction of his credit-needs at the official government price of 7 per cent per annum and then have to get the bulk of his credit-needs fulfilled in the informal market ~ at a price perhaps of 1 per cent-5 per cent PER DAY! The FM promising in his Budget to subsidise farm credit sounds nice on TV but may be wholly futile as a way of stopping farmers’ suicides.

The same kind of Humpty Dumpty monetary economics has been religiously pursued by the Reserve Bank of India for decades upon directions from its owner and master, the Finance Ministry ~ which in turn has always meekly followed the dictates of India’s unreasonable politicians of all parties. Formal sector interest rates in India have been for decades so artificially lowered that even if we use official figures measuring inflation, this leads to real interest rates being lower in capital-scarce India than in the capital-rich West! (See graphs). Negative or near-zero real interest rates in India’s formal financial sector coexisting with massively high profit rates in informal credit markets point to continuous processes of low risk profits being made by arbitrage between the two. That is why the organised private and public sectors seem so pleased with official credit policies ~ while every borrower in the informal credit markets always has suicide not far from his/her mind.

Other than Dr Rangarajan who once mentioned it, we have never had an RBI Governor who has wished to see the Reserve Bank of India constitutionally independent of the Government of the day, and hence dedicated to restoring the integrity of India’s money. Playing with the repo rate or other short term monetary rates is fun and makes the RBI think it is doing something as important as the US or UK central banks. Certainly the upward trend in such short term rates over the last few months is better than the nonsensical flip-flops previously. But it is small potatoes compared to the really giant variables which are all fiscal and not monetary in India. For example, Sonia Gandhi (as advised by another naturalized Indian, Jean Drèze, disciple of the Non-Resident Amartya Sen) insisted on a massive “Rural Employment Guarantee”; Manmohan Singh and Pranab Mukherjee have insisted on massive foreign weapons’ purchases and government wage increases; Praful Patel on massive foreign aircraft purchases; Arjun Sengupta on Scandinavian welfare benefits; Montek Ahluwalia on nuclear reactor purchases (so South Delhi will be able at least to run its ACs in 20 years’ time). All this adds endlessly to the stock of government paper being held as bank-assets, while the currency remains inconvertible (See e.g. The Statesman 30 October 2005, 6-8 January, 23 April 2006).The RSS/BJP and JNU/Left have been equally bereft of serious thought.

Tell any suicidal farmer that the Government of India has been borrowing larger and larger amounts every year just to pay intereston previously incurred debts; it may make him realise there are famous and powerful people who are even more unwise than himself and amount to effective suicide-prevention therapy. But do not tell him that they unlike himself have been playing with public money ~ or you may have the opposite effect.

Posted in Academic economics, Academic research, asymmetric information, Banking, BJP, C Rangarajan, Capital and labour, Communists, Congress Party, Credit markets, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of housing markets, Economics of Public Finance, Enterprise and entrepeneurship, Financial markets, India's credit markets, India's stock and debt markets, India's Agriculture & Food, India's Banking, India's Budget, India's Capital Markets, India's corruption, India's currency history, India's Economy, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Industry, India's inflation, India's Labour Markets, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's political lobbyists, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, Inflation, Interest rates, Irving Fisher, Knut Wicksell, Macroeconomics, Manmohan Singh, Microeconomics, Monetary Theory, Money and banking, Mumbai financial world, Sonia Gandhi, Unorganised capital markets. Leave a Comment »

Indian Money and Banking

April 23, 2006 — drsubrotoroy

ON MONEY & BANKING

The deficit-finance of all public institutions flow like rivulets into the swamp that is our Public Debt, managed by the RBI

SUBROTO ROY

First published in The Sunday Statesman, Editorial Page, Special Article

April 23 2006, www.thestatesman.net

THE Reserve Bank of India, like all other public institutions, belongs to all of India’s people. There has been a tendency with every national institution, whether the ONGC or nationalised banks like SBI, or the IITs and IIMs or Air India and Indian Airlines or the Railways, Army, Navy, Air Force, IAS, IFS, Central Secretariat etc, even Parliament and State legislatures, to think that its assets, both tangible and intangible, are to serve the interests mainly of its employees, whether of Class 1, 2, 3, or 4. In fact, the assets of all such national institutions belong to all Indians: all one thousand million of us, from nameless street children and rural mendicants onwards. The body of our whole Indian citizenry own any and all such public institutions, and their employees are merely our “agents”, literally “public servants” who get paid salaries and perquisites out of public revenues. The task of managing and controlling these vast cohorts of public servants is a stupendous one of democratic politics and public administration. As a country we have never been very adept at it, indeed we often have been hopelessly incompetent. Without proper control and management, employees of national institutions have naturally tended to take over control of these assets, shifting liabilities onto the shoulders and budgets of the anonymous diffused body of citizenry who are supposed to be their masters. The public’s servants have tended to become the masters of the public’s assets and resources.

