Friday, 19 December 2008

The Geopolitics of India

Of all the articles and opinion pieces about India and Pakistan that I have been devouring in recent times, this one from Stratfor is the most fascinating. It provides a strategic geopolitical basis for understanding the nature of India, its fundamental drivers and its relationship with its neighbours.

I've come away with a deeper insight in one or two areas. One, I have always believed that Pakistan has nothing to fear from India, but according to this article, it appears that notwithstanding the benign worldview of the Indian government of the day, there are fundamental geopolitical reasons why India poses an existential threat to Pakistan. (According to another Stratfor article supporting this view, "geography dictates that Pakistan either be absorbed into India or fight a losing battle against Indian influence.")

Another interesting insight is that in spite of the fact that Indians often speak of the Chinese threat as being potentially greater than the one from Pakistan, the article asserts that India and China are virtually on different planets and pose no geostrategic threats to each other.

In all other respects, it confirms the commonly held Indian view that "we threaten no one and are not interested in anyone else's affairs, nor are we fundamentally affected by others".

It's a pretty compelling line of reasoning and a highly recommended read.

Wednesday, 3 December 2008

An Audacious Suggestion to the President of Pakistan

Pakistan is in a bind.

It seemingly faces threats from every direction. Stratfor lists four major operational demands on the Pakistani army:

  • Defend the border with India, being prepared for possible conventional Indian military aggression.
  • Combat the home-grown Taliban insurgency raging across the Federally Administered Tribal Areas (FATA) and the Pashtun districts of the North-West Frontier Province (NWFP).
  • Combat a much lower-intensity — but nonetheless very real — mounting insurgency in the southwestern province of Baluchistan.
  • Provide heightened military security in Islamabad and other major urban centers in order to defend against an uptick in radical Islamist suicide bombings domestically.

Stratfor adds that Pakistan maintains 6 of its 9 Corps formations on the Indian border.

To an Indian, something in all this information sticks out like a sore thumb. The "threat" against which Pakistan has deployed the bulk of its army is ironically the one that is not a threat at all!

You see, if India blinks and leaves its border unguarded for a moment, either Pakistani troops or irregulars would move in in an instant and dig themselves in, as happened in Kargil in 1999.

But if Pakistan leaves the same border unguarded, India is highly unlikely to take similar advantage. Frankly, India has far bigger fish to fry than to try and occupy measly Pakistani territory. Indians know this because we're not obsessed with Pakistan and Pakistani territory the way "elements in Pakistan" are obsessed with "grabbing back" "their" territory in India.

So here's my suggestion to President Zardari (who I must say appears to be one of the most sensible leaders of that country in recent times):

Quickly sign a border agreement with India, formalising the line of control as the international border. This has been talked about in India for decades, and the Indian leadership is likely to jump at the offer.

Once the agreement is signed, you can pull your divisions from the Indian border secure in the knowledge that you won't be attacked. You can redeploy your troops where they're really needed instead of wasting them in guarding against a non-existent bogeyman. Heck, in time you can even reduce the strength of your army and use the money for development. It's an excessive military budget for a small poor country, you know.

The cost? You give up territory that you don't have and will likely never get, so it's really getting something for nothing.

It's a deal too good to pass up.

Do you have the guts, Mr. President?

Monday, 17 November 2008

Obama's "Gaffes" - The Truth and Nothing But the Truth

Conventional wisdom holds that Obama made two major gaffes during his long presidential campaign. The first was during the Democratic primaries when he remarked at a private dinner that many poor whites in Pennsylvania were bitter and clung to guns and religion. Hillary Clinton pounced on him for that bit of political incorrectness and attempted to squeeze every bit of mileage she could from it (not very much, as it turned out). Then, towards the end of the campaign, there was his comment to Joe the Plumber that "spreading the wealth around" was a desirable thing in the current circumstances, a comment that was promptly seized upon by the Republicans to proclaim Obama a socialist.

Now that the election is safely over, and far from the heat and dust of US politics, I have to wonder what Obama said that was so wrong.

Do uneducated poor whites in the Appalachian region bitterly cling to guns and religion? Sweet Jesus, that's God's own truth, so shoot me.

Perhaps as Jack Nicholson's Colonel Jessep suggested in A Few Good Men, Americans can't handle the truth...?

And wouldn't spreading the wealth around just be the opposite of George Bush's policy of concentrating wealth in the hands of a few? That hasn't exactly been the best policy as current events have shown, so why the fuss?

I think it would be far better to suffix the word "socialist" every time it's used with the Seinfeldian phrase, "not that there's anything wrong with that."

(My idea of Utopia isn't socialism (not that there's anything wrong with that) and neither is it laissez-faire capitalism, but if we cannot have competitive markets to spread the wealth around in a capitalistically acceptable way, then perhaps a little fiscal spreading through progressive taxation is the way to go.)

After the election, Obama made another "gaffe". He said he wouldn't hold séances to contact dead presidents like Nancy Reagan did. That was untrue only in a literal sense. In spirit (pun intended), it was a fair comment since Nancy Reagan was known to consult astrologers.

All in all, I think I like Obama's gaffes better than his trite statements. They have the clear ring of truth. Keep them coming, Mr. President!

Monday, 10 November 2008

The Smartest US President

Barack Obama's impressive résumé and obvious intelligence have the world in raptures, but there was at least one President before him who could give him a run for his money in the intellectual department.

That President was Thomas Jefferson, horticulturist, statesman, architect, archaeologist, paleontologist, author, inventor, and founder of the University of Virginia (source: Wikipedia). Rather than reference the tons of material written by and about Jefferson, I will only quote one example of his many prescient words:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all their property until their children wake up homeless on the continent their fathers conquered.

Beat that, Barack Obama. Jefferson predicted the current mess in 1802. (And yes, the Fed is a private organisation, not owned or controlled by the US government.)

No wonder Kennedy said when welcoming a group of 49 Nobel laureates to the White House that it was "the most extraordinary collection of talent and human knowledge that has ever been gathered together at the White House - with the possible exception of when Thomas Jefferson dined alone."

Thursday, 6 November 2008

Ich bin ein Amerikaner


Change has indeed come to America. And what momentous change!

Take your eyes off Barack Obama for a minute to see the greater wonder. Michelle Obama enters the White House as First Lady of the country that enslaved her ancestors. Now that is poetic. None of Barack's ancestors was ever a slave. It is in Michelle Obama that I see the wheel of history come full circle.

Still, the world has reached but one milestone. We rejoice that a black (or as my pedantic mind would interject, "half-black, half-white") person has won the recognition he deserves for his talent and potential without regard to his race. That is a triumph of American meritocracy. The next milestone for our collective civilisation will be when such an achievement does not evoke comment.

