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Chicago School of economics post-crisis

John Cassidy

TEXT OF INTERVIEW

Kai Ryssdal: The recession that we are just now beginning to work our way out of has been miserable for a huge chunk of the economy. For economists, though, it's literally been a once-in-a-lifetime chance to see how some of the dominant theories in the dismal science hold up in reality.

There are, in essence, two of those theories. One based on the ideas of John Maynard Keynes. The other popularized by Nobel prize winner Milton Friedman and named after the university where he taught: the University of Chicago. The Great Recession of '08-'09 has exposed some weaknesses in Friedman's ideas. And in the most recent issue of The New Yorker magazine staff writer John Cassidy explores the decline and fall of the Chicago School of economics. When we talked I asked him if he would start with a little primer.

JOHN CASSIDY: The basic idea of Chicago School economics is the free market left to its own devices works well, so it doesn't need much government intervention, and indeed, government interventions if they are put into effect will tend to go wrong.

Ryssdal: And in the magazine this week you profile a guy named Richard Posner. He's a federal judge in New York, and he is, as you say, a convert now. He says it doesn't work anymore, basically.

CASSIDY: Richard Posner is one of the most famous members of the Chicago school. He was largely responsible for growing the law and economics movement, which has helped populate a lot of American courtrooms with conservative judges and with judges who take free market economics very seriously. Last year, in the wake of the financial crisis, Judge Posner had a conversion, and went from being a sort of standard Chicago school economist to being a Keynesian.

Ryssdal: When you say Keynes, it's John Maynard Keynes. Explain briefly what it was that he said.

CASSIDY: In the free market view of things, economies are naturally self-correcting. If a recession starts, it will quickly bounce back, and unemployment won't go up very high, won't stay very high. Keynes said no, that's not true. Because of a variety of reasons, economies can get stuck in a recession, and you can have high unemployment for years on end and things can feed on themselves. So in order to avoid that outcome, he said government needs to step in and spend money.

Ryssdal: Well, make the connection for me, though, between the efficient markets theory and regulation and the attitude toward the markets in Washington.

CASSIDY: Well, the efficient markets hypothesis, although it's sort of obscure economic theory in one sense, also had a very practical impact in that it underpinned a lot of the deregulation in the 1990s and 1980s. The basic idea behind that deregulation was that financial markets, if you left them to their own devices, wouldn't depart from economic fundamentals. Prices in the market would reflect what companies are really worth, or in the housing market, what houses are really worth. There wouldn't be any speculative bubbles for example. That's what Alan Greenspan said, that's what Bob Rubin, and Larry Summers said when they were Treasury secretaries, and it justified a whole range of deregulatory measures taken to allow banks and investment banks to get together and invest in all sorts of securities, such as credit default swaps, subprime mortgage securities, all these things we've heard a lot about in the last few years. Turns out, however, markets aren't always efficient. Twice in the last 10 years we've had enormous speculative bubbles.

Ryssdal: You spent a lot of time out in Chicago, it's clear in that article, and you talk to a bunch of people. Relate for us what they said when you went out to these Chicago school people and said, hey, what sense do you make of the last two years in this market, if you believe that the market knows everything?

CASSIDY: The reactions really were across the board. Some of the people I spoke to said look, this is just a one off, it doesn't invalidate the general idea that markets work well and that financial markets work well. Other people, such as Gary Becker, who is one of the Nobel laureates of Chicago, said no, it's more serious than that, markets aren't always efficient. And we have to rethink that side of things. If we go back to the two notions of Chicago economics, one that the market always works well, and one that the government always works badly. The first one has sort of gone out the window, but they do tend to fall back on the second idea that that doesn't mean that governments will do any better.

Ryssdal: You point out in your piece that really a lot of the heat of the moment of the financial crisis is what drove people to reexamine their ideas of models of economics. And now a lot of that heat, frankly, has kind of dissipated.

CASSIDY: Right, well, actually one of the things which Gary Becker said to me was that about a year ago he thought there would be a complete revolution in economics, but twelve months later the economy looks more healthy than it did a year ago and the sort of urgency of the debate has gone out of it a bit, and he thinks there will be some moderate changes to economics but there won't be a whole new paradigm.

Ryssdal: Safe to say though it will be more nuanced, it won't be all black and white.

CASSIDY: You would hope so. One would hope that things would be more nuanced. But you never really know in economics. There could be some new genius out there somewhere who comes up with a theory, which everyone buys into. I tend to think that that's unlikely, but you never know.

Ryssdal: John Cassidy. He's a staff writer for The New Yorker magazine. His new book is called "How Markets Fail." Mr. Cassidy, thanks so much for your time.

CASSIDY: Thank you.

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PAK & OSAMA, MARKETING TERRORISM,A GOOD TRADE
Pak Gov & Military kept Osama in the cradle (at Abbotabad) near Islamabad to milk Ams (US) by fomenting & nurturing “ISLAMIC FUNDAMENTALISM”. Can’t one understand it? Fool the world is?
“OSAMA resided (perhaps still) in the mind of MUSLIM RADICALS”, also perhaps planned 26/11, Mumbai, TAJ Attack. MUSLIM RADICALS behaving suave, gentlemanly, but keep hatred deep inside & highly intolerant to others & even to Muslim groups within Muslims, see Iran, Igypt, Saudi,Iraq,Syria, Pakistan, Bangladesh. ISLAM is intolerant of Democracy, without Tolerance Democracy can’t survive. This Radicalism is also a Great Moral Corruption. : Subhro Das

PAK & OSAMA, MARKETING TERRORISM,A GOOD TRADE
Pak Gov & Military kept Osama in the cradle (at Abbotabad) near Islamabad to milk Ams (US) by fomenting & nurturing “ISLAMIC FUNDAMENTALISM”. Can’t one understand it? Fool the world is?
“OSAMA resided (perhaps still) in the mind of MUSLIM RADICALS”, also perhaps planned 26/11, Mumbai, TAJ Attack. MUSLIM RADICALS behaving suave, gentlemanly, but keep hatred deep inside & highly intolerant to others & even to Muslim groups within Muslims, see Iran, Igypt, Saudi,Iraq,Syria, Pakistan, Bangladesh. ISLAM is intolerant of Democracy, without Tolerance Democracy can’t survive. This Radicalism is also a Great Moral Corruption. : Subhro Das

EQUITY/STOCK/FINANCE
-----------------------------------.
FLOATING THEORY

I have discovered this theory i.e. “floating theory” all on a sudden, while thinking over economy, recession, boom, rise & fall of stocks & MARKET CRASH, one evening this theory came to my mind, probably on 10/05/2010 & I jotted it down on 20/05/2010.