The RBI, as the nation’s Central Bank, has a unique position because its principal task is to establish and maintain the integrity of our money and banking system. The deficit-finance of all public institutions flow like rivulets into the swamp that is our Public Debt, managed by the RBI.

Money as such has no “intrinsic” worth. All the paper rupees, dollars, pounds, euros, yen in the world have less “intrinsic” usefulness than a hairpin or a button or a pair of shoelaces. Hairpins, buttons and shoelaces at least keep your hair, your shirt or your shoes together ~ the paper of paper money can be at best used to roll cigarettes perhaps. Yet paper money comes to be needed and is valued by everyone in every country ~ from street children upwards to Mr Premji, Mr Gates and Mr Mittal. Everyone accepts paper money as wages in exchange for his/her work, and then plans to use that same paper to buy food, shelter, clothing and other necessities with. I.e., we accept paper money for a short time believing we can use it to acquire useful things with. It has no intrinsic worth yet it is universally valued because everyone believes it will be accepted by everyone else in exchange for real goods and services which are in fact useful and conducive to life. The use of paper money depends on a fine and invisible web of collective trust permeating throughout the economy.

Banks arose due to the increasing complexity of modern economies in the last six hundred years. Paper currency was then supplemented in commerce by “deposits”, so that a transaction between two persons need not involve turnover of cash but can come to be accomplished by adjustment in their respective deposits with their banks. This vastly increased the quantum of trust ordinary people placed in the system of normal transactions, since they had to now believe not just in the exchangeability of paper money but also in the viability of the banks where they had placed their deposits. Currency plus Bank Deposits constitute what is called the “Money Supply”, and its controller is the RBI.

Our collective trust in money and banking is in and of itself something with economic value, which commercial banks are in a unique position to exploit. Banks can usually bet that all their customers will not demand their deposits at the same time, and so they are able to lend out as loans a very large fraction of what they have received as deposits from the public. Making such loans in turn causes the recipients of the loans to make new deposits (of what they have borrowed) in yet other banks, and this in turn acts as a signal to the receiving banks to make even more loans. Hence a process of “redeposit” or “deposit multiplication” occurs in any banking system where only a fraction of deposits is legally required to be kept as reserves by the bank. A Central Bank like the RBI then has the duty to see none of this gets out of hand: that while individual banks are acting to make profitable investments on the capital risked by a bank’s owners, they are, as a collective body, creating enough but not excessive credit to meet the needs of business.

In India, most banks came to be nationalised decades ago by Indira Gandhi on advice of P. N. Haksar, the mentor of Dr Manmohan Singh in his career as an economic bureaucrat. Whatever original capital they have had also arises from the public exchequer, and all their employees are effectively “public servants” under the Ministry of Finance. We have not been hearing from the RBI anything about the deleterious effects of this continuing state of affairs.

The RBI’s functions include managing the “Public Debt”, which stands today at perhaps Rs. 30 trillion (1 trillion= 1 lakh crore), on which interest of perhaps Rs 2-3 trillion must be paid by the Union and State Governments every year to those holding the debt (mostly the nationalised banking system under duress from the RBI). Why the stock-market has been doing so “well” is because it has been like an athlete on steroids. A stock market is supposed to be risky while a debt market is supposed to be safe. Our Government’s fiscal and monetary behaviour over decades has caused the formal debt market to yield negative returns, and so the stock-market has become relatively lucrative despite its risky nature.