Personally, my opinion of the US has now soared. Having always looked at the US from outside, I would say it was US foreign policy that has had the greatest influence on my opinion. Specifically, as an Indian growing up in India during the seventies and eighties, resentment was my uppermost feeling whenever I thought of the US. US foreign policy never practised what it preached. It preached democracy and human rights. Yet when asked to choose between democratic India and authoritarian Pakistan, the US always came down on the side of Pakistan. Repeated evidence of Pakistan's sponsorship of terrorism in Kashmir and elsewhere in India was ignored by successive American administrations. In particular, Nixon's shameful partisanship during the 1971 Bangladesh war will remain forever in my mind, and I could not help but feel glee at his subsequent ignominous departure from public life. If I was religious, I would call it karma.

It has only been in recent times (i.e., during the Clinton adminstration) that India has received more favourable treatment compared to its troublesome neighbour. And that's not so much because the US finally saw the error of its ways but because India became economically so much more important. Barack Obama too understands where the threat to peace comes from today. He is the highest-profile American to have talked about possible military action against Pakistan to root out terrorism. One more example of his clear thinking if one was needed. At last, an American President who sees what only Indians could see so far.

Regional politics aside, Obama's election now robs every dictatorship around the world of its last remaining excuses. I remember eighties-era Soviet propaganda and its boast - that it was easier for the descendent of a Russian serf to achieve high office in the USSR than it was for the descendent of an African slave to become a governor or the President of the US. Now, a truly liberal American populace has shown the lie to that sort of thinking. As recently as a couple of months ago, people around the world were muttering that American racism was alive and well, that American voters would never "allow" a black person to become President.

America retorted: Yes, we can. Just watch us.

And the world watched, mouth agape.

I have always resented it when Americans referred to their country as "the greatest nation on Earth." Today, I'll swallow that resentment and grant them the right to say that. As Obama said in his victory speech in Chicago, "the true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity, and unyielding hope."

Meritocracy matters. At least two generations of talented Indians have left India's shores for the US. "Opportunity" is the word most often used to explain their decision to migrate, but what provides opportunity is the undiscriminating meritocracy of American society. You perform, you are rewarded. No wonder Indians are known as the most successful ethnic minority in the US. The entrepreneurial Indian provides the seed, and the meritocratic American environment provides the fertile soil for that seed to become the biggest tree it possibly can. Reportedly, 40% of Silicon Valley's startups have Indian owners. So many Indian names feature in the senior executive level of the American corporate world and in the faculty lists of the Ivy League. In contrast, India's own soil has been sadly barren for several decades, and native seeds could never grow into such tall trees in that soil.

The challenge that Barack Obama's election poses to India is different from the challenge that it poses to many other countries. India is already a democracy with an equally impressive record of righting historical wrongs and empowering its historically disadvantaged minorities. Next year's Indian elections may see the elevation of a Dalit ("untouchable") woman to the highest office in the land. That will be doubly impressive for a society that has historically been both patriarchal and caste-ridden. No, the challenge for India from Obama's election is to develop as an equally visible meritocracy. Can India provide opportunity to all, regardless of personal background? Affirmative action is hugely effective in India in churning and inverting the social pyramid, but it is also hugely controversial and creates its own pockets of unfairness. There is also entrenched unfairness and bigotry in the Indian populace at large of the kind that Americans were so recently accused of. As an example, the leader of the party that formed the current Indian government was effectively denied the Prime Ministership in spite of her Indian citizenship because she was born Italian. Even educated Indians wrote emphatic comments on blogs swearing that they would never accept her as PM. Welcome to racism, Indian-style. India needs to answer the American challenge - Can a white person become prime minister of India? Because meritocracy counts, and change starts at the top (or at the bottom, if you're talking about the mind of an individual).

We will definitely see this election reverberate throughout the world. Obama's greatest handicap now is the weight of expectations that he carries. No one expects that he will sell out US interests in a naive internationalist spirit. He will first and foremost safeguard US interests. If he can see (in a way that past US administrations could not) that US interests are best served by supporting a network of true democracies around the world rather than by propping up acquiescent dictators, he would have achieved a win-win situation for all of us.

I also cynically hope he will renege on his protectionist election promises. Protectionism always harms those it is meant to protect, so I'm hoping he will prove to be as pragmatic (on trade) as he was when he rejected campaign financing after initially pledging support for it.

Tuesday, 4 November 2008

Great Ad, and Great Advice

Apparently, this ad saying "Let the issues be the issue" is running in Manhattan on the eve of the US election. It dramatically shows a white Barack Obama and an African-American John McCain. It's a great idea, just imagining how race could be factored out of the election so that voters could concentrate on the really important issues.

Why didn't they do this earlier, and why only in Manhattan?

Monday, 3 November 2008

The McCain Less Known

I read everywhere about John McCain being "a man of honor", with no one challenging his bravery or his principles, only his policies and choice of VP (if at all). I wonder why this detailed piece on McCain titled "Make-Believe Maverick" by Tim Dickinson hasn't been more widely known. The article was originally published on Rolling Stone.

It's either a brilliant exposé or a smear, and I'm not in a position to say which it is, but it's worth a read anyway. It's also profoundly disturbing.

I've always favoured Obama as US President, and this article has only reinforced my feeling.

Sunday, 26 October 2008

Liberal or Conservative, the same rules apply

All this partisan talk from the right about Barack Obama being a "socialist" who wants to "spread the wealth around" ignores some basic commonsense principles. I don't believe the ground rules change whether a government is "liberal" or "conservative". And this is nothing specific to the US. It applies equally to any country.

Advice to the liberals:
Tax and spend all you want, but maintain a balanced budget. Don't spend more than you can earn.

Advice to the conservatives:
Cut taxes and cut spending all you want, but maintain a balanced budget. Don't give up more in tax cuts than you give up in spending.

Fiscal responsibility is the watchword. You could call it "true conservatism" if you want. I'm a true fiscal conservative, because I abhor budget deficits. They borrow from the future, provoke inflation and reduce our future wealth.

(Somehow, I think Barack Obama will be fiscally conservative, not irresponsible. It will of course take any future US administration years to recover from the trillion dollar deficit created by George W Bush, but I believe Obama will make things better, not worse.)

Friday, 24 October 2008

Separated at Birth - 1

Twins, separated at birth, both associated with humour and depression. One attained renown as a comedian who struggled with personal depression that found expression in his trademark brand of humour, and the other has now unwittingly become a laughing stock whose past actions (and inaction) now threaten to bring on a severe recession, possibly even a Great Depression.

I give you Woody Allen and Alan Greenspan!

[Incidentally, I don't believe that the entire concept of the "free market" has been repudiated, only one definition of the word "free" in the term "free market". Once again, let me harp on my distinction between "free" as in a lack of controls, and "free" as in protection from the acts of others (i.e., a liquid market with no player large enough to impact the market by themselves). A truly liquid market would not be suffering from the failures of a few players, as has happened in our oligopolistic system with no effective controls on their behaviour.]

Thursday, 23 October 2008

US Election - My Prediction

Less than two weeks to the US election! It's no big deal predicting that Obama is going to win. Everyone's saying that. The real deal is in predicting the margin. I think it'll be an absolute landslide. Obama will pick up more than 400 votes out of 538.