The Theory is, in nutshell: -

Why recession comes at all? Answer is from Boom.
For a boom is created (or a boom time) due to increase in demand of certain commodities, such as for computerization, change of usage e.g. plastic in place of wood & bio products, mode of connectivity e.g. mobiles, infrastructure spending, government money pumping, loans etc etc, so has to recede, just like in a BLAST, an expansion then a vacuum, if you apply floating theory to it (this situation), as in stock market, you probably know when to abandon the boat/ship or to board.

Floating theory says the higher price is(e.g. stock), the lesser the buyers are(with reducing purchasing power), so if you exit a stock at 25 (supposing you bought at 15), the buyers you will find(number of buyers you may not actually see) will be lesser than that at 15 & if it is 35(supposing you wait for 35), the buyers will be far lesser & perhaps no buyer will exist at 500, even in a virtual, theoretical, mathematical or future probable situation (that is in a reasonable timeframe, reasonable frame of reference, not 10 or 20 years) & even if the day arrives, when it is actually 500, your value of money i.e. value of 500 will be reduced to almost 15, that is to today’s value(i.e. 500 will be equal to 15), due to inflation, growth of economy, uncertainty factor & cost of things after 10/20 years.

2. There is always a blast behind a shock wave i.e. a shock wave always created by a blast, so there is always an event behind a BOOM and as a blast wave always comes & goes, so a boom must go, if it is an economic boom or boom in a certain sector, it must go & next cycle will come, but difficult to say when & in which sector in case of economy. Even a keen watcher may not predict perfectly but can foresee probability better.

3. Formula of Stocks:-

“Wind & Floating Paper Formula”.

1—3—5—2—1—3—2—4—3—5—3—2—2—3--.
-------a piece of paper floating in the wind------.
(digits denote heights(levels), for example).

As a float (a piece of paper in the wind) is very abrupt in its flight path, as shown in above graph, so grip it when as low, reasonably low, approachable comparatively as per going price & market & release it as soon as it is reasonably high, no wait that it will go higher, this is the selling method.

Now Buying: Buy, when it is reasonably low, no wait that lower it may go, actually it may dip further down, but don’t wait for future, see the present only.

Know, PAST is dead & FUTURE never comes (i.e. the future one thinks).

A reasonable gain is enough, you may lose too, but that will be a reasonable loss, a bearable loss.

Selling: 15/20----------------------------------------------------------------20/25.
Low, grip/hold high, release.

Buying: 25/30---------------------------------------------------------------20/25.
High, overlook low, buy.

Above is only an example, a methodology in general to explain the theory & formula.

And a pack (a group of people) does it, it becomes less volatile & more reasonable trade practice, i.e. the more people the better it is.

If you wait for 30/35 (in example above in selling), you will repent, so if you wait for 15/20 in buying so will you, as in the long run in life that is gambling.

Subhro Das
Araria
India
Written 20/05/2010
I have published it in the blog.

EQUITY/STOCK/FINANCE
-----------------------------------.
FLOATING THEORY

I have discovered this theory i.e. “floating theory” all on a sudden, while thinking over economy, recession, boom, rise & fall of stocks & MARKET CRASH, one evening this theory came to my mind, probably on 10/05/2010 & I jotted it down on 20/05/2010.

The Theory is, in nutshell: -

Why recession comes at all? Answer is from Boom.
For a boom is created (or a boom time) due to increase in demand of certain commodities, such as for computerization, change of usage e.g. plastic in place of wood & bio products, mode of connectivity e.g. mobiles, infrastructure spending, government money pumping, loans etc etc, so has to recede, just like in a BLAST, an expansion then a vacuum, if you apply floating theory to it (this situation), as in stock market, you probably know when to abandon the boat/ship or to board.

Floating theory says the higher price is(e.g. stock), the lesser the buyers are(with reducing purchasing power), so if you exit a stock at 25 (supposing you bought at 15), the buyers you will find(number of buyers you may not actually see) will be lesser than that at 15 & if it is 35(supposing you wait for 35), the buyers will be far lesser & perhaps no buyer will exist at 500, even in a virtual, theoretical, mathematical or future probable situation (that is in a reasonable timeframe, reasonable frame of reference, not 10 or 20 years) & even if the day arrives, when it is actually 500, your value of money i.e. value of 500 will be reduced to almost 15, that is to today’s value(i.e. 500 will be equal to 15), due to inflation, growth of economy, uncertainty factor & cost of things after 10/20 years.

2. There is always a blast behind a shock wave i.e. a shock wave always created by a blast, so there is always an event behind a BOOM and as a blast wave always comes & goes, so a boom must go, if it is an economic boom or boom in a certain sector, it must go & next cycle will come, but difficult to say when & in which sector in case of economy. Even a keen watcher may not predict perfectly but can foresee probability better.

3. Formula of Stocks:-

“Wind & Floating Paper Formula”.

1—3—5—2—1—3—2—4—3—5—3—2—2—3--.
-------a piece of paper floating in the wind------.
(digits denote heights(levels), for example).

As a float (a piece of paper in the wind) is very abrupt in its flight path, as shown in above graph, so grip it when as low, reasonably low, approachable comparatively as per going price & market & release it as soon as it is reasonably high, no wait that it will go higher, this is the selling method.

Now Buying: Buy, when it is reasonably low, no wait that lower it may go, actually it may dip further down, but don’t wait for future, see the present only.

Know, PAST is dead & FUTURE never comes (i.e. the future one thinks).

