Sunday, August 30, 2015

47 A note on Business Cycles

There are three types of business cycle indicators that are reported on a) The composite leading business cycle indicator which for example includes the number of residential building plans passed, and the interest rate spread. It also looks at the percentage change in the composite leading business cycle indicators for South Africa’s major trading-partner countries, and changes in the US dollar based export commodity price index.

Then these is the composite coincident business cycle indicator.

and the composite lagging business cycle indicator.

Wednesday, August 26, 2015

46. Equity or Loan capital?

I will be posting some information on this topic shortly.

Monday, August 24, 2015

45. How an economy grows.

Wednesday, August 19, 2015

44. Why not Free Market Capitalism?

Why would one not be a free market capitalist? Let this be the legacy of the African Renaissance. The awakening of the African giant.

If , in a market economy, the government simply allows and then protects the private ownership of property and the right to the voluntary exchange of labour, goods and services through consenting participants. A society of peace and stability within which people live their lives without fear of confiscation through taxes and expropriation for the common good. Where willing buyers and sellers meet in an unfettered marketplace where the value of goods and services are determined by buyers and sellers that are allowed to trade freely without subsidies and price controls, tariffs and special licences and controls to stem the free flow of ideas and goods and services.

If, in a free market economy people can trade with their property and labour in any way they see fit, as long as they not act in a way that would infringe on others to be have in a similar way and without force or the threat of force or acting in a fraudulent way. Where individuals take responsibility for their actions and cause no damage to others lives and property. Where there is a free movement of people, goods and services between nations and states.

A free market capitalist society where the role of the state is not to promote the interest of any one group, where it sees its role as the protector of property rights of all and cherishes individual liberty and the rights of groups to promote their groups as long as it does not done in a way that it offends basic human and individual rights.

A free market where economic growth is high because of a low tax regime, where people spend more time and effort on creating wealth than on efforts to protect themselves from the tax authorities. Where the government upholds a policy of protecting the value of the currency and therefore takes no inflationary actions. Where nobody is granted any special privileges on the basis of race or gender and there are no special subsidies, tax concessions, import controls, tariff protections granted to favour some special interest groups. Where political power and influence is curtailed to the essential services of foreign relations, the army, the judiciary and internal safety and security.

A free market where rules are kept simple and understandable, where you would not find unrealistic building, zoning, and other restrictions on trade and costly process involved in setting up of businesses, the subdivision of land and the meeting onerous regulatory requirements when starting enterprises.

A society where the government allows communities and sub-communities a bigger say in those decisions that affect them directly.

Why not free market capitalism?

Many of the ideas expressed here have their origin with Marc Swanepoel - previously Director of FEBDEV.

Eustace Davie Capitalism, free markets, economic freedom and free enterprise all have in common that they consist of voluntary exchange between individuals free of third party intervention. Where is the evil to be found in voluntary exchange between individuals? It is force and fraud that are the evils that hamper progress towards a civilisation that is epitomised by peace and freedom. It is incongruous that the most ardent critics of "capitalism" are ferocious in their support for collective violence against those with whom they disagree.

Tuesday, August 18, 2015

43. Equal pay for equal work

On 702: Gender pay gap in the workplace "The principle of equal pay for equal value remains elusive in South Africa. Women continue to earn less than their male counterparts despite the enactment of legislation to promote equality. The South African gender pay gap is estimated, on average, to be between 15%-17%."

 This morning we speak about why the pay gap persists and what needs to be done to correct the situation."  (Government has embarked on legislated non-discrimination, titled: equal pay for equal value which is detailed in the Employment Equity Act).

The answer: It will stay elusive until the law is removed. If a person is faced with a choice A or B, the price of A and B is the same, but the perceived value of A is greater than B, A will be chosen. That is normal human behaviour whether you are selecting a cake to eat, shoes to wear or your life partner. Why would it be different when you select an employee? One cannot legislate that people not have preferences, biases or discriminate on the grounds of reasons that they might not even know or understand themselves - it is for this reason that there may exist a preference to select men for certain positions and women for others. To force an equal pay regime onto situations like this one will unfairly force the decision maker to select in favour of the bias that he/or she holds - exactly the opposite of what the act's intentions are!