(Here's my reasoning. As of 24-25 October, ABC's electoral map gives Obama 311 votes to McCain's 163, with 64 being too close to call. I believe the states that are labelled 'moderate Republican', 'marginal Republican' or 'too close to call' will gradually be won over by Obama before election day, so I've counted only the electoral votes of strongly Republican or very strongly Republican states in favour of McCain. That only yields a total of 134 votes for McCain, leaving 404 for Obama. See map and table below.)

And why do I think the moderate Republican states will ultimately swing to Obama? Many reasons - Colin Powell's endorsement, Sarah Palin's un-hockey mom wardrobe that should speak louder than her pro-American rhetoric to undecided voters, the lingering fears of an economic collapse and a recession that alienate voters further from the Republicans whose cronies and appointees are perceived as having caused the whole mess, attacks on President Bush by McCain and Palin (!) that may put some Republican voters off voting altogether, my expectations of a high voter turnout that's usually a good sign for the Democrats, and my belief that there is a 'reverse Bradley effect' at work that prevents many people in conservative neighbourhoods from openly backing Obama in opinion polls, understating his actual support.

We've seen a generation of "Reagan Democrats". Welcome to the Obama Republicans. I believe they're called Obamicans.

Wednesday, 22 October 2008

One more reason to vote for Obama

Well, Obama's locked up the geek vote, at any rate.

When visiting Google's headquarters last year, he was reportedly asked a question that would have stumped even a few techos: "What's the most efficient way to sort a million 32-bit integers?"

In the thoughtful, deliberate way we've come to admire so much, the Democratic candidate answered that he thought the bubble sort would be the wrong way to go. I'm sure he'll arrive at the correct algorithm with the help of his advisers, but it's good to know that his instincts were correct, as always. And there's at least one country that he could be President of in a heartbeat.

It could be disastrous to elect a person with a poor sorting policy, especially in these difficult economic times when we can't afford to waste resources. I'm told McCain couldn't answer the same question when he visited the Google campus a few months earlier. And I'm sure Sarah Palin's answer would have involved stacking the numbers as far right as they'd go...

Tuesday, 21 October 2008

Resumption of India-Pakistan Trade - Good News or Bad News?

With the noise of the US election rising to a crescendo, a development in a faraway part of the world is understandably going unnoticed. After sixty years, a trade route between India and Pakistan has tentatively opened. Reports by the Voice of America, The Guardian and The New York Times cover slightly different aspects of the story.

I have three simultaneous reactions to this development:

There's naive internationalist liberal me: "This is great news! Trade bonds between nations strengthen peace. When countries become economically interdependent, the chances for conflict between them recede. This is the first step towards peace in our time. How wonderful that India and Pakistan can finally enjoy normal relations! South Asia as a whole will now prosper."

Then there's paranoid me: "This isn't about trade between India and Pakistan. It's a lifeline to Indian-controlled Kashmir to help it support itself through trade with Pakistan-controlled Kashmir. Never a big fan of India (in spite of the Indian taxpayer-funded largesse continuously poured into that province), Kashmir probably now sees a way to cement its ties to "the other side". It's a wedge that Pakistan is driving between India and Indian-controlled Kashmir. This is the economic unification of Kashmir at India's expense. There's nothing here for India or Indians to rejoice about."

Finally, there's geopolitically cynical me: "India is squandering the chance to do to Pakistan what Reagan's America did to the Soviet Union - exploit its bigger and faster-growing economy to bankrupt its military rival and dictate peace on its own terms. Why throw a lifeline to someone who doesn't like you? As Ray Kroc of McDonald's said, when you see a competitor drowning, you stick a hose down his throat. India should throw Kashmir out into the cold, even into Pakistan's waiting arms, then force the pyrrhic victor to come crawling back a few years later to sue for peace and beg for a chance to share in the prosperity of its (by then) superpower neighbour."

So what do I finally think? I don't know. A little of each of the above, I guess. One thing I'm sure about - Indians are too sentimental a race to elect a Reagan. Even the biggest hawks in the previous Hindu right-wing BJP government turned out to be doves on Pakistan, a reality that India's smaller neighbour cunningly understands and exploits. So fortunately for Pakistan, India will never press home an advantage even against a proven enemy.

Enemy? Surely that's a tad harsh? Well, Pakistan's civilian president blurted out the truth in a rare moment of candour (i.e., that India has never been a threat to Pakistan). If only the reverse was also true...

As always, I'm hopeful about peace in our time and all that, but not optimistic.

Thursday, 16 October 2008

The Effect of Race in the US Presidential Election

I like to think I'm post-racial, and I also like to think the US election has progressed beyond considerations of race. But this comment by Realista over at has startled me into understanding just how potent a factor race still is.

Essentially, it's a set of hypothetical questions - what if certain characteristics of Sen. Obama and his Republican opposite numbers (McCain and Palin) had been switched around? Would people still look at the two candidates the same way?

I'm going to repeat those questions verbatim here, because they're so hard-hitting:

What if the Obamas had paraded five children across the stage, including a three month old infant and an unwed, pregnant teenage daughter?

What if John McCain was a former president of the Harvard Law Review?

What if Barack Obama finished fifth from the bottom of his graduating class?

What if McCain had only married once and Obama was a divorcee?

What if Obama was the candidate who left his first wife after a severe disfiguring car accident, when she no longer measured up to his standards?

What if Obama had met his second wife in a bar and had a long affair while he was still married?

What if Michelle Obama was the wife who not only became addicted to pain killers but also acquired them illegally through her charitable organization?

What if Cindy McCain graduated from Harvard?

What if Obama had been a member of the Keating Five? (The Keating Five were five United States Senators accused of corruption in 1989, igniting a major political scandal as part of the larger Savings and Loan crisis of the late 1980s and early 1990s.)

What if McCain was a charismatic, eloquent speaker?

What if Obama couldn’t read from a teleprompter?

What if Obama was the one who had military experience that included discipline problems and a record of crashing seven planes? (My note: I understand it was 3 planes, not 7)

What if Obama was the one who was known to display publicly, on many occasions, a serious anger management problem?

What if Michelle Obama’s family had made their money first bootlegging, then from beer distribution?

What if the Obamas had adopted a white child?

Amazing, isn't it? Any or a small set of the negative aspects of McCain/Palin might have ended Obama's candidacy prematurely if they had been his flaws. Conversely, any of the positive things about Obama might have been trumpeted far more loudly had it applied to McCain/Palin.

What's often said about women (i.e., that they have to work twice as hard as a man to get the same recognition) may also apply to minorities.

I'm afraid we're still in Kansas, Toto.

Wednesday, 15 October 2008

Is the War on Greed as misdirected as the War on Terror?

George W Bush had a response to the September 11 terrorist attacks on the US. He declared a "War on Terror". We all know how well that's going.