It is also the RBI’s task to manage the country’s foreign exchange “reserves”, i.e. the residual balance left after all forex outgoings from purchases of imports (like petroleum or weapons) and payments of interest on or repayment of foreign loans have been subtracted from flows of incoming forex arising from export revenues, emigrants’ remittances, and new foreign loans and investments. These “reserves” do not belong to the Government or the nation in the same way tax-revenues belong to the Consolidated Fund of India. It was a shocking conceptual error of the Manmohan Singh Government’s most prominent economic bureaucrat to fail to see this and to suggest forex reserves could be used for “infrastructure” development. For the business press to get excited about forex reserves being at this or that level is also misleading, since high reserves may or may not indicate a better financial position just as a heavily indebted man may or may not be in a bad position depending on what kind of use he has made of his debts.

We have not been hearing of any of these matters from the RBI under Dr Y. V. Reddy. Instead, the one definite number we have received last week is that the RBI, under behest of its master, the Ministry of Finance, has been causing the Money Supply to grow at something like 15%. The Government’s apologists would like us to believe that this gets distributed between real economic growth in the region of 10% and inflation in the region of 5%. But for all that anybody really knows, it may be that real growth is at 5% and inflation is at 10%! Ask yourself if what you bought last year for Rs 1000 costs Rs 1050 or Rs. 1100 this year. Your guess may be as good as the Government’s.

Posted in Academic freedom, Academic research, Accounting and audit, Banking, Congress Party, Economic Policy, Economic Theory, Economic Theory of Interest, Economic Theory of Value, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's balance of payments, India's Banking, India's Budget, India's bureaucracy, India's corruption, India's currency history, India's Economic History, India's Economy, India's Foreign Exchange Reserves, India's Government Budget Constraint, India's Government Expenditure, India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's pork-barrel politics, India's Public Finance, India's Reserve Bank, India's State Finances, Indira Gandhi, Inflation, Interest group politics, Macroeconomics, Manmohan Singh, Mendacity in politics, Microeconomics, Money and banking, Public Choice/Public Finance. Leave a Comment »

Waffle but No Models of Monetary Policy: The RBI and Financial Repression

October 27, 2005 — drsubrotoroy

Waffle but No Models of Monetary Policy:

The RBI and Financial Repression (A Stock Market on Steroids)

Subroto Roy
First published in The Statesman, Perspective Page, October 27 2005, http://www.thestatesman.net

If the average Indian citizen feels flummoxed at hearing all the fancy words from official spokesmen and the talking heads on TV and the expensive pink business newspapers — words like “credit offtake”, “liquidity”, “reverse repo rate” “medium term”, “inflation mandate” etc — there is help at hand. It is as likely as not that the purveyors are as flummoxed themselves even while they bandy these terms about in what has been passing for monetary policy in India in recent years. No one has any reliable economic models backed by time-series data to support all the waffle.

Here is an example.

The Government (and specifically the department of the Finance Ministry known as the RBI) will have us believe that the decline in the value of money that has been occurring in India has been at less than 5% per annum. According to official figures, the average Indian’s purchase of consumable goods and services (food, housing, clothing, transport etc) has been costing more every year by merely 5% at the very most. “What you can buy for Rs. 1000 in one year, you have to pay just Rs 1050 to buy the next year” is what the Government will have us believe. But is anyone’s personal experience of the diminishing value of the domestic currency in India consonant with what official spokesmen say inflation happens to be?

You may well reply that you cannot quite recall what Rs. 1000 bought for you last year. Precisely so. Nor really can anyone else — and that mutual collective loss of memory on the part of the public is something that India’s Government (like many other governments across time and space) has been literally banking on!

Consider a few very simple calculations. Suppose a citizen earns an annual income of Rs. 100,000, and an honest Government told him/her to pay total taxes (from both income and expenditure) of 10%. Clearly Rs. 90,000 would be left for the citizen to spend on his/her various choices of consumption or saving afterwards. If the citizen could assume the value of money was constant (inflation was 0%) then this Rs. 90,000 in one year would buy the same amount of goods and services the next year. But instead we may be living in a political system where the Government officially taxes very lightly, and then dishonestly taxes very heavily by reducing the value of money invisibly, i.e. by inflation. The Government may make the official tax-rate 8% and the actual inflation-rate 15%. The citizen who has Rs. 100,000 will then pay Rs. 8,000 in nominal taxes, but the Rs. 92,000 that is nominally left over for his own consumption and savings, will be made to decline by a further 15% every year.

I.e., a further value of Rs.13,800 (15% of Rs. 92,000) would effectively disappear as an invisible tax from the household budget due to the decline in the value of money, without the household being any wiser. In real terms, the household would have only Rs. 78,200 left.

