Friday, 29 March 2019

Introducing the subject of Economics

In order to really learn about something, it is desirable to understand it’s relevance to our life.  In other words, it is easier to understand a thing if we know how it helps in our daily life.

When it comes to ‘subjects’, I used to wonder what is ‘Economics’?  It is not a natural one like Physics, where one can see the effect of gravity on a jumping ball, or like Biology, where there are living things that grow and multiply.  It is not a primary tool like Language which is used to communicate with others, or Mathematics which is used to count and count faster.

‘Economics’ hence appeared to be a man-made subject. But things like money, prices of goods, savings etc. have been directly affecting our lives and we can ignore them only at our own peril.

I think the best way to understand economics is to see it as a language we use to communicate regarding ‘how much we value things or acts’.  Some communications are understood only by the giver and the receiver – say a birthday card.  The same item does not present the same value for a third person – you cant pass on the card to other person.  So the language that will be common to all will be a ‘currency’ or ‘money’. 

When someone sells a product for say Rs.100/- they communicate that it holds a value of Rs.100/- in their perception.  When a buyer declares that the thing is cheaper/costlier than its worth, the perception changes.  If the seller sticks to the value he/she thinks it is worth, and doesn’t change the price, it is termed cost/supply driven.  If the seller changes the price based on what the buyer thinks it is worth, then it is termed market/demand driven.

In other words, in a cost driven scenario, if a person sells a product for Rs.100/-, he/she communicates that Rs.X/- is the cost incurred and Rs.(100-X)/- is the value that he/she thinks has been added by making the product.  In a market driven scenario, a person may be ready to buy the product for Rs.90/- and not any more because he/she thinks that the product is only worth that much, immaterial of the cost incurred.  In such a scenario, the seller has to find ways and means to bring down the cost to Rs.(X-10)/- in order to get the value he/she thinks is deserved.

Either way… ’Economics’ should have helped the Humans to achieve lesser cost of living… so that poor people can afford at least the basic necessities of life.  But we commonly hear our elders saying something like… in our days, 1kg of tomato was Re.1 !!!  For all the fancy terms, definitions that this subject has, it has never brought down the price of the products apart from few exceptions and that too mostly items of luxuries.  ‘Economics’ as a subject appears to favor the rich rather than the poor ?!?

Theoretically, it is possible for every one to bring down their prices resulting in products becoming cheaper than what it was.  A person with Rs.1000/- could then be equivalent to a millionaire of today.  Such a thing is not happening because it requires each and every one to do it and even if one person does otherwise, the scheme falls off.  Also, it is not easily understood by all.  While the reverse is easy to understand !!!  A person spending 10 out of 100 rupees for food can continue spending 100 out of 1000 rupees for food.  Inflation is hence naturally sought after.

Okay, but see what the government is doing? Prudence says that one should not spend more than one’s income.  We do need to save or keep some money for unforeseen emergencies.  But the government is always spending more than what it has !!!  some fancy term ‘deficit financing’.  At the same time people cry that ‘fiscal deficit’ should be under control.  Why should government spend more at all?  Let it keep a ‘fiscal excess’ !!!  The country’s credibility will grow ?!?

To understand this, one needs to see where does the government spend the money.  If it spends on infrastructure or public goods where no private investment is coming up, but the projects will help many businesses to grow, then it is okay to do ‘deficit financing’.  The government also expects people to bring in new products or services to the market and people will need more money to buy those things.  The government then can ‘print’ more money and ensure that the prices don’t soar.  Thereby the government can bridge the deficit too.  Two birds in a stone !!!
However the following two questions come in mind….
1, Why doesn’t the government print money and give it to the poor directly?
2, Inflation is good but why government doesn’t want the prices to soar? 

The most likely reasons are…. If the government needs to give money directly to the poor, the mechanism of identifying the poor has to be water tight.  Even then, it will be counter intuitive, as there will be reward for being poor and doing nothing.  In a country like ours, with large population of poor, the total amount required will be humongous.  With regard to inflation, a little bit of inflation is okay but if prices soar, the poor are likely to be the worst affected persons.

And like the Chinese proverb, it is better to teach a man about fishing rather than giving him a fish.  So expenditure in improving the skill set of the people is a good place for the government to invest even with ‘deficit financing’.

(This is an attempt to open up the subject ‘Economics’ and understanding how it affects daily life and governance.  Feedback is most welcome <ravichanderirts@gmail.com>)

1 comment:

  1. Wonderful blog sir. Explained it in simple language and examples. Please keep writing more sir👍

    ReplyDelete