I'm not advocating that the US should have done nothing in response to the September 11 attacks. I'm saying that when you suspend clear thinking and honest debate in favour of blind belief and misguided loyalty, you get the totally misdirected Iraq war rather than the focus on Afghanistan (the home base), Pakistan (the training ground) and Saudi Arabia (the financier) that the response should have comprised. A proper response would have been messy and complicated, to be sure. It would have involved embarrassing investigations into two nominal US "allies" and brought out into the open the obvious failures in US foreign policy over the years. I believe that the longstanding US policy of cozying up to dictators instead of strengthening ties with democracies led ultimately and inexorably to 9/11. Yet nobody who knew better could talk sense to President Bush, because those who weren't with him were against him, remember? The world is in a fine mess thanks to expediency and moral certainty, combined with a knee-jerk reaction to crises.

Are we in danger now of reacting to the recent financial crisis with similarly misdirected populism? Australian Prime Minister Kevin Rudd today essentially announced a "War on Greed", by attacking the excessive pay packets of corporate executives as one of the negative aspects of what he called "extreme capitalism". And sure, he's got a point, a very valid point. But he's also in danger of being way off the mark, to the detriment of all of us.

Attacking excessive remuneration appeals to everyone (everyone, that is, except those in the top levels of the corporate world). Last year, Macquarie Bank's CEO Alan Moss took home 33 million big ones. This year, Macquarie caused quite a few jitters among investors. CEOs take home the big bucks, and when their enterprises threaten to fall over, governments have to rush in and prop them up with taxpayers' money, because the economy will suffer otherwise. It's like the fat cats have a gun to everyone's head.

So attacking executive remuneration understandably attracts animal howls of approval from the gallery. (Mind you, many of those in the gallery don't even pay taxes! They've nothing at stake, and it's probably just petty jealousy at work.)

Let me make my position clear. I'm a taxpayer, and my money is being used in these bailouts, so I have a legitimate right to voice my opinion about the way the system is run. But perhaps surprisingly, I'm against placing limits on executive remuneration. It indicates a mercantile mindset that believes in rationing out scarce resources. What we need is a capitalistic mindset that recognises wealth to be potentially limitless. The capitalist worldview recognises the need for appropriate systems that incentivise us to apply our ingenuity and industry to continue to create wealth out of nothing, exactly as we have been doing since we left our caves thousands of years ago.

Having said that, there are clearly limits to executive compensation that exist, not absolute dollar limits, but limits that are dictated by the ability of the enterprise in question to pay those salaries and bonuses. If an enterprise pays its top executive $466 million and then collapses, then in hindsight, it clearly couldn't afford the payout.

Many people may miss a crucial portion of Rudd's statement: "Regulators should set higher capital requirements for financial firms with executive remuneration packages that reward short-term returns or excessive risk-taking." (emphasis mine) I agree with the way Rudd is proposing to tackle the problem, which is to impose higher standards of capital adequacy on firms that show short-termism or risky behaviour in pursuit of profits, but there is a deeper aspect to the problem, which I'll come to in a moment.

I do believe that one of the fundamental things wrong with the brand of capitalism practised today (apart from its hostility to competition) is that it rewards companies for showing short-term profits. It encourages CEOs (who serve relatively short tenures) to under-invest in the future and show unnatural returns in the short term, then depart with huge payouts as a reward for such stellar performance. Every new CEO announces that things have been left in very bad shape by their predecessor (true), and then proceeds to write off huge losses at the start of their tenure. Not only does this clear the decks of all past losses, it also takes the share price to a comfortably low level, so that the new CEO can demonstrate impressive share price gains from this low point. Repeat ad nauseam. The enterprise and its shareholders bear the brunt of this short-term and self-serving behaviour. The technical term for this is "agency risk". The goals of the agent (the management) are not aligned with the goals of the principal (the shareholders).

To my mind, the problem of "extreme capitalism" (as Rudd would call it) is the tendency to reward short-termism. So it's not executive salaries per se. If a way can be found to link executive remuneration to an enterprise's long-term performance, then by all means, shower your executives with gold. For example, go ahead and give your CEOs generous stock options, but ensure that they vest only after 5 years or later. That'll make them more careful about the long-term effects of their decisions.

So I've no real argument with Rudd's proposal, as far as that goes.

Is this the root of the problem, though? Perhaps there's really no agency risk here! Perhaps the agents' goals are in fact perfectly aligned with their principals' goals.

We need to look within ourselves as shareholders. What kind of shareholders are we? Are we true investors, who buy stock and hold on to it, wanting a share of the profits of the enterprise in the form of dividends? Or are we just speculators, who buy shares in the hope that we can sell them at a higher price? Speculators don't care what happens to an enterprise after they sell their shares.

I think short-term performance benchmarks rule the market because the market is dominated by speculators.

If we want enterprises to be healthy, we need to encourage long-term behaviour from all concerned. The goals of the principals (the shareholders) must themselves be aligned with the long-term health of the enterprise rather than its short-term performance. Then the goals of the agents (the management) of these enterprises will automatically be tuned to the long term.

Executive remuneration is the Iraq of the War on Greed. It's an expedient target, but likely to prove a costly diversion. The real problem is more messy to target. It's short-termism, and we're all guilty of it as speculative shareholders. To quote Walt Kelly, we have met the enemy, and he is us.

Monday, 13 October 2008

Testing Times for the Clever Country

I guess not many people knew that bank deposits in Australia have hitherto not been guaranteed, until the government announced that they would now be. The other marvel, of course, is that when a guarantee exists, it will probably not be resorted to. The government's statement is purely to shore up confidence in the financial system and prevent a run on the banks.

Of course, there's the fine print. The Australian government will only guarantee deposits in Australian-incorporated banks, so we could still see a run on foreign-owned banks like Citi and HSBC. Still, it's a much-needed affirmation from the government, and will do much to keep the financial system on its feet.

I guess we're entering a phase when the "Australian model" is going to be put to the test like never before. Prime Minister Kevin Rudd has said he doesn't consider the budget surplus as something to defend in its own right. He's willing to use up the surplus if that's what it takes to stimulate the economy and prevent a deep recession.

Quotable quote: "How long have you all heard me say it is good to have a surplus ... as a buffer for the future? Well, the future is here."

The biggest fears now are a slowdown in growth and a rise in unemployment. The Reserve Bank has done its bit to stimulate growth by slashing interest rates by a full percent, something normally unheard of. The upside of having had high interest rates in the recent past is that there's sufficient leeway to move rates down, a luxury that the US doesn't have. If the PM and his Treasurer Wayne Swan play their cards right by operating the right fiscal levers (and they can spend a fair bit without running up a budget deficit, unlike the US government, which has dug itself into a deeper deficit hole), they can keep the Australian miracle going, and in the process, ensure their own places in history.