A reasonable gain is enough, you may lose too, but that will be a reasonable loss, a bearable loss.

Selling: 15/20----------------------------------------------------------------20/25.
Low, grip/hold high, release.

Buying: 25/30---------------------------------------------------------------20/25.
High, overlook low, buy.

Above is only an example, a methodology in general to explain the theory & formula.

And a pack (a group of people) does it, it becomes less volatile & more reasonable trade practice, i.e. the more people the better it is.

If you wait for 30/35 (in example above in selling), you will repent, so if you wait for 15/20 in buying so will you, as in the long run in life that is gambling.

Subhro Das
Araria
India
Written 20/05/2010
I have published it in the blog.

EQUITY/STOCK/FINANCE
-----------------------------------.
FLOATING THEORY
----------------.
EQUITY/STOCK/FINANCE
-----------------------------------.
FLOATING THEORY

I have discovered this theory i.e. “floating theory” all on a sudden, while thinking over economy, recession, boom, rise & fall of stocks & MARKET CRASH, one evening this theory came to my mind, probably on 10/05/2010 & I jotted it down on 20/05/2010.

The Theory is, in nutshell: - Why recession comes at all? Answer is from Boom.

For a boom is created (or a boom time) due to increase in demand of certain commodities, such as for computerization, change of usage e.g. plastic in place of wood & bio products, mode of connectivity e.g. mobiles, infrastructure spending, government money pumping, loans etc etc, so has to recede, just like in a BLAST, an expansion then a vacuum, if you apply floating theory to it (this situation), as in stock market, you probably know when to abandon the boat/ship or to board.

Floating theory says the higher price is(e.g. stock), the lesser the buyers are(with reducing purchasing power), so if you exit a stock at 25 (supposing you bought at 15), the buyers you will find(number of buyers you may not actually see) will be lesser than that at 15 & if it is 35(supposing you wait for 35), the buyers will be far lesser & perhaps no buyer will exist at 500, even in a virtual, theoretical, mathematical or future probable situation (that is in a reasonable timeframe, reasonable frame of reference, not 10 or 20 years) & even if the day arrives, when it is actually 500, your value of money i.e. value of 500 will be reduced to almost 15, that is to today’s value(i.e. 500 will be equal to 15), due to inflation, growth of economy, uncertainty factor & cost of things after 10/20 years.

2. There is always a blast behind a shock wave i.e. a shock wave always created by a blast, so there is always an event behind a BOOM and as a blast wave always comes & goes, so a boom must go, if it is an economic boom or boom in a certain sector, it must go & next cycle will come, but difficult to say when & in which sector in case of economy. Even a keen watcher may not predict perfectly but can foresee probability better.

3. Formula of Stocks:-

“Wind & Floating Paper Formula”

1—3—5—2—1—3—2—4—3—5—3—2—2—3--.
-------a piece of paper floating in the wind------.
(digits denote heights(levels), for example)

As a float (a piece of paper in the wind) is very abrupt in its flight path, as shown in above graph, so grip it when as low, reasonably low, approachable comparatively as per going price & market & release it as soon as it is reasonably high, no wait that it will go higher, this is the selling method.

Now Buying: Buy, when it is reasonably low, no wait that lower it may go, actually it may dip further down, but don’t wait for future, see the present only.

Know, PAST is dead & FUTURE never comes (i.e. the future one thinks).

A reasonable gain is enough, you may lose too, but that will be a reasonable loss, a bearable loss.

Selling: 15/20----------------------------------------------------------------20/25
Low, grip/hold high, release

Buying: 25/30---------------------------------------------------------------20/25
High, overlook low, buy

Above is only an example, a methodology in general to explain the theory & formula.

And only a pack (a group of people) does it, it becomes more reasonable trade practice, i.e. the more the better.

If you wait for 30/35 (in example above in selling), you will repent, so if you wait for 15/20 in buying so will you, as in the long run in life that is gambling.

Subhro Das
Araria
India
Written 20/05/2010

EQUITY/STOCK/FINANCE
-----------------------------------.
FLOATING THEORY
----------------.
EQUITY/STOCK/FINANCE
-----------------------------------.
FLOATING THEORY

I have discovered this theory i.e. “floating theory” all on a sudden, while thinking over economy, recession, boom, rise & fall of stocks & MARKET CRASH, one evening this theory came to my mind, probably on 10/05/2010 & I jotted it down on 20/05/2010.

The Theory is, in nutshell: - Why recession comes at all? Answer is from Boom.

For a boom is created (or a boom time) due to increase in demand of certain commodities, such as for computerization, change of usage e.g. plastic in place of wood & bio products, mode of connectivity e.g. mobiles, infrastructure spending, government money pumping, loans etc etc, so has to recede, just like in a BLAST, an expansion then a vacuum, if you apply floating theory to it (this situation), as in stock market, you probably know when to abandon the boat/ship or to board.

Floating theory says the higher price is(e.g. stock), the lesser the buyers are(with reducing purchasing power), so if you exit a stock at 25 (supposing you bought at 15), the buyers you will find(number of buyers you may not actually see) will be lesser than that at 15 & if it is 35(supposing you wait for 35), the buyers will be far lesser & perhaps no buyer will exist at 500, even in a virtual, theoretical, mathematical or future probable situation (that is in a reasonable timeframe, reasonable frame of reference, not 10 or 20 years) & even if the day arrives, when it is actually 500, your value of money i.e. value of 500 will be reduced to almost 15, that is to today’s value(i.e. 500 will be equal to 15), due to inflation, growth of economy, uncertainty factor & cost of things after 10/20 years.

2. There is always a blast behind a shock wave i.e. a shock wave always created by a blast, so there is always an event behind a BOOM and as a blast wave always comes & goes, so a boom must go, if it is an economic boom or boom in a certain sector, it must go & next cycle will come, but difficult to say when & in which sector in case of economy. Even a keen watcher may not predict perfectly but can foresee probability better.

