19. Nobel Prize winners in Economics

Nobel Prize winners in Economics The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

1971

Simon Kuznets "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development" 1970 - Paul A Samuelson. 1969 - Tinbergen

18. Per Bylund on Inflation

http://www.lewrockwell.com/2008/08/per-bylund/inflation-research-as-propaganda/

There should be no surprise to readers of LewRockwell.com that the State statistics on inflation seek to cover up most of the problem. However, this article is not on government statistics (or propaganda, which is probably a better word for it) but on economics research on the phenomenon of inflation. Libertarians as well as Austrian economists would agree that inflation is a problem that needs to be dealt with (i.e., government needs to stop meddling with the economy), and we often tell the story of how inflation "eats up" wealth and creates imbalances in the market place while offering great opportunities for the State to increase its powers and further strengthen its hold on our society.

We often stress that the definition of inflation used by both the State and the economics profession is "incorrect" and that the "general increase in price levels" definition should be replaced by the Austrian "increase in money supply" definition. It is true that the latter is a whole lot more correct in both explaining and describing the problem while pinpointing what is really going on and how these problems could be overcome. However, it is not simply the fact that the generally accepted definition is "wrong" — it is also "evil" in that it includes quite a bit of propaganda for State control of the marketplace and the rest of society.

It should be clear to anyone with some knowledge in how the economy works that all the individuals in it work together like an invisible hand to produce goods and services and that they tend to do so ever more efficiently. This is true even in a regulated market, which is why even monstrous welfare states talk about the importance of and try to "encourage" economic growth. The concept is a bit confusing, though, since the economy doesn’t only grow — "it" strives to get increasingly efficient in the use of resources in order to produce goods and services of [even greater] value to consumers. Such increased efficiency is generally achieved by entrepreneurs, be they capital owners or labor workers, and innovators finding new ingenious ways of using the resources available.

In such a market the natural tendency is for prices to fall — anything else would be incomprehensible. Even in the world of neo-classical economics this is a fact despite the endless calculations on fixed cost functions and production technologies. Competition spurs cost-cutting and efficiency-increasing measures for the actors to gain advantages in the market through satisfying consumers’ wants by offering better products at lower cost. So how could prices ever increase in such a setting?

Yet the definition used for inflation is the general increase in prices. Of course, even those trained in mainstream neo-classical economics should realize such a phenomenon is a symptom of something being wrong. But what is commonly overlooked or not understood (or at least not mentioned) is that inflation is not something going wrong as shown in price increases — it is wrong because prices don’t fall. In other words, if inflation is taken as only the price increase the statistic necessarily and systematically overlooks the natural price fall that is also a part of inflation.

If prices in the market would naturally fall by 5% in a specific year but we instead experience a 5% increase in prices, the real "price increase inflation" isn’t the experienced 5% increase compared to the level of prices the previous year but the new level compared to what the level would have been, i.e. 105%/95% = 10.5%. In this simple example the official inflation statistic would only take into account less than half of the real price increase inflation.

The inflation statistic of 5% in the example doesn’t take into account that the market is never static; it simply compares the price level of one year with the price level of another year as if nothing has happened: the cost and production functions are the same (i.e., competition has no effect), the money supply is exogenous or unimportant (i.e., printing more money has no effect), and time has a "reverse" effect (it would obviously be better to always sell goods at a later time while producing as early as possible since all prices go up — the best thing you can do is horde and "never" sell).

It is true that such a world as the one implied by the inflation statistic is very neo-classical in that it is so oversimplified that it doesn’t make sense at all (but allows for taking nice derivatives to optimize abstract functions). It is also true that it is literally impossible to tell how much prices would have fallen, which means the inflation statistic is nowhere close to the real inflation rate and also that it is impossible to even guess how wrong it is.

For obvious reasons the State benefits quite a lot from using this definition of inflation. After all, it covers up most of the effects of its tampering with the market. But why in the world would anyone doing economic research use such a statistic that is so totally flawed? One possible answer to this question is that the economics profession (generally speaking) is not about economic truths, but aim to serve the State through providing research on how it can "optimize" its policies to best take advantage of the market processes. If this is the case, then the economics profession overall should know little about how the market really works — and what would cause it to fail.

Per Bylund [send him mail] is a Ph.D. student in economics at the University of Missouri and the founder of Anarchism.net. Visit his website www.PerBylund.com or his blog where he comments on this article and more.

17. Youth subsidy

At best it is a short term solution. The longer term solution is economic growth. Economic growth is actually not difficult to achieve. Remove the obstacles in the way of economic growth. Individuals will take the actions reqired. What are the obstacles to economic activity and growth? In South Africa there are just myriads and myriads of these obstacles. Many are relics of a colonial and Apartheid past and many of these obstacles have been placed on the statute books by a government with good intentions but that have a limited understanding of Free Market Capitalism. I dare the government to take a small area in a depressed area - say rural Transkei and remove ALL impediments to economic activity - no labour legislation, no zoning requirements, no permits, minimum tax, and even legal marijuana, and so on. Ensure that effective and efficient policing and legal processes exist to ensure that any use of force (slave labour, child trafficking, theft, fraud) is controlled. I guarantee that this area will become the most prosperous and wealthy part of the country in a very short time.

16. Dumping

If food (often sponsored by the country of origin's tax payer) is donated to citizens a poor country it is called foreign aid and is lauded and encouraged. When (taxpayer) subsidised food is exported and/or sold below cost to citizens of a poor country it is called "dumping" and is condemned and prevented? Please tell me what the essential difference is.