It's a difficult time in world history and no time to be partisan, but if Australia comes out of this crisis in better shape than other nations, it will be a powerful lesson in the benefits of good economic governance. I.e., avoid a budget deficit at all costs and tweak interest rates constantly to encourage growth without provoking inflation higher than 2-3%. (And let me add my Liquidism mantra like a broken record: maintain high levels of market liquidity through aggressive antitrust if need be. A thousand blades of grass will weather a storm better than a few oak trees.)

The Australian financial sector has also been prudently regulated and the "toxic assets" of other economies haven't been ingested to any significant degree here. To some extent, this hides the problem of oligopolistic conditions in the market. I wonder if we will have to wait for a different crisis before we learn that lesson...

Sunday, 12 October 2008

JDRF Walk to Cure Diabetes

Today (Oct 12, 2008) was the Walk to Cure Diabetes organised by the Juvenile Diabetes Research Foundation (JDRF) at Sydney's Olympic Park. Not many people know that Juvenile (or Type 1) diabetes is fundamentally different from the diabetes that is more commonly seen in adults.

Let me quote the JDRF website verbatim:

Type 1, or juvenile diabetes is a serious, chronic disease that destroys the body's ability to produce insulin - a hormone needed to convert food into energy.

Type 1 diabetes is an autoimmune disease that usually begins in childhood or early adulthood, but can occur at any age. People with type 1 diabetes need up to six insulin injections every day for the rest of their lives, just to stay alive.

Type 1 diabetes is not caused by diet or lifestyle
and cannot be managed through diet and excerise. Insulin injections keep people alive but are not a cure. There is no cure.

Even when treated, type 1 diabetes can cause serious and devastating long-term health complications such as blindness, kidney failure, heart disease, amputations and stroke.

Type 1 diabetes affects every aspect of a person’s life and managing the disease involves whole families.

There are currently around 140,000 children and adults in Australia living with type 1 diabetes. We have one of the highest rates in the world and every day, five more people are diagnosed, most of them children.

The only way that people with type 1 diabetes will live the long and healthy life they deserve is if more money is invested in research to find a cure.

For further information about type 1 diabetes and current research progress go to the JDRF Website.
I've written before that I'm sensitive to reports that ethnic minorities in Australia tend to volunteer less than the general population, so I've been trying to do my bit from time to time.

This time, I put together a group of like-minded friends and decided to collect money for the JDRF cause and also make this an enjoyable family outing. Most of us being Indians, we called our team the Sydneyside Maharajahs. The team website may not remain in place for long, so here's a screenshot (with the names of my friends and other volunteers blurred out to protect their privacy).

I would like to thank all my friends and colleagues who kindly donated and helped us towards our target (not quite achieved as of the time of writing).

Although the walk is over, fundraising is still open till the 7th of November, I'm told, so if anyone out there would like to donate towards finding a cure for this cruel condition that afflicts some of our youngest, please donate at my JDRF page.


Saturday, 11 October 2008

Old Products, New Marketing

Being a nerd, I'm always amused by church signs that reference technology to evangelise religion.

Now the church has competition in this space, as this sign from Gurgaon near New Delhi demonstrates.

[I'm not an expert on Yoga, so I won't attempt to explain what Pranayama is. I'll leave it to Wikipedia to define Pranayama (and if someone doesn't agree with the definition, they can always edit the entry ;-).]

Tuesday, 7 October 2008

Humanity's Three Great Epics

OK, this is partly tongue-in-cheek, but only partly.

Those of you who saw the romantic comedy My Big Fat Greek Wedding will surely remember the father of the female lead who is always very big on Greek culture ("What were the three greatest contributions of Greek civilisation to the world? Astronomy, philosophy, democracy").

Well, like the Greeks have the Iliad and the Odyssey, we of Indian descent have the Ramayana and the Mahabharata. (Yes, it's hard to tell where the accent goes, so try Raa-maayuh-na and Muh-haa-bhaa-ruh-ta). Mighty proud of these epics are Indians, and rightly so. Modern Indian literature, movies, songs and colloquial speech are littered with allusions to these classics. Babies are named after characters in the great epics. You'll even find these epics in comic book form. Indian kids grow up on the stuff. I read these comics in English, side by side with Tarzan and Superman, when I was growing up.

But I've also enjoyed shocking traditional Indians with my entirely serious thesis that there are three great epics in the world, - the Ramayana, the Mahabharata and Star Wars. I never fail to get a rise out of people with that statement.

Just look at the similarities. All three are about the struggle of good against evil (and the ultimate triumph of good). They're all long, all boring in places, with confusing sub-plots and myriad characters, many of whom are only tangentially relevant. And ultimately, they're entertaining while being morally educational (To those like me who are perpetually suspicious of organised religion, that last bit should prompt a mental uh-oh).

I would like to report a successful experiment that I just concluded last week. I got my 77 year old mother to watch the entire 6 part movie series of Star Wars! And wonder of wonders, she grudgingly acknowledged that Star Wars was "quite nice". She agreed that there were parallels between the Jedi religion and Hindu philosophy (there are murmurs in the musty corners of Indian philosophy to the effect that dark, tantric practices are a bit more powerful than the wholesome yoga and meditation that India would like to showcase - the "power of the dark side"). She thought the transformation of Anakin Skywalker from innocent child through idealistic (and disillusioned) young man to evildoer paralleled the stories of many demons in Hindu mythology who also started off being nicer folk.

She quoted Yoda's statement: "Fear leads to anger; anger leads to hate; hate leads to suffering." To her, this was lifted straight out of Eastern philosophy, so rather than Star Wars being a legitimate epic of the stature of the Ramayana and Mahabharata, it was just a copy, albeit a well-made one.

An example of how Hindu philosophy has influenced Star Wars

But I'm happy at the outcome. My mother, a representative member of an older Indian generation, has seen something of value and relevance in Star Wars, so much so that she's expressed a desire to watch the series again after a few months!

I must say I don't necessarily see religion in any of these epics (though there's a fair bit of spirituality). I think they're great stories with awesome atmosphere, powerful symbolism and beautiful imagery. To me, the image of Tatooine's twin suns or the unfinished Death Star is as powerful as the paintings (by Raja Ravi Varma and by someone else) of the noble vulture Jatayu's (Juh-taa-yoo) vain attempt to rescue Sita as she is carried off by the demon king Ravana (Raa-vuh-na), or of Abhimanyu (Uh-bhi-muhn-yoo) attacking the Kauravas (Cow-ruh-vaas) "like a proud young lion falling upon a herd of elephants" (to quote Amar Chitra Katha). Or, for that matter, the image of Achilles dragging Hector's body around the walled city of Troy, or that of the Cyclops throwing rocks at Ulysses' ship as the Greeks flee his island. Lots of stuff that gives me goose-pimples even today.