3. Formula of Stocks:-

“Wind & Floating Paper Formula”

1—3—5—2—1—3—2—4—3—5—3—2—2—3--.
-------a piece of paper floating in the wind------.
(digits denote heights(levels), for example)

As a float (a piece of paper in the wind) is very abrupt in its flight path, as shown in above graph, so grip it when as low, reasonably low, approachable comparatively as per going price & market & release it as soon as it is reasonably high, no wait that it will go higher, this is the selling method.

Now Buying: Buy, when it is reasonably low, no wait that lower it may go, actually it may dip further down, but don’t wait for future, see the present only.

Know, PAST is dead & FUTURE never comes (i.e. the future one thinks).

A reasonable gain is enough, you may lose too, but that will be a reasonable loss, a bearable loss.

Selling: 15/20----------------------------------------------------------------20/25
Low, grip/hold high, release

Buying: 25/30---------------------------------------------------------------20/25
High, overlook low, buy

Above is only an example, a methodology in general to explain the theory & formula.

And only a pack (a group of people) does it, it becomes more reasonable trade practice, i.e. the more the better.

If you wait for 30/35 (in example above in selling), you will repent, so if you wait for 15/20 in buying so will you, as in the long run in life that is gambling.

Subhro Das
Araria
India
Written 20/05/2010

My Three Thises:-

The Inadequacies of Modern Economic Theories

1. In respect to the above I put forward my analyses of “classical & modern economic theories” as I have found most of them are grossly ineffective to deal with modern economic situation of the world.
It must be said modern economic theories are inadequate to explain present economic environment which some classical ones do somewhat successfully.

I will deal with both modern & classical theories in short.

I begin with the famed quote of Daniel Fusefeld : “A prosperous economy requires levels of spending high enough to employ the work force fully”.

Most economists from time of Adam Smith believed that capitalistic & market oriented economies can provide full employment.

The lower the wages the more workers will be employed.

If wages are flexible a competitive economy will maintain maximum employment.

Now coming to J.B. Say’s law : “Production of goods creates its own demand; it generates an income that is equal to the goods produced, so production process will automatically provide people with buying capacity”.

Are above theories & laws equally applicable in modern economy? Or some new concept is required to explain it?
As per Say’s law intt rate depends on demand of capital & supply of it. In a bad economy (in an economic down turn) as there is job loss & savings dwindle so intt rate will tend to go higher, but as loan offtake is lesser so intt will tend to go down. And in a growing economy as demand is more & more so there will be more & more investment for production so there will be more job creation, hence more savings will take place therefore intt rate will stabilize to a normalcy.

But in a super charged (heated) economy saving will vanish as people will go for more consumptions as now in China & a bit like in India which are charged due to huge money pumping.

So a normal economy is a 4 to 5% growth rate & a 3 to 4% inflation rate. It is the exact balance.

2. Keynes contradicted classical theories mainly on following points:-

He said savings depend on “national income” (NI), so to increase NI, infuse money in the system, when economy in depressive/shrinking mode. It is only partially true as he did not envisage paradox of modern economy. He missed on some major counts, infusion of money will increase consumptions in all sectors he assumed, from gadgets to foods to clothing to housing to education, but my point is if one sector takes away the most?

He called for pumping money when there is a depression, he talked of domestic production & domestic demand but he had no clue if depression was caused by free trade, inflicted by other economies.

He advocated for an artificial increase of national income which would create demand & people would get back the employment, but in the present modern economic scenario would it happen? The capital infusion will go in vain.
Theory of Insulation answers this dilemma.

Keynes although criticized wartime infusion of capital, but the truth is US mostly benefited from 2nd world war & that advantage ran up to 1980.

He misconceptuatized trade unions & modern labour market as trade unions can’t now prevent job loss & control wage market.
Modern trade unions are not at all Keynesian models.

The most influential of his theories is “money supply” & creation of “aggregate demand” & thereby enhance employment; here he collided with classical economists head on. But his money pumping theory is totally clueless in today’s economy.

Actually problem is that, not much economic theories have evolved in economics as in physics or other sciences, so economists are bound by so called modern economics theories of 1930s to 1950s, many of them may have bagged Nobel prizes it may sound harsh, but is true.
Yes, some great modern times’ economists (if they are also taken as economists) like Nash & Borlaug are mathematician & agronomist, I am sorry to point out.

3. Milton Friedman’s Hypothesis: This is very interesting in respect of cost of education, as he assumed “transitory consumption components” are unrelated to “permanent consumption components”.
This is absolutely unfit in modern financial system; please refer to “Financial system & Cost of education”.

4. R. G. Lipsey’s “theory of equilibrium of income” is not a sufficient tool to solve paradox of modern economy, also Keynes’s “consumption function & investment function” the most powerful components as per him fail miserably to explain world economic scenario of today.

Liquidity Trap: When there is an excess liquidity in the system & as there few are takers of funds as demand (that is because of lesser spending by people) is down as in a jobless economy, govt spending has no effect to revamp the market.
This creates the “crowding effect”, govt borrowings may raise intt rate but as the govt spends the borrowed money it crowds out public spending.
This happens when public is jobless, but a large liquidity in the market due to govt spending, money goes to a few people & they make huge money.
But Keynes & his followers attach main importance to “fiscal policy” & put it superior to “monetary policy” to the point “where money does not matter”, the Keynesian model of employment is to raise output (production) by using fiscal policy, which is according to his theory; it is possible to eliminate deflation & achieve employment by infusing money.

This is no more a viable option in modern economic system unless there is a “market of demand” already existing & that is exploited, be that within or out of national boundary. For example, as China is doing today.
To quote P.H.Thurow “The final function of money is its purchasing power & money tends to live a life of its own, which is difficult to control. These cause a disturbing fluctuations in value, which can at one hand stimulate activity & on the other can disrupt activity & seriously damage achievement of economic objectives. Is this not happening today?

As per Keynes money supply by govt in a depression economy can expand output & employment, but P.A.Samuelson & Milton Friedman differed from this Keynesian view, as in a situation they called “stagflation” both stagnation & inflation can occur at the same time, i.e. unemployment & inflation can coexist.