For the serious student - here is an interesting situation of "dumping" by American chicken producers on the South African market. http://www.cato.org/publications/free-trade-bulletin/antidumping-fowls-out-us-south-africa-chicken-dispute-highlights

My personal view is - dump your cheap chicken on me! In this case I believe that we have an opportunity to export "white meat" to the US and earn higher prices on that market. Perhaps someone in the chicken industry in South Africa can enlighten me. The focus on the flow of money rather than the flow of value (represented by goods and services) by economists when looking at trade is a fundamental mistake that analysts make when analysing trade between countries. The gain from imports is always larger than the loss in money or currency! This is always true otherwise the trade would not have taken place in the first place! This holds true whether one is talking about consumer goods or capital goods.

Another point that needs to be kept in mind when talking about "cheap" imports. When a country imports "cheap" (in price terms) one is importing goods that is of relatively high value in the sense that local producers cannot compete by producing similar goods at competitive prices. The effect of this is that local productive capacity can employed in producing other products that will be of higher value (products that are valued more highly by customers).

There is no such thing as unemployment in a free market economy - just as there is no such thing as unsold goods in a market where there is no reserve price. As an exapmple one can look at the implosion of the Steinhoff share price there were sellers and buyers from R 120 per share right down to R 1,07! In the same way if a person cannot find a job, one reason could be that the price is to high for the value produced.

Cato Institute:

https://www.cato.org/publications/free-trade-bulletin/antidumping-fowls-out-us-south-africa-chicken-dispute-highlights

15. Education and Economic growth

Scores on science tests have a particularly strong positive relation with economic growth. Given the quality of education, as represented by the test scores, the quantity of schooling — measured by average years of attainment of adult males at the secondary and higher levels — is still positively related to subsequent growth. However, the effect of school quality is quantitatively much more important. Barrow RJ, Education and Economic Growth, on http://www.oecd.org/edu/innovation-education/1825455.pdf

14. Developing a developing country

There are many ways that developing countries can overcome difficulties when trying to compete with developed countries.

1. The first way is to concentrate on producing what they have a) an absolute advantage in and b) produce what they a comparative advantage in. (explain and define these terms in your answer). This means that they would continue producing the raw materials that they could export to the developed countries that have either run out of those raw materials (natural resources like iron ore, copper, platinum, and even timber) or never had in the first place (oil to Germany).

2. The second way is to start beneficiating these products if economically viable to do so. This can be done by increasing the skills base and developing the capacity to do so by importing the skills and technology - this will help to improve ones competitive advantage on home ground. Competitive advantage can be improved by upskilling the local population - so that they gain the needed advantage. They can do this by making it easier to attract foreign skills (by not placing barriers in the way to do so), attract foreign direct investment (by lower tax regimes) and importing technology (by not placing onerous tariffs and levies on imported capital equipment)without unduly worrying about foreign exchange imbalances. The idea is similar to a start up business having to obtain external finance to get going.

3. The third way is to capitalise on the lower cost of labour that is usually present in most developing countries (not in SA because of the fact that unions have gained political pull and are able to make SA labour costs uncompetitive in terms of labour productivity). Labour costs can however be reduced by not placing tariffs on basic foodstuffs (like the 80% chicken tariff) which pushes up the cost of living for SA labourers, which in turn affects cost inflation and salary demands; and makes local production not able to compete with other developing countries.

4. In developing countries where there are high levels of unemployment minimum wages tend to keep labour costs artificially high. Labour rates should be allowed to go down and find their levels where all resources are fully employed. This will be at lower levels than the controlled minimum wage levels and have a dramatic effect on the county’s ability to compete in the international marketplace. This is especially important for developing countries that are far away from major markets such as the US, Europe and Japan.

5. Developing countries can form alliances such as BRICS, SADC to reduce obstacles in trade between such markets.

6. One reason that developing countries do not fare well is a lack of infrastructure. Here Fiscal policies could be redirected from consumer spending (social grants) to infrastructure development through capital projects (but also not in the way that China tried to do it under Mao in the Great Leap Forward and Stalin in his attempts to industrialise Russia - the key lies in freeing up the economy to private initiative and reducing the heavy hand of the state when it comes to taxes and regulations.

7. Developing countries can also reduce the cost of doing business – by reducing the cost of governance – in other words extract less tax from the productive sector of the economy to fund unproductive government initiatives. This will place such a country in a more competitive relationship to others. Mauritius is an example in this regard.

8. Some developing countries have had tremendous success in establishing Free Trade Zones where all onerous employment regulations, tough foreign trade requirements and capital restrictions as well as high tax levels have been reduced or completely eliminated. Much of China’s growth has been because of the liberalisation of these policies, including the protection of private property rights.

Charl Heydenrych charl.heydenrych a t mancosa co .za

13. Measuring the Economy: GDP

GDP refers to the total market value of all the final goods and services produced and sold in within the borders of a specific geographical area (such as within the borders of a country) within a given period - normally a year. Why is it calculated? Often students say it is to enable governments to manage the economy. Governments don't manage economies - they are pretty powerless to do so and it is not their function to do so. At best they can only create the climate in which individuals and firms can do business and set up some rules as how production and trade can take place - usually modern governments do this by removing the obstacles in the way of production and trade. These conditions relate to the monetary and fiscal frameworks of a country. Countries that have less government involvement in the economy have higer GDP growth rates than countries with larger government involvement (EFW Report, 2013). A low tax regime would for example attract more Foreign Direct Investment than contries with high taxes. GDP is measured through various methods that attempt to measure economic activity during the different stages of the circular flow of income and expenditure. One point of measurement is when expenditure takes place. So what is measured is all the expenditure by the main actors on final goods - this includes the consumption expenditure by individuals, expenditure by governments and net purchases by foreigners (less imports). C.M. Heydenrych Johannesburg 2013.