Star Wars - Tatooine's twin suns

Star Wars - The unfinished Death Star

The Ramayana - Jatayu fights Ravana in vain to save Sita

The Mahabharata - Abhimanyu attacking the Kauravas "like a proud young lion falling upon a herd of elephants"

The Iliad - Achilles drags Hector's body around Troy

The Odyssey - The blinded Cyclops throws rocks at Ulysses's ship

That's the stuff of which epics are made. Epics are about heroes and other larger-than-life characters (many of them tragically flawed), their struggles and adventures, they're about destiny and nemesis and an overarching moral theme that dwarfs all characters. Star Wars has all of this in full measure. So an epic isn't necessarily one that was written hundreds or thousands of years ago. It could just as easily have been released in 1977.

So there you have it - humanity's three great epics (or five, since we wouldn't want to belittle Homer :-).

Friday, 3 October 2008

Clever Signs

We've all read about the funny signs with inadvertent mistakes from around the world. But try these:

At a car lot: The best way to get on your feet....Miss a car payment.

At a tyre repair shop: Invite us to your next blowout.

Outside a muffler shop: No appointment necessary. We heard you coming.

In front of a car wash: If you can't read this, it's time to wash your car.

At a towing company: We don't charge an arm and a leg. We want tows.

At a used car lot: Second-hand cars in first crash condition.

At an auto body shop: May we have the next dents?

On a caravan trailer: I go where I'm towed to.

On a music teacher's door: Out Chopin.

At a music store: Out to lunch. Bach at 12:30. Offenbach sooner.

On the door of a music library: Bach in a min-u-et.

At a pizza shop: 7 days without pizza makes one weak.

On a butcher's window: Let me meat your needs.

Outside a restaurant: Try our fish just for the halibut.

On the menu of a restaurant: Blackened bluefish

Outside a hotel: Help! We need inn-experienced people.

At an optometrist's office: If you don't see what you're looking for, you've come to the right place.

In a counselor's office: Growing old is mandatory, growing wise is optional.

In a dentist's office: Be true to your teeth or they will be false to you.

In a podiatrist's window: Time wounds all heels.

On a maternity room door: Push. Push. Push.

In a veterinarian’s waiting room: Be back in 5 minutes. Sit! Stay!

At the electric company: We would be delighted if you send in your bill. However, if you don't, you will be.

A church sign: To remove worry wrinkles, get your faith lifted.

At a gym: Merry Fitness and a Happy New Rear!

At a beauty parlour: Dye now!

In a farmer’s field: The farmer allows walkers to cross the field for free, but be aware that the bull charges.

In a non-smoking area: If we see smoke, we will assume you are on fire and take appropriate action.

In a cemetery: Persons are prohibited from picking flowers from any but their own graves.

At a hardware store: Would the person who took the step ladder yesterday kindly bring it back or further steps will be taken.

In the front yard of a funeral home: Drive carefully. We’ll wait.

In the window of an appliance store: Don't kill your wife. Let our washing machine do the dirty work.

Inside a bowling alley: Please be quiet. We need to hear a pin drop.

At a maternity clothes shop: We are open on Labor Day.

On a desk in a reception room: We shoot every 3rd salesman, and the 2nd one just left.

On a fence: Salesmen welcome. Dog food is expensive.

On a plumbing company's trucks: Don’t sleep with a drip. Call your plumber.

On a scientist's door: Gone Fission

On a taxidermist's window: We really know our stuff.

On an established dry cleaning store: Thirty-eight years on the same spot.

On the door of a computer store: Out for a quick byte.

Outside an antique shop: We buy junk and sell antiques.

Sign at the psychic's hotline: Don't call us, we'll call you.


And my favourite (Patel & Co. Plumbing in London): You've tried the cowboys, now try the Indians.


Wednesday, 1 October 2008

The Self and the Other

An aspect of the recent stock market meltdown has led me to some philosophical musings regarding ourselves versus other people.

When they say trillions have been wiped off the stock market, what do they mean exactly?

The market value of the stock is what the market thinks it is worth. Obviously, when a crash happens, a lot of people suddenly think a lot of stocks are not worth what they thought they were worth just hours earlier, and they put their money where their opinions are by not being willing to pay the earlier price for them. It's just opinion that suddenly changes. Nothing in the real world has changed in such a short period of time except some trigger event.

The reasons for the change of opinion have been heavily researched, and will no doubt continue to be heavily researched, but my immediate concern is something else.

Why are people suddenly "poorer" after a stock market crash?

If the bulk of a person's savings is held in the form of shares, either directly or indirectly (through mutual funds that invest in shares) [or even more indirectly (through retirement savings plans that invest in mutual funds)], their "wealth" is not measured by how well they dress and eat and live but by the value of the shares in which their entire life savings are ultimately invested. I have been oversimplifying by using the word "shares" when I should have been saying "assets", which include real estate, commodities (gold, oil, wheat) and securitised versions of these.

When the market value of assets crashes, the owners of those assets become poorer overnight.

In other words, in a financial sense, we are ultimately worth what other people think we are worth.

How starkly this contrasts with Eleanor Roosevelt's reassuring admonition that no one can make us feel inferior without our consent!

But on reflection, I realise that the two statements are not saying different things at all. When the market suffers a "correction", it implies that the new value of the assets we hold are the "correct" ones. Therefore it can only mean we bought them at unrealistically inflated prices. In other words, we accepted other people's opinion of what they were worth at the time we bought them. That's why we're now poorer. We have allowed other people to make us feel inferior because we earlier (wrongly) allowed an aspect of our true worth (our savings) to be pegged to other people's inflated opinions of various assets.

So Warren Buffett and Eleanor Roosevelt are essentially saying the same thing. Look for the fundamentals, for true worth. If you are blindly led by the opinions of others, they can make you feel superior for a while while the market continues to boom. But when things return to their "true" value, they can make you feel inferior as well. And it can really hurt.

On the positive side, if you invested in true value and the market has now crashed to take the price of your assets below their true value, there's no need to feel down. Things will eventually return to normal, and you will once again be seen to be worth what you are (in financial terms). Just don't panic and sell :-).

Tuesday, 30 September 2008

The lighter side of the financial crisis

Although I cannot vouch for its authenticity, there is some grave news coming out of Japan as the repercussions of the US financial crisis hit that country.

In the last 7 hours Origami Bank has folded, Sumo Bank has gone belly up and Bonsai Bank announced plans to cut some of its branches. Yesterday, it was announced that Karaoke Bank is up for sale and will likely go for a song, while today shares in Kamikaze Bank were suspended after they nose-dived. Samurai Bank is soldiering on despite sharp cutbacks, Ninja Bank is reported to have taken a hit, but they remain in the black. Furthermore, 500 staff at Karate Bank got the chop and analysts report that there is something fishy going on at Sushi Bank where it is feared that staff may get a raw deal.

[Update 25/08/2012: This is my own - Sudoku Bank has been unable to make the numbers.]