5. Modern economists theorized increase in price level, due to inflation results in more profit & more production, so more employment, so inflation eventually becomes productive not counterproductive.
Yes, production & employment increase due to money supply, causative inflation & price rise, but money goes to only to a handful of people, 90% people lose “income”, mind it I am saying “income” not employment, as rise in price is fall of value of money, so the income of the mass does not rise, rather decreases as wages fall, that is per capita wage due to initial job losses caused by depression & wage cuts in a depression economy with inflationary force caused by excessive govt money supply, so the mass become actually poorer, even though they may have got some employment.

This was completely overlooked by Keynes & modern economists did not come out with suitable theories to explain modern economy, unlike in other sciences, where daily new grounds are broken.

Keynes has gone on records, strongly advocating that only way to fight depression is deficit financing; only way to raise “aggregate effective demand’ is to incur deficit & cover the deficit by printing “paper money”.
How wrong! If not wrong how inadequate this is in modern economy if we look at the world scenario.
If we use “cobweb syndrome”, that is fluctuations of prices & quantities overtime as generally seen in agriculture produces cyclically, to factory products, a depression economy becomes very interesting, that is if demand & price of factory products are low in previous year, then production will be less in the current year, so in the depression, the domestic production will fall in a cobweb & be caught in a bind in today’s economy.

Even to solve the basic dilemma of oligopoly “the game theory” of John Nash had to be employed & today’s modern world economy is developing a highly oligopolistic trend, a kind not seen before & China is creating this oligopoly as a leader.

Advancing Euler’s theorem, Samuelson synthesized “In the long run cost of inputs & outputs will settle towards a level, no surplus or profit will be there for the entrepreneur excepting his own wages for his labour & intt on his capital invested, so profit will be there only if there is a monopoly”.
But this is absolutely wrong theoretically, may be true hypothetically in an imaginary, perfectly built-up model.
There can be no absolute monopoly i.e. only one is producing a particular product & everyone is buying from him, in that situation production will be equal to the demand or less than the demand i.e. supply will always be lesser than the demand to sellout the whole production, to avoid stagnation of goods produced & to maximize profit.
So Samuelson is wrong as talks of a hypothetical situation. See:-

Suppose if China only is making cheapest items & others are out as China is selling at the cheapest rates, so it will have a monopoly & really it is setting a kind of monopolistic trend, in trade of many goods, but this monopoly cant give right to China to raise prices, as although others are seemingly out, but will bounce back at the slightest opportunity & at that time China will be in great trouble to lower prices as input costs including the labour cost have gone up meanwhile with rise of product prices, so China will be immediately out of business.

6. Heckscher-Ohlin Theory: Recardian theory predicts except for transport cost free trade would lead to equalization of commodity prices, later Heckscher & Ohlin added to it “endowment factor to international trade”, as per them international trade takes place due to differences in factor endowment (resource bases such as raw material, labour, capital, government policies etc). They argued a labour abundant country would always export labour intensive goods, similarly a capital abundant country would export capital intensive goods, so logically every country would import commodities which are produced with scarce factors. From this theory Paul Samuelson & K. Lancaster developed “the factor price equalization theory”. The theory states that “free trade of goods & services” across national borders would not only equalize commodity prices, but factor prices as well, although inputs are not traded, as the trade in commodities actually is trade of factors.
Here they have again gone wrong, not only wrong, but could not see through the haze they themselves created, as actually a created product when reaches its destinations (station to station) is not the factors themselves, but it is entirely something else, it may have been produced out of factors be that labour, materials, processes, packaging, transportations, like everything is made of electrons, protons & neutrons (except normal hydrogen i.e. made of only electron & proton) but final things become very different from one another, like evolution of living beings as they become very different species over time in different environs.
Take a simple example, if one only transports an object in space (by a rocket on charges) the object in space is no more a combination of original object, its parts & transportation to space, but entirely a different thing. So Samuelson & Lancaster’s theorizing that free trade will lead to factor price equalization is very misleading, neither it has happened ever, nor it seems to happen any day, yes in an imaginary situation it is possible.

Now coming to The Stolper-Samuelson theory formulated on the basis Heckscher-Ohlin theory, it made a case to tax scarce factors, as imports happen in scarce factors, so impose high tax & due to this taxation domestic produces will get higher prices, as imports will be costlier, so more domestic production will take place, as it will be lucrative to produce due to price rise & this will engage more employees.

Here they have gone very shortsighted & much narrowed, as they have harped on old protectionism method, totally failed to deliver a new concept, not to talk of a theory.
Then what is the difference between the protectionists & them?

“Theory of Insulation” does not talk of protectionism; it puts every economic activity in a new perspective, in a new dimension, a pure theory, perfect, derived from nature & totally practicable & it has to be practiced some day, as no other way out.
It covers whole activities, whole life related activities & beyond.

7. Economics of Protection
--------------------------------.
R.G.Lipsey: As some trade is better than no trade, so a normal proposition is “a bit more trade is better than the current trade”.
How wrong he is, actually misleading, as his postulation ends up to “absolute free trade” with absolutely no restrictions, but as per theory of insulation this is against nature, so will cause devastation.

The Case for Free Trade: As advocated by modern economists “specialization & free trade lead to an efficient allocation of world’s resources, they enable all nations to have more of all the goods than in absence of free trade”. It is based on Recardian principle of “comparative advantage”. Opposite of free trade has been termed as protectionism, as in Stolper- Samuelson theory, taxing the scarce factors (i.e. tax imports of scarce factors) is the only theoretical solution of the crisis, how ludicrous, at one hand modern economists talk of free trade, at other talk of restrictions, actually they could not grasp the matter.

Here we can see a very funny thing, Norman.E. Borlaug who halted India’s grueling famines by bringing in green revolution in India, by increase of food production manifolds by introducing high yielding hybrid dwarf varieties & by extensive farm mechanization (Borlaug is revered highly in India), but Mr. Amartya Sen theorized that those famines were artificial, caused due to hoardings of food grains, not due to low productions & he got Nobel for this research.