 The only way to resolve the situation is to allow the person who is being discriminated against to be able to attain some competitive advantage. So, often when a person, in this case a woman, wants to do a particular job where there may be a bias to select men (the bias may be based on real issues such as physical strength, or on more subtle and even wrong perceptions) the only real advantage the woman could offer is a lower rate in order to obtain the job. By forcing equal pay for equal work, the law is really forcing the hand of the employer in this case to select the man. An understanding of economics will help to find a solution - not the law.

C.M. Heydenrych
September 2015

Sunday, August 16, 2015

42. Stardust Investments

An investment company that focuses on creating a wealth repository for individuals - to enable individuals to contribute to securing an income for themselves if they live beyond the normal points of demise (have funds available to pay for amenities when normal sources have been depleted, and not have to be dependent on the state to do so).

41. This looks interesting

Saturday, August 15, 2015

40. Link to Economics 1A Slides - MANCOSA 15 August

If you have any problems - talk to me proplib

Friday, August 14, 2015

39. Public Sector Economics

Thursday, August 13, 2015

38. Handout 1: Macroeconomics

I have noticed that this link sometimes does not work if you just click on it - just copy and paste it into your brwser in that case.

Saturday, August 8, 2015

37 "Market" failure

Do we talk about “sun failure” when the sun comes up 30 minutes later in winter than in summer? IMPERFECT INFORMATION Just as the sun is not failing us, the market is not failing us when consumers do not have ALL the information available when making a decision. In the normal run of events they will have gathered sufficient information, taking into account the cost (time, money and effort) to do so – whether purchasing a car, selecting a medical practitioner, an estate agent on toothpaste. By calling anything less than the availability of perfect information a market failure opens the door for the government to step in and rectify the “failure”. An action that will cause many more unseen losses and never called “government failure” If we accept that there is a cost attached to obtaining the information – just as the purchaser of any share on the JSE will tell you - then it is clear that that is the way that the world works. Consumers will take the necessary actions to satisfy themselves to the degree that they need to, for them to be comfortable with the decisions that they are taking. Some people need less information and some more – the market normally adjusts to that need. If the Government steps in and arbitrarily sets some packaging contents rules for example – which places a cost burden on manufacturers and suppliers, they put the smaller suppliers, whose only advantage was that they were able to undercut more established suppliers, out of business. These suppliers were also supplying to a market that did not want the requirement in the first place – their customers might not even been able to read! Now they have to pay more for a product that they were able to get cheaper previously. Often these interventions are not beneficial to the poor. In the end the market works best if left alone to deliver maximum individual choice, both from the point of view of the consumer and the supplier. The market is perfectly suited to meet even the informational needs of consumers if the consumer is prepared to pay for it and to do it without government intervention. MARKETS OPERATE IN THE REAL WORLD The notion of “market failure” is based on a theoretical model of “perfect market conditions” (Similar to when the sun “fails” if there is not perfect weather conditions). So far the focus was related to the sufficiency of information. Another prerequisite of the “perfect market is that the information flows instantaneously”. This time lag is impossible to fulfil even in the most sophisticated market systems (price information on the world’s stock and commodity training platforms – as soon as the current price of the most recent trade appears, it is superseded by the next, and the next. The market is not a static event, it is the dynamic process where price levels continuously get adjusted through the supply and demand forces that are interacting. Equilibrium is attained at every point a transaction takes place – and that is at a point that may be the same as the previous transaction, but it may be at a higher or may be at a lower point, depending on the participants in the next transaction. This is not market failure, this time lag is the market. LAGS IN ECONOMIC ADJUSTMENT The second instance of market failure are the lags in economic adjustments. The textbook puts it this way: “Most markets do not adjust very rapidly to changes in supply and demand.” Now this is patently not true – markets adjust at the speed the participants want to change. If there is a change in consumer preference from fixed line communications to cellular communications, that change will be as fast as the participants want to change. There are still individuals that are installing fixed line telephones even today and there may still be for the next 100 years – even though cellular communications may be more convenient and even cheaper. The lag is market driven! There are still people today that use ox wagons – it may be an economic necessity for them in their particular circumstances – there is nothing wrong with a lag. That is how things work - it cannot be labelled a market failure. (Just as the fact that it takes four minutes for the sun’s rays to reach the earth – it cannot be labelled “sun failure”!) In any other system, other than an unhampered market system, these lags