And in earlier news from Wall St:

Helium was up, feathers were down. Paper was stationary.
Fluorescent tubing was dimmed in light trading.
Knives were up sharply.
Cows steered into a bull market.
Pencils lost a few points.
Hiking equipment was trailing.
Elevators rose, while escalators continued their slow decline.
Weights were up in heavy trading.
Light switches were off.
Mining equipment hit rock bottom.
Diapers remain unchanged.
Shipping lines stayed at an even keel.
The market for raisins dried up.
Coca Cola fizzled.
Caterpillar stock inched up a bit.
Sun peaked at midday.
Balloon prices were inflated.
Scott Tissue touched a new bottom.
And batteries exploded in an attempt to recharge the market.

The Current Financial Crisis - My Biggest Fear

So Congress rejected the bailout plan, the markets reacted by (what else?) crashing, and now the world is waiting with bated breath to see what happens next.

This being an election year when the contest is particularly close, truth can safely be expected to be the first casualty. The name-calling and one-upmanship between the candidates and their parties has already begun.

There is great temptation on the part of everyone involved in the debate to take the path of maximum populist appeal. The unanimously agreed villain of the piece? Deregulation. The solution? Lots of regulation.


So now the answer is to control, stifle, smother and shackle the economy so it can't collapse? You poor sods, now you've really done it!

No one can recommend the free market in the current climate without being booed, it appears. The free market (taken in the sense of an unregulated market) has now been blamed for all the world's ills. Yes, the lack of controls has been a major culprit, but it wouldn't have been such a killer if the market had been truly competitive. The collapse of a few players wouldn't have developed into the market-threatening crisis that it has now become.

In the process of blaming the free market, I fear we may be walking away from the one thing that can get us out (and forever keep us out) of this kind of mess - a free market! And my regular readers know that when I say "free market", I mean a liquid market. A market with plenty of competition. Because freedom for me does not carry the petty meaning of a freedom without restrictions. It means a freedom that cannot be taken away. Only liquidity (the inability of any single player or small group of them to influence the rest of the market) can protect the freedom of all players in the market. To enjoy freedom, we need to (paradoxically) accept the constraints demanded by freedom, i.e., the guaranteed powerlessness to unduly influence others.

I think we should start using the phrase "liquid market" or "competitive market" instead of "free market" from now on. The term "free market" has been tainted, ironically because the financial markets weren't really free but highly illiquid and oligopolistic with a few very large and powerful players who operated without the checks on their behaviour that a competitive environment would have naturally provided. It's no use trying to educate people about what the term "free market" should really mean. In the aftermath of a systemic collapse, no one wants to hear what would appear to be hair-splitting or intellectual sophistry. People cannot now be convinced that a free market is the solution we need and not the problem.

I think we need to start characterising the problems of the last few years as an "oligopoly", an "illiquid market" or as "cronyism". Any and all of these terms would be an accurate description. And we should then point to "liquid markets", "competition", "transparency" and "accountability" as the answers, rather than "regulation".

Competition provides most of the regulation we really need. All we need to do is ensure that our markets stay competitive.

Regulation by government bodies is important and has its place, but knee-jerk legislation mandating more regulation will exacerbate the problem. Complexity hinders transparency.

Will the wisdom of crowds see through the current round of election-sozzled name-calling and understand what the economy really needs?

I'm hopeful, but not optimistic.

Saturday, 27 September 2008

My Economic Philosophy - 8 (Beyond Socialism and Capitalism)

(This is the eighth of n pieces on my emerging economic philosophy called Liquidism.)

I came across this hilarious illustration today:

While funny, it's also sad that both systems have come to represent a zero-sum game in the eyes of many people, a belief that one person's gain must always result in another person's loss. I don't believe this is true. I believe that wealth is potentially infinite, and human civilisation is constantly improving the incentive systems that cause us to apply our ingenuity and industry to increase our collective wealth, with everybody being better off as a result. I believe in the capitalist ideal based on competition and liquid markets (not the cronyism and oligopolistic markets that pass for capitalism nowadays). At the risk of appearing trite, I can sum up my economic philosophy with another illustration:

It could be argued that what I call Liquidism is just "capitalism done right", but it does involve some non-intuitive aspects. I arrived at this economic philosophy in stages, and it's the fortuitous result of many coincidental experiences in my life.

My journey began when I realised that "freedom" could mean two very different things, and that one kind of freedom is higher than the other. A freedom that cannot be taken away is superior to a freedom without restrictions. I thank the Free Software / Open Source software communities for sensitising me to this difference.

Then I discovered the beauty of Ayn Rand's philosophy (and its limitations). Ayn Rand opened my eyes to the fact that capitalism was not just an economic system but a political philosophy grounded in the notion of individual freedom. The economic aspects of capitalism flow out of the political philosophy.

With that insight, I tried to derive (from first principles) an economic system from a philosophy of freedom, but using the higher of the two kinds of freedom I talked about earlier. In essence, I was trying to redefine a "free market". In the process, I realised that a truly free market had to be a guaranteeably liquid market, not a market without controls. That meant that there was a legitimate role for government (in the absence of any self-correcting behaviour on the part of the market) to step in and enforce liquidity whenever required. In other words, antitrust is not an enemy of the capitalist system (as libertarians make it out to be), but its saviour. That's where Ayn Rand is wrong.

From there, it was only a short step to realising that Liquidism is the next logical step in prudent economic policy, taking the "Australian model" of prudent fiscal policy (avoiding budget deficits) and prudent monetary policy (keeping inflation low through alert interest rate manipulation) to its natural conclusion by ensuring high market liquidity as well. I have been privileged to be part of the Australian economy for over a decade now, and I marvel at the simple yet effective way in which the Australian government and central bank have together kept the economy consistently booming in the face of worldwide boom-bust cycles. The Australian model has many aspects of a welfare state, but that welfare state operates within the discipline of a balanced budget. Australia has shown the world how to reconcile capitalism and socialism. However, many segments of even the advanced Australian economy are held to ransom by oligopolies.

It's unfortunate that nowhere on earth can an example be found of the perfect economic system. Worse, very few people have shown an interest in getting there. Until now.

I have finally seen the vindication of my philosophy in the market failures of 2008, and I realised (as did an eminent economist and old classmate of mine), that capitalism has to be saved from the capitalists. In a truly liquid market, the effect of a single player (or even a few players) has no perceptible impact on the market as a whole, so bailouts using taxpayers' money are never required. But in our imperfect world, large players always act to preserve their oligopoly, by making it harder for themselves to fail (governments are forced to prop them up using taxpayer's money in the larger interests of market stability, making a mockery of the free market in the process) and by erecting scale barriers to newer entrants. I'm sure the downsides of having extremely large players in the market has become apparent to others as well. We just need to join the dots and go where the logic leads us, i.e., to a guaranteeably liquid market, where no player can ever become large enough to unduly influence the market.