Modern economists always freely deride Abraham Lincoln’s famed quote “I do not know much about the trade, but I know this much: when we buy manufactured goods abroad, we get the goods & the foreigners get the money. When we buy manufactured goods at home, we get both the goods & the money”. Economists say “only first eight words of Lincoln are correct, i.e. I do not know---”.
But modern economists are now in a situation to be derided, by the present economic crisis, as they have gone belly up with limitations of their theories.
Most of the modern economists are data crunchers & data interpreters & can’t think beyond protectionism & free trade.

Referring to the analysis of economist D. Fusefeld, it clearly expresses the inability of modern economic theories to explain modern economic situation.
The view of great American economist Henry Clay is interesting in this regard; it comes very near to finding the law i.e. “the theory of insulation”, but gets entangled in protectionism veil & falls short.

Almost all economists have advocated free trade & explained protectionism as only political, but theory of insulation does not talk of protectionism, it has nothing to do with protectionism, it gives an economical, theoretical, scientific & social explanation for viability of survival, trade with social context.

Subhro Das
Araria, India
Conceptualized: 2002 to 2006
Written: 15/09/2010

2.Theory of insulation

Preface

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When globalization was a hot matter & everybody was gunning for it, mainly from developed countries & there were discussions all over on how important were GATT, WTO, Uruguay Rounds & a few persons & groups of poor & developing nations were opposing it as they thought it was a clever ploy of developed nations to exploit their markets.

Later it was found globalization more adversely has hit the developed nations. And for the time being developing nations are benefiting (as from making & exporting cheap goods & outsourcing) as they (poor & developing nations) have enormous and endless supply of cheap labour, owing to huge poor population and ample availability of child labourers.
One can’t curb it (the child labour), whatever law or regulations one can prescribe or try to enforce.

For a sideshow (window dressing) in some factories you will not find them, but where cheap goods & mass productions are going on in smaller, scattered factories and at subsidiaries of big companies (a smart little technique to obviate the law, but very effective) and in vast unorganized sectors: industry to agriculture to sundry odd jobs, child labour is very handy & the main stay.

Add with that huge young labour force, skilled & unskilled, but mainly unskilled but very hardy workers, mostly illiterates or half literates, but very fit for blue colour jobs, they throng in very large numbers from countryside to cities ( if you want a proof or want to see by your own eyes? visit to UP, Jharkhand, Bihar, MP provinces of India & southern, western & northern provinces of China).
Poor & developing nations have ample quantity of both skilled & unskilled labourers, but mostly unskilled young labourers and an unending supply of them.

But ultimately with the fall of economies of developed nations they also will reel down and with a more catastrophic effect, as, if these labour force undergo job losses & are driven out of work, with no assets & means to fall back upon, one should not dwell in dreams, that they will happily migrate back to the countryside, where they originally belonged and get back the sordid & low income occupations (mostly agriculture) they had left for good.

But now China’s strategy is (also of some east Asian nations) supply cheap items (I am consciously “not” using the term cheap goods) to the poorer nations, exploit the markets of poor & developing nations, as these poor now have enough raw cash to buy cheap items & developed nations are in crisis & cheap items hardly have a good market there & exporting there is hazardous (of late China is taking measures to obviate this problem by investing for building bases in vantage & frontline countries), so better to cash on these poor nations & their people.

This is a vast matter, it demands separate analysis, so leaving it now.

Now, I begin on the theory.

Law of nature

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“Theory of insulation” says every region, estate, geographical area; nation should have an insulated, (not isolated) existence of its own, a separate identity, a separate social culture, a separate lifestyle, a separate work culture, above all a separate financial system. It is a law of nature.

Advocates of globalization were for openness, open doors, for free unhindered trade & flow of money.
Not only that, they wanted the world to bring into one financial system(globalization) by breaking of all financial barriers, so that open & unrestricted trade could be done, and also wanted free flow of money in & out, with or without a base (an office, or an installation or a collaboration).

The idea was advanced by rich & developed nations & their conglomerates.

Here, I want to remind people of GATT, WTO, Uruguay rounds (search in internet, you will find what not they cried for, even to the extent of “principle of most favoured nation status for all” & also see, all circulations of that times 1994 to 2006, all carried news, views regarding the above & how dislodging of trade barriers will ensure a provertyless, prosperous world.

Now, I break into my thesis.

I wrote this in 2004 & sent copies to Cambridge & Illinois economics depts. by Regd posts, but they gave no heed to it, as all economists & professors at that time were too engrossed in globalization, so could not perceive its implication & overlooked the fact. Also at that time saying anything against globalization or proposing even a little contradictory view or suggesting some precautions by discerning persons (the economists) carried risks of degrading oneself.

Insulation is a nature’s law & system.

Everything survives because there is a natural insulation, insulation due to geography, distance, customs, habit, habitat, & immunity.
For example, animals, plants survive because there is insulation between groups, colonies, species, races, but not isolation, as isolation is being alone, being cut off, but insulation is being part of the system with protected identities.

Anything, for example, take the sun, it is the origin of life on earth and life survives as the sun is there, but we are insulated from the sun (not isolated) by distance & earth’s atmosphere, so we can live. Globalize the sun & we evaporate.

So with animal or plant habitats, put them together they will hardly survive. But animal & plant groups are not isolated from each other, but there is insulation between the groups. All are dependent on one another for survival, all affect each other but the effect is beneficial & shapes them to be better, a healthy & protected competition, and a competition to evolve for the better.

Darwin envisaged this law of nature & conceptualize “the theory of evolution” but did not talk about “the theory of insulation” or the necessity of insulation. But I found how must is the “insulation” by my long observation of nature, not only that, I happened to apply it to “the global financial system”. Soon it began to answer many financial puzzles the world financial system is facing now.

Human beings

So are human beings, be it national or cultural or any type of colonies of human beings, they are there, because there is insulation, not isolation, as isolation will cause elimination.

Example: small colonies of Andaman’s, east pacific islands are dwindling as they are isolated.

But, other human races are surviving as they are not isolated but insulated, there is an exchange of everything (not only trade) between them but there is a distinction, but in remote isolated islands, there is hardly any exchange so elimination is looming.

Put all human races together, mix them, sure they will degenerate.

From my observation of nature “theory of insulation” has come and as I applied it to “financial system” I got astonishing result.