Where would that extra value disappear to? Clearly, the beneficiary of this invisible extraction of real resources from household budgets would be the only entity that is able to compel the decline in the value of money, namely, the Government, which holds monopoly power to print the pieces of paper (at zero cost) that we call “money” and which we are forced by circumstances to use to expedite our real transactions of goods and services. Roughly speaking, that is how the Government’s own budget deficit gets financed in India.

I.e., the Government of India has its own (massive) expenditures — not merely on things like roads and bridges and military tanks and submarines, but also on ministers and bureaucrats’ wages etc., besides enormous interest payments on past debts incurred by the Government. If the expenditures exceed the visible revenues raised from taxation, as they have done by perhaps 40-50% or more every year for several decades, then the difference gets bridged by printing more paper money over which the Government has had a monopoly.

In India, a total of perhaps 18 million people work in all branches of government and a total of perhaps 12 million people work in the entire organised private sector. That makes 30 million people — with 4 dependants each, that accounts for perhaps 150 million people in the country. That leaves another 850 million people in our population of 1,000 million. Everyone, whether in the 150 million or the 850 million, rich and named or poor and anonymous, has had to use for his/her real transactions of goods and services the paper that the Government produces as money. By causing a decline in the value of this paper every year by x%, everyone who holds this paper, as well as assets denominated in this paper, suffers an invisible taxation of x% without quite realising it. The real revenue the Government of India extracts in this way is what has allowed it to balance its own books.

Furthermore, in the Indian case, what is said to be the inflation-rate and the actual inflation-rate experienced by ordinary people, may well be two different things. The wage-bill of those 18 million people employed by government agencies are linked directly to what official spokesmen say the inflation-rate is, so if the actual rate being experienced was higher and was announced as such, so would have to be that wage-bill and public expenditure! Official spokesmen may tell us the decline in the value of money has been merely 5% or less a year, so what cost Rs. 1000 last year costs Rs. 1050 this year, but as a matter of plain fact, the average citizen’s experience (and memory) may well tell him/her something different – e.g. that what cost Rs. 1000 last year, is in fact costing Rs. 1100 or Rs 1150 or Rs 1200 this year.

So much for the value of money. Now turn to interest-rates.

Here too, the average citizen need not be a rocket-scientist to know that relative to the Western countries, India is labour abundant and is capital scarce. Roughly speaking, that means we have relatively more people and fewer high-rise concrete buildings than the West does. Where then would you expect wages (the price of labour) to be higher, in the West or in India? Clearly in the place where labour is more scarce, namely, the West. And where would you expect interest-rates (the price of capital) to be higher? Clearly, where capital is relatively more scarce, namely India. Such was clearly the case between 1864 and 1926 (Fig. 1). Calcutta bank interest-rates were uniformly higher by about 2-3% than London bank interest-rates (in an era of zero inflation). But something wholly different occurred in the pseudo-socialist India after Independence. E.g., for the years 1975-1992 official Indian interest-rates (adjusted for inflation) were uniformly lower than those in world capital markets represented by the USA (Fig. 2). That remains true today. Not only have the higher wages of the West been attractive to Indians, so seems to be the higher real rates of return on capital! Hence everyone who could fled India – exporting their adult children and their savings abroad , leaving future generations of the anonymous masses with larger public debts to pay the bills in due course. There has been a flight of skilled labour and as well as capital flight from India — are foreigners going to come when they can see the Indian “elite” has fled? Official real interest-rates in India today may well be negative if inflation is properly measured, which would explain the Bombay stock-market boom the same way an athlete can perform better when on steroids.

Of course in the unorganised capital markets, actual real rates of return have always been higher in India than in the West and remain so. Just ask anyone in the unorganised capital markets how much he has to pay to rent machinery on a daily basis e.g. in the building or construction trade in an Indian city or small town or village. He will quote you rates of 2% or 5% or 10% — per day. Hence there is a massive distortion between what is happening in the unorganised capital markets all over the country and the official money markets the RBI believes itself to be presiding over in Bombay. Until the RBI starts to tell us frankly about this phenomenon, which is known to economists as “financial repression” and which has been caused by runaway Government spending programmes in India for decades, the average citizen may discount all the talk about a few basis points changing here and there on this or that nominal rate, in our pale imitation of what we think the US Fed or the European or British central banks do as policy. The truth is the RBI has never been allowed to model itself after those institutions. Instead, India has had nationalised commercial banking whose pampered inefficient management and staff have allowed the holding of massive amounts of government debt as assets in their balance-sheets, all denominated in an inconvertible controlled currency, and all presided over by a “one-tier” central bank patterned on the old Gosbank of the former Soviet Union, completely subservient to the dictates of the runaway spending that this or that particular set of politicians in power may demand. If there are dreams to be dreamt by honest economists in India, it would be for all that to be made to change.