However, entrusting the role of market "liquefier" to governments is fraught with danger. Governments are corruptible, as we all know. The timidity of competition watchdogs in our economies is testament to the power of incumbent market players to protect their interests. Governments and legislative bodies are influenced more by market incumbents than by companies yet to be formed. Therefore, liquidity-seeking behaviour needs to be driven into the DNA of the basic unit of capitalism itself - the corporation. Corporations need to have an "amoeba gene" that causes them to grow and split ad infinitum, rather than grow and merge. This is the only way that the market can inherently (i.e., without external intervention) be prevented from consolidating into an oligopoly or monopoly. Such a solution would satisfy Ayn Rand as well. In this context, it must be pointed out that divestitures do not reduce shareholder wealth. On the contrary, new wealth can be released when diseconomies of scale are eliminated and competitive energies are unleashed. The few examples we have of corporate breakups (such as AT&T in 1984) bear out this optimism.

I think it's time the world innovated a new kind of corporation that contributes to market liquidity instead of opposing it. This may need to be defined and enshrined in law, just as the notions of "joint stock company" and "limited liability" were previously formalised through acts of legislative bodies. The capitalist system can then be relied on to generate wealth in a sustainable way, without needing constant government oversight and intervention, and without suffering the periodic system-wide collapses it is prone to in its current suboptimal form.

My concept of Liquidism has been a gradual awakening rather than an epiphany. I still read semi-informed (yet heated) debates in many forums about the merits of different ideologies and varied reasons for our recent financial crises. Although I don't want to sound overconfident, I'm increasingly convinced that I have found the answer to these questions. I think Liquidism is the key to future financial stability and world prosperity.

Three Palindromes and a Spoonerism

We've all heard palindromes that make no sense, such as
Mad Zeus, no live Devil, lived evil on Suez dam.

I much prefer palindromes that make sense in a plausible context, not contrived ones like "Step on no pets" or "Draw pupil's lip upward".

My favourite ones are these three:

An ad for Toyota:
A Toyota. Race fast, safe car. A Toyota.
A sports-hater's plaintive plea to be left alone:
Golf? No Sir, prefer prison flog!
(I can identify with that!)

An anti-smoking slogan:
Cigar? Toss it in a can. It is so tragic.
And a good spoonerism I read yesterday in MX fits in neatly with the story of the Knave of Hearts:
The Queen of Hearts, she made some tarts,
All on a summer day:

The Knave of Hearts, he stole those tarts,
And took them quite away!
Q: How did the knave respond when questioned about the lack of pies?
A: With a pack of lies.

My Economic Philosophy - 7 (The Place of a Welfare State in a Capitalist Economy)

(This is the seventh of n pieces on my emerging economic philosophy called Liquidism.)

The Welfare State has always been synonymous with Socialism and generally viewed as incompatible with Capitalism. This belief has polarised opinion along rather simplistic lines, between those who favour government support for the needy, and those who believe that all economic decisions should be made by "market forces" (a term that implicitly excludes the government). And then there are the pragmatists who believe in a mixture of the two, unencumbered by any ideology.

I have evolved a different view, and my philosophy not only provides an ideological basis for the pragmatic approach but also lays down clear guidelines for how big the Welfare State can be.

I have written about what is known as the "Australian model". From a social perspective, the Australian model is a wonder of the modern age because it manages to reconcile a capitalist economy with elements of a Welfare State, such as state-subsidised healthcare and social security. From a purely economic perspective too, the Australian model is a wonder because it has managed to deliver 17 straight years of growth while the rest of the world reconciled itself to the "inevitability" of periodic recessions.

What's the secret?

The economic model is no big secret. It lies in responsible government spending that yields a (growing) budget surplus and thereby refrains from provoking the inflation that unfailingly follows deficit financing. As a bonus, the budget surplus delivers flexibility in investing for the future (the Future Fund) and acts as a cushion against economic shocks. The secret also lies in an alert central bank that promptly raises interest rates as inflation rises and lowers them when the economy slows. These two levers of the economy, when prudently applied, maintain conditions of low inflation, low unemployment and uninterrupted growth.

Of course, the Australian economy could do with even greater efficiency, and this can only occur when the oligopolies in its various markets are broken, but that is not the topic of this post.

Returning to the social perspective, how does Australia manage to be a successful capitalist economy while also supporting aspects of a Welfare State? Even if it works (as it clearly does), isn't there at least a theoretical contradiction between the two?

My answer is no, there's no contradiction, because the perceived dichotomy between a Welfare State and a capitalist economy is false.

It leads back to the fundamental definition of "freedom". If freedom is taken to mean the untrammelled freedom of individuals to act, only constrained by the rights of other individuals and with no "controls" by external authorities, then every act of government (as a player in the market) is seen as a violation of freedom. The model of a "free market" by this definition of freedom is a laissez-faire system where government does not interfere with the functioning of the market, either as a regulator or as a bulk consumer.

If, however, freedom is seen as something that must be guaranteed never to be taken away, then some controls are inevitable. The model of a "free market" by this definition of freedom is a liquid market with a large number of buyers and sellers, where no single buyer or seller (or a small group of them) can significantly influence prices or the stability of the market as a whole. Actions by government violate no principles as long as the market stays liquid.

And this explains the seeming paradox of a Welfare State within a capitalist society. By itself, government action in a market is neither good nor evil. The crucial question is whether such action breaks one of what I would call the three pillars of the economy (a balanced budget, the right level of money supply and healthy levels of competition in the market).

The Welfare State is an example of government spending. Is this a legitimate activity in a market economy? In a democracy, government is an agent of the people in a legal sense, and so government spending on behalf of the people is really no different from individuals spending their own money. The various mechanisms of democracy ensure that the agency of government spends the money of its principal (the people) in a way that serves the interests of the principal. I believe that government spending in a functioning democracy is legitimate, as long as it does not lead to a budget deficit.

(One could argue that government spending that leads to a deficit budget is also legitimate because in a democracy, it reflects the will of the people. I disagree, because deficit budgets in effect borrow from the future. They are inflationary, and they rob our descendents of wealth. Our children, grandchildren and unborn descendants do not have a vote, even in a democracy. We have no right to rob them of their wealth without their consent. And so government spending has legitimacy only as long as the budget stays balanced.)

The constant demand by "free-market" advocates to privatise social security seems pointless to me. I can't see any economic reasoning behind it, merely an ideological one stemming from the dubious definition of freedom as an absence of external controls.

So how large should the Welfare State be? As large as the budget allows. The government is a consumer on behalf of the people, and like any consumer, should live within its means. "Free-market" advocates tend to criticise "big government", but to my mind, the problem is not "big government" but "irresponsible government". I say, if the government has the revenue to sustain a large Welfare State without running into deficit, then go for your life! There are no absolute limits (in dollar terms) to the size of a Welfare State. The only limit is the size of the budget.

So in my opinion, there is no contradiction between a capitalist economy and a Welfare State. Those who start off with an inferior definition of freedom ("no controls on individual freedom") exhibit a knee-jerk opposition to any action by government, which seems a bit silly to me. To those who define freedom as something that cannot be taken away, it is obvious that there are clear-cut principles that determine what governments can and cannot do. As long as the Welfare State abides by those principles, its proponents need not be apologetic or defensive about its existence.

We can have our cake and eat it too.