Financial systems

Financial systems are also unique to every nation, every culture, every colony, every group, even every individual and a product of nature. They (the financial systems) have evolved over thousands of years. They prospered & existed as they had their own resilience. There was exchange of trade between them from primitive to modern ways but always with insulation, so they survived and are still surviving.

Take any human civilization from mankind’s history they survived as they had their own resilience, an insulation, a protected identity, also they had trade, exchanges, interactions, may be very primitive, may be very limited.
For example take Maya, Indus valley, Byzantine, Mesopotamian, Egyptian, Roman or Inca civilizations, all these great civilizations survived as long as they had insulation, protected identities, but also trade, exchanges & interactions, as soon as the balance went off (got too confined or invaded & exposed), they fell down.
So with our modern financial system, we are not an exception to the rule. We are very much part of this nature’s governing law. Try to flout it, try to break it, we face the devastating consequences.

It is a mathematical fact, that without insulation nothing can exist, also in “isolation” nothing can survive. I have named this “theory of insulation”.

Advocates of globalization had no idea of this theory or natural concept.

Even Joseph’s. Stiglitz who has written & analyzed so much about this subject of globalization, capitalism & finance could not comprehend it, so ended up without a conclusion.

Then
--------.
if this theory is true, then all financial systems must have some insulation for their survival, as global financial system is dependent upon one another (all financial systems, may be located at different geographical areas within a national boundary or outside), so if insulation is done away with, then one fin.sys. After the other will collapse, as in “domino effect”.
And now we know how to remedy the “domino effect”.

Those who say, free the markets, bring down all the barriers,
so that all will prosper & a great global fin.sys. will evolve and that will take care of all, are unaware of this “theory”.
They are not to be blamed for this as they could not envisage this “nature’s law”.

Therefore, it is imperative every market (financial system) should have its own identity, an insulation, even being a part of the global financial system. Let all survive for the sake of own survival. If we break this law, the nature will teach us a lesson for this violation in a very brutal way.
A small example, though lots have been written about this and many books also have been written on this, I actually mean “the U.S. financial crisis & its global fallout”.
It is due to the breaking of institutional financial barriers, in short: sub prime home loans- securitizing them- issue of CDO against them- sell them (buyers hoped high returns as home price will boom, even if not CDO cant lose value)- issue credit default swaps, the CDS (insurances against defaults)- sell the CDS- then trade futures against these instruments, a dangerous amalgamation, a dangerous mixing.

So “theory of insulation” is very vital, so far unrevealed and demands a lot of research & debate as it may explain many financial riddle of modern financial system. I welcome & invite any further debate, research and additions.

(This is a paper, so I would not stretch it further as in a book, but I believe I have explained my idea.)

S.K.Das. (Subhro)
Araria (India)

Notes:

1. Theory of insulation covers all gamut of economic activities, is all pervasive, everything on earth, even beyond earth.

2. To come to this “theory” it took 6 years of research & a long observation of nature.

Revised, 02/06/10

3. Financial System & Cost of Education
----------------------------------------------.

As I studied global financial crisis and tried to delve deep into it to find the causes for the crisis and also its effects I observed some financial relations unseen so far.
It is what, a fall out of a situation that is going to have on social, family and individuals’ financial health.
I happened to observe something which was so far ignored or overlooked or was not touched upon.
My analysis took the matter to a completely unexplored area so far, “the relation between financial system & cost of education”.
Even great economists by “miss” perhaps, could not catch it or may be it escaped all eyes as it remained in disguise of a social or holy cause, so was hard to perceive, but when one analyses it on hard rocks of fact, it gives in.
Here may I point that Joseph.e.Stiglitz & others got shortsighted by dwelling too much on U.S. financial crisis (not their fault, situation led them to) and failed to perceive it.
As I studied educational systems, educational institutions, primary to higher to vocational levels and most importantly “the cost of education” and “connection of financial system with education”, more precisely “cost of education” for two years, I came up with some absolutely new revelations & analysis. The research or the analysis was not envisaged or done by anyone before.
That there could be a connection between financial system & cost of education is quite a new concept, but the deeper the analysis & the research were done, it was found, it is not only true but a fact and a mathematical & theoretical truth.

I start the analysis at point blank range.
Why even after job market is crashing, the educational institutions are doing well, why are they unaffected by the crisis? Are they above all? Above the financial system?
Rationally everything is governed by the “demand supply rule” but, it appears educational system does not come under this rule, and then if it is governed by the universal rule, why cost of has not crashed or at least come down or mellowed?
But, deeper research reveals that the relation is there, but that is beyond ordinary perception, perceiving this requires a unique analytical approach.
Once you reach there you begin to see a lot things, can analyze the present financial & social situations & coming (future) financial system & economy and the effect it is going to have on the economy & most importantly the social damage this will ultimately do.

Contemplating on this I struck a unique analysis. I summaries this below:-

1. High cost of education (be it any) rs20lac or more, (for example, in Indian context & in Indian rupees):- cost of education is (on other words extortion by educational institutions) very high even in a very bad job market. And surprisingly the cost of education is so high from preliminary level to higher level to vocational level.

All the institutions charge too high and they have so many avenues to charge, so many means to milk the students & the families.
This high cost of education is completely irrational compared to the job market (the availability of jobs or in other words non availability of the same) & affordability to meet the high cost of education by families & students.
As most families & students grope frantically to finance the education and end up broke (who bother about broke, bankrupt families? all scratch their heads on failed corporates.
But must one know broke families are far more devastating, damaging for a nation than the broke corporates. Broke corporates cause financial crisis, job loss, share price fall, but, broke families deplete the economy of a nation & break the backbone of a country, impoverish a nation, it is a very dire consequence.

2. Cost of education is so high but, there is no job security. Although all vocational institutes claim 100% placements, but people are actually losing jobs.

In developed countries situation is very bad.
Job market is directly related to educational institutes, (any, vocational or the other). But it (cost of education) is totally defying demand supply rule.
If job market is down so the cost of education should be down, but really is not.
As if educational institutions are heavenly bodies, are floating in the space, not earthly things, so what, if global financial system crashes! They will not come down (with their heavenly costs) you have to reach out to them. Cough up what you have.