will be even longer since the price mechanism will be clouded or absent. EXTERNALITIES This next market failure is a real failure - Market participants do not always fully account for the external costs associated with their actions. Companies that pollute do not in all cases pay for the negative consequences of their actions. The short answer is that they should. But, because the benefit is concentrated - the one company benefits and those that bear the costs are distributed - all the individual households that have to live with for example the smoke that waft over their properties, do not have individual incentive to lay a claim against the company - the cost is too high in relation to the individual benefit - so they bear it and the company gets away by not spending the money to clean up the pollution. If a company pollutes a stream that damages the recreational and irrigation potential of a river, the general taxpayer should not bear the cost, in these cases the Government then steps in with regulations, laws and fines. Carbon emission credits bought by companies is one mechanism that is used to mange the process and ensure that companies carry the full cost of their activities. Only in extreme cases should the taxpayer be expected to carry the cost. The incidence of acid water on the Witwatersrand is a case in point. The original mines and owners are long gone. The "benefits" of the mining has been distributed and is dispersed into society. The society now will have to pay for the rectification. The free market principle is that the consequences of an action should be borne by the actor. NON-COMPETITIVE MARKET CONDITIONS Another "market failure" is the existence of non-competitive market conditions which result in monopolies, oligopolies, monopsonies - (these occurs when a firm has market power in employing factors of production. A monopsony means there is one buyer and many sellers. This is a similar concept to monopoly where there is one seller and many buyers. Governments will again intervene through institutions such as the competition commission, regulations and fines. Again there are often more effective free market solutions if it becomes a problem. Often the solution lies in freeing up the economy rather than trying to regulate it. The reason in South Africa why we have such a rigid and Oligopolistic market in Banks, Cellphone companies, TV broadcast, Beer, Cement and other industries is because of existing laws and regulations that make it difficult to enter the market. Admittedly some industries are protected from competition by high start-up costs, but a huge part of the start up costs are the compliance cost to new companies apart from the legal prohibibtion that exist in many cases. Government protected state monopolies is major stumbling block and cause disasterous "goverment induced market failure". The electricity crisis is a very good example of this. Monoplies are not a "market failure" per se - take Microsoft as an example - they might be dominating the market in certain software today - they have attained the position through staying ahead of the pack and producing what consumers want at an affordable price. They will cease to retain that position if they fall behind - like many before them. KODAK, IBM, Ford Motor company and even De Beers are examples of organisations that may fit into this category. Macro-economic instability is cited as a market failure (Mancosa Economics 1B Study Guide). It says that markets left on their own are slow to react. Is this true? I believe that markets left on their own would correct themselves as fast as the participants want to. It is often governments that may not be able to face the political consequences if that were to happen - that is why the Chinese government stepped in and limited the trade in the shares trading on the Bejing Stock Exchange, that is why the US government viewed some banks as "too large to fail" INEQUALITY With regards to inequality as a market failure let it be suffice to say that North Korea may be more equal than South Korea. If that is seen as a market failure, then let the market fail in distributing poverty evenly. Under free market conditions the poor have never had it so good in countries that have moved towards economic liberalisation. It seems that the sun is shining bright onto those that dare to venture outside.

 C.M. Heydenrych 8.08.2015

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Tuesday, August 4, 2015

36. The Study Guide (Economics 1B)

If you lose the study guide - here it is:

If you wish to return to the Index page CLICK HERE

35. Free Economics Textbook!

If you don't mind adverts in your textbook - try this one :

Sunday, August 2, 2015

34. Poverty

Poverty is a complex problem that should not be trivialised. We must however get some principles straight. So here we go with the first of a series of articles.

Saturday, August 1, 2015

33 Using Wikipedia as an Academic Resource

Go to the Wikipedia Business and Economics portal

Read the stuff there - it is useful.

When quoting Wikipedia in an academic context one needs to be careful. I will talk about the pitfalls later,

32. INFLATION and other things economists agree and disagree about.

Video - At 16:25 Economist agree that inflation is caused by an increase in money supply:

Who benefits from inflation a)the government - it is a hidden tax - they apy and use the better money before it filters down into the economy where people realise that it is of lesser value and b)Debtors benefit by paying off their debts with depreciated paper. c) The greatest burden (in colonial America was borne by the soldiers of the Continental Army, whose wages — usually in arrears — declined in value every month, weakening their morale and adding to the hardships suffered by their families.