My May 29 2000 Recommendation of a 36 Lecture Introductory Economics Course for Advanced Undergraduate Students in India

May 29, 2000 — drsubrotoroy

When invited by a higher educational institution committee to give my recommendation on an economics syllabus for advanced undergraduates, this was my proposal dated May 29 2000:

INTRODUCTORY ECONOMICS COURSE FOR ADVANCED UNDERGRADUATE STUDENTS IN INDIA

Lecture 1 – Introduction to the history of economic thought, scholasticism, mercantilism, classical political economy, Marx, Keynes, modern neoclassical economics.

Lecture 2 — Introduction to India’s economy: Kautilya’s Arthasthastra, the Indian economy in ancient and medieval times, impact of British imperialism on the Indian economy, the economy after Independence: 1950-1991; post 1991.

Lectures 3-15: Introduction to Microeconomic Principles

Lecture 3 — Production, consumption and exchange; households and firms, goods and services.

Lecture 4 — Exchange between two parties without prices; Edgeworth’s Box analysis; the core of an exchange economy.

Lecture 5 — The notion of a relative price; the budget constraint of the individual household; maximization of utility subject to the budget; optimal consumption.

Lecture 6 — Consumption of the household; income-consumption curves; Engel curves; the derivation of the demand curve.

Lecture 7 — Theory of demand; aggregation of individual demand curves.

Lecture 8 — The firm in economic theory and reality; the activity analysis view of technology and production; costs and their minimisation; profits and their maximisation.

Lecture 9 — Elementary derivation of the supply curve from profit-maximisation principles. Aggregation of individual supply curves.

Lecture 10 – Market demand and supply together for a single good or service. Elementary partial equilibrium analysis.

Lecture 11 – Market equilibria of all goods and services together; elementary general equilibrium theory.

Lecture 12 – Theory of the firm revisited: cost curves, industry supply; the number of firms in an industry.

Lecture 13 — Monopoly and competition; Chamberlin’s monopolistic competition and product differentiation.

Lecture 14 – Elementary notions of game theory.

Lecture 15 — Review of microeconomics.

Lectures 16 –30 : Introduction to Macroeconomic Principles

Lecture 16 – Intertemporal models of consumption and production. Notions of savings and investment as a function of the interest rate.

Lecture 17 – Classical Wicksellian equilibrium in the market for savings and investment.

Lecture 18 – Money and its functions; the demand for money and the supply of money. Monetary equilibrium in the classical economy.

Lecture 19 – The Keynesian income-expenditure model.

Lecture 20 — The same contiued.

Lecture 21 – Basic Keynes-Hicks IS-LM model of macroeconomic equilibrium. The notion of involuntary unemployment.

Lecture 22 – The same continued. Macroeconomic aggregate supply and demand curve analysis. The working of fiscal and monetary policy in a closed economy under Classical and Keynesian assumptions.

Lecture 23 -- The same continued.

Lecture 24: The open economy. Basics of international trade.

Lecture 25 – Basics of exchange-rate and balance of payments theory.

Lecture 26 – The same continued.

Lecture 27 – Fiscal and monetary policy in an open economy.

Lecture 28 — The same continued.

Lecture 29 – Modern macroeconomic problems of inflation and unemployment.

Lecture 30 — Review of macroeconomic principles and policies.

Lecture 31-36 Introduction to Applied Economics

Lecture 31-33: Basics of National Income Accounting for India; GDP, GNP, price-series, Indian balance of payments and budget data analysis.

Lectures 34-36: Basics of demand estimation and introductory econometrics.

By a “Lecture” I mean one or more sessions over a week, so the whole course would take an academic year, whether divided in semesters or terms or quarters.