3. To meet the cost of education, savings of families are vanishing. Now the situation is so, that families plan (save) from the day child is born or even before the child is born and begin to arrange money for the child’s education.

It causes strain on their finance, as income is always limited of a family so will resort to squeeze the spending, get ready more for future expenses & reduce present expenses.
These reductions & squeezes are not enough to meet the educational costs, so they have to unlock their savings (being a banker myself, I come across so many cases).
But alas! savings alone can not meet this high cost of education (like offering bunch of grass to the elephant for food) so only recourse now left is to “borrow” & please mind it, this “borrowing” is not the first borrowing of the family, but borrowing by an already indebted family, it is a borrowing by a family who already has availed of many loans, so the repercussion of this on the economy is huge.

4. As the high cost of education is generally met by savings & debts, so families borrow huge sums for education of their children and become ultimately debt ridden and fall in debt trap.
As they have already squeezed their personal expenses, so either they have to cut many more expenses or take more loans & divert debt funds (the loans taken for one purpose go to meet the other urgent obligations and the education cost), this will, naturally, create a catastrophic effect on the economy.

5. Results of above situation lead to household financial crisis.
Families take recourse to austerity, they spend less on all items & goods, so viability of the economy is adversely affected.
If families start to squeeze expenses, some families even go to the limit of starving themselves on many items; one can envisage that such an economy is not a healthy economy, rather a sick economy, an economy with shrinking growth, having a negative growth variance.

6. Less buying power of families due to this situation causes a huge effect on economy & results into a depleted economy. An economy with “less buying power of people” is an impoverished economy. It is a sign of a nation becoming poorer.

A nation with less buying power is a poor nation, though it sounds harsh, but is an undeniable fact, an absolute truth.
To counter it you (the govt) pump huge money into system, run a dangerous deficit financing, following a Keynesian policy, but you forget Keynes’ theory succeeded as there was 2nd world war & America reaped huge benefit out it. Industries, mainly arms industry worked overtime, but remember in normal circumstances if you do this you become doomed as Greece or mildly saying now as the U.S.

7. Less spending spree (less extravagancy), please don’t mix it with less buying power, affects the economic boom.

It is a very dangerous syndrome (mind it), because it prevents buoyancy of an economy & flourishing of an economy. An economy with such a syndrome is obviously heading for the doom. Just as a healthy body has an ample RBC count in the blood & with a lesser count one is anemic so for a vibrant economy, vibrant spending by people (not by handful ones, they neither build the economy nor shoulder the economy, only they are at the fringe, ride on the given infrastructure of the economy) is required. And if people are unable to do this then economy is bound to become anemic.

8. Obvious results of above are slowing down of the economy. Job creation gets on a hold and ultimately results into job losses. And a financial crunch begins.

This financial crunch leads to loan defaults, and loans defaults are in every area of the debt market, be it credit card loan, consumer loan, home loan, education loan.

9. This results into a total financial crisis, a total economic slow down. Total economy comes under this grip. A vicious cycle, which affects all gamut of financial activities & businesses.

10. Ultimately financial institutions are affected as loan defaults happen & off take of loans is slowed, putting financial institutions in trouble.

This analytical approach about the relation between cost of education & financial system has not been pointed out before.

Then, why educational institutions are still getting long queues?
Because the lesser jobs are the more is the competition, so longer is the queue. As in hot summer days in African terrains animals vie for food & water & gatecrash.

Example of this, if one knows only a few will get jobs then all will naturally strive more. This is a law of nature.

More will try for the best institutes so one can be a cut above others. All most all educational institutions claim to be great & all the aspirants can’t make it to the elite ones so all institutes, be that of lesser reputations will get aspirants.
Therefore educational institutions are not affected by the slow down immediately, but “this remaining unaffected” is for the time being only.
The effect of failing economy, the job losses will catch them gradually, as they will be in the mood (rather in the mode) of sucking money but the depleted, disabled families, any more could not cough up that.

This syndrome will gradually eat up entire society from inside.

Now, we have seen a financial crisis but, then we are going to see a collapse of society. a depleted society, a social rot.

S.K.Das. (Subhro)
Araria (India)

(This research took me two years. and I took three months to summarize this analysis. now i publish it and make it public.

S.K.Das.
Written 22/03/2010
Revised 07/06/2010

Oh, sure the FreeMarketeers would drink FreeMarket milk...they already drank the KoolAid, a long time ago.

We don't need to watch what a Pentagon, run by Friedman lover Don Rumsfeld, to free market standards of letting the private contractors like Blackwater handle war, to decide FM doesn't work. We didn't need to watch the deregulation of the S&L's during the first Bush administration to learn it doesn't work. We don't need to listen to Alan Greenspan, raised at Ayn Rand's knee, declare FM a failure to know it was.

We could have simply looked at the "Chicago Boys" playground, the right wing near facist economies in Central and South America. How many tried to let the free market run free, open themselves up to globalization, remove all tarriffs, cut social spending...and then self-implode and need more IMF funding?

But, none of the fans want to let it die. They'll still insist, somehow, the American economy wouldn't have failed if only the Bush administration had allowed for no government oversight or interference whatsoever. Well, except for the bank bailouts, of course--that was perfectly OK.

Well put.
One question for the Free Marketers...

Would you drink "Free Market" milk?

Government regulations and intervention come about because of free market failures. The New Deal was born from the ashes of the Great Depression. The 40-hour work week and prohibitions against child labor came as a reaction to the abuses of early American industrialists. The EPA and water quality standards came about because private companies have no economic incentive to not pollute.

While the free market is very good at allocating capital, it's not very good at many things that matter in a civil society. It doesn't solve public "goods" like national defense or paving roads. It doesn't factor in long-term repercussions of short-term economic decisions. And it doesn't capture the true costs (also known as negative externalities) of most goods and services.

History has proven time and time again that left to its own devices, the free market results in financial bubbles, environmental abuses, exploitation of workers, and greater economic inequality.

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