The current economic circumstances have a corrolary in the test pilot’s world. Certain types of aircraft instability can be amplified by the pilot due to the nature and timing of aircraft responses to pilot inputs, and the pilots subsequent change in inputs. This is sometimes referred to as PIO or pilot induced oscillation. It is my view that a similar thing is currently happening economically. There are so many mis-matched policy/monetary/fiscal/ regulatory inputs to the system that further actions can result in completely unexpected results. In addition, very large amounts of investment capital have been mobilized to benefit from this increasing volatility, so much so that there is now a purposeful amplification of volatility. The solution is to reduce the uncertainty and complexity of the system, based on long term functional principals.

I am a former MD at Citi, and have a very clear understanding of the need for logical regulation. That is why I am a fervent advocate of returning to Glass-Steagall (not very Ayn Randian of me!). I was there when all the post-depression Banking/Investment banking/insurance firewalls came tumbling down. The result was the placing of shareholder and depositor capital in the hands of speculators that had “heads I win, tails you lose” comp agreements. This, in conjunction with Barney Frank’s willingness to “take a little risk” in government subsidization of housing risk has created a true catastrophy.

To your point on nuclear fusion, it is true of all nuclear-related issues that the government controls everything, and we can see how quickly that technology has evolved (I was trained as an engineer with a nuclear background).

By the way, your last comment about infrastructure being not profitable enough to be run privately. I am a Managing Partner of a Private Equity fund that invests in large capital assets. I can tell you that they can be profitable, and cost much less when a private investor creates them than when a government does. As for education, if you test students coming out of public education, what percentage know anything really useful? How ever we pay for it (public or private) the system is horribly broken and we need to fix it now.

@Guru – Thanks to the magic of the Internet, and before that the printing press, it is possible to acquire knowledge of distant lands without actually physically going there oneself, and without spending years doing the research directly. Now, we can learn from others’ years of research without duplicating it.

Of course there are some instances of severe power deference in the United States or anywhere else, but I am not talking about isolated examples and anecdotes. I’m talking about systemic cultural patterns, which have been well studied and well documented.

Sociological research on Indian subcontinent cultural attitudes towards power and institutions is abundant and well known. Google, for example, “Geert Hofstede,” “Indian subcontinent power distance” and related themes. For a general and more informal discussion of the phenomenon, try Malcom Gladwell’s book “Outliers”.

@Harry Toll – Interesting points, but I must say that I strongly disagree with the libertarian/Ayn Rand “let the economy run wild and everything will be fine” plan. Economic activity exists for the benefit of human society, not the other way around.

It’s true that the economy will expand itself in the absence of regulation, but that is not necessarily a good thing. It does so precisely because it is an entirely amoral system that has no constraints whatsoever beyond self-expansion. Human misery is irrelevant to its expansion. So, the economy must be strictly regulated, or else it is nothing more than a cancer upon us.

This is not to say that any and all regulations are good – most are quite bad. (I live in California, so I have seen plenty of examples of asinine regulations firsthand.) But unbridled private enterprise, with the government relegated to nothing more than policing fraud and contract disputes, is also quite bad. Such a society aggregates wealth in the hands of a small and always-shrinking elite.

And let’s not forget that many, perhaps even most, regulations are created not to benefit society or to regulate the economy in some sane sense for the benefit of society, but by those already established in a line of business (i.e. rich people with capital) so as to create barriers to entry. Regulations must be carefully and thoughtfully structured so as to benefit the society, rather than to benefit some cartel or oligarchy (as with alcohol production and distribution regulations in the US, for example) or some entrenched bureaucratic class (as in Latin America and the Mediterranean, for example.) I’m sure you’d agree that these kinds of regulation are to be avoided. But that doesn’t imply that all regulation or government interference in the economy of whatever kind is necessarily bad.

On a somewhat related note, governments should absolutely be investing in capital-intensive projects that provide great social benefit but for which there is insufficient profit motive or excessive risk for private investors, even if their capital is pooled.

For example, microchips and the Internet have had massive and undipsuted benefits for humanity, but the risks involved in researching the technologies required to make them, and the extremely long R&D cycle that led up to them, were not feasible for private investors. There were much better and less risky opportunities available in traditional sectors, so why would any private investor pay for the decades basic scientific research to make, say, a transistor? So, the government stepped in, in the form of Cold War era research grants funnelled through the military and DARPA. An entire new and hugely profitable industry emerged and was spun off into the private sector.

Going farther back, European colonization was a similar case. Setting aside debate on its morality so as to look at the economics of the situation, it was of unquestionable economic benefit to the colonizers, and it required such a massive amount of capital at first that no private subscription was capable of funding it. So, the governments paid for it initially, and eventually spun off private concerns. The spice trade with Asia worked much the same way.

Today, I would point to nuclear fusion as a sector where the R&D cycle is much too expensive, long, and risky to be able to attract private capital, but where government subsidy could revolutionize the entire energy infrastructure, not to mention spawning a huge new profitable industry that would then be spun off into the private sector.

A parallel case can be made for infrastructure such as highways, roads, and yes, even education. These things provide tremendous benefit to society — economic and otherwise — but are not profitable enough to be run privately. Moreover, some things such as education are almost by definition loss