Subroto Roy

Kolkata

Posted in Academic economics, Economic Policy, Economic Theory, Economic Theory of Value, India's higher education, Macroeconomics, Microeconomics, Money and banking. 1 Comment »

Announcement of My “Hahn Seminar”, 1976 November 17

November 17, 1976 — drsubrotoroy

Frank Hahn believed in throwing students in at the deep end — or so it seemed to me when, within weeks of my arrival at Cambridge as a 21 year old Research Student, he insisted I present my initial ideas on the foundations of monetary theory at his weekly seminar. I was petrified but somehow managed to give a half-decent lecture before a standing-room only audience in what used to be called the “Keynes Room” in the Cambridge Economics Department.

(It helped that a few months earlier, as a final year undergraduate at the LSE, I had been required to give a lecture at ACL Day’s Seminar on international monetary economics. It is a practice I came to follow with my students in due course, as there may be no substitute in learning how to think while standing up.)

I shall try to publish exactly what I said at my Hahn-seminar when I find the document; broadly, it had to do with the crucial problem Hahn had identified a dozen years earlier in Patinkin’s work by asking what was required for the price of money to be positive in a general equilibrium, i.e. why do people everywhere hold and use money when it is intrinsically worthless. Patinkin’s utility function had real money balances appearing along with other goods; Hahn’s “On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy” in Theory of Interest Rates (1965), was the decisive criticism of this, where he showed that Patinkin’s formulation could not ensure a non-zero price for money in equilibrium. Hence Patinkin’s was a model in which money might not be held and therefore failed a vital requirement of a monetary economy.

The announcement of my seminar was scribbled by a young Cambridge lecturer named Oliver Hart, later a distingushed member of MIT and Harvard University.

Posted in Academic economics, Academic research, Cambridge Univ Economics, Cambridge University, Don Patinkin, Economic Theory, Economic Theory of Interest, Economic Theory of Value, Frank Hahn, London School of Economics, Macroeconomics, Microeconomics, Monetary Theory, Money and banking. Leave a Comment »

Independent Indian: Work & Life of Dr Subroto Roy

Bibliography, Books, Public Lectures, Memoranda, Memoirs

Some Recent Articles

Index of Names and Subjects

“I have a student called Suby Roy…”: Reflections on Frank Hahn (1925-2013), my master in economic theory

Towards Making the Indian Rupee a Hard Currency of the World Economy: An analysis from British times until the present day

(Another) Memo to Dr Kaushik Basu

A New Drachma? Thinking further on the need for a new Greek domestic currency to revive trade: Is the Greek/German Eurozone problem the mathematical dual of Gresham’s Law?

“On the blissful innocence of the RBI” (2009), plus “A Small Challenge to the RBI’s Governor Subbarao”(2010)

Finance Minister Mukherjee deserves a cheer for connecting with economics (though half a cheer gets subtracted)

How to fight government corruption whether on Earth or Mars

Protected: The point is not about a PhD but deception about it

Protected: The Case of the Missing Princeton PhD Thesis

Mistaken Macroeconomics: An Open Letter to Prime Minister Dr Manmohan Singh (12 June 2009, addendum 7 March 2013)

How tightly will organised Big Business be able to control economic policies this time?

India’s incredibly volatile inflation rate!

Can President Obama resist the financial zombies (let alone slay them)? His economists need to consult Dr Anna J Schwartz

“A Dialogue in Macroeconomics” 1989 etc: sundry thoughts on US economic policy discourse

America’s divided economists

Monetary Integrity and the Rupee

122 sensible American economists

October 1929? Not!

Reddy’s reckoning

Growth of Real Income, Money & Prices in India 1869-2008

Hutton and Desai: United in Error

Fallacious Finance: Congress, BJP, CPI-M et al may be leading India to hyperinflation

Our Policy Process: Self-Styled “Planners” Have Controlled India’s Paper Money For Decades

Milton Friedman: A Man of Reason, 1912-2006

Indian Money and Credit

Indian Money and Banking

Waffle but No Models of Monetary Policy: The RBI and Financial Repression

My May 29 2000 Recommendation of a 36 Lecture Introductory Economics Course for Advanced Undergraduate Students in India

Announcement of My “Hahn Seminar”, 1976 November 17

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Bibliography, Books, Public Lectures, Memoranda, Memoirs

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Index of Names and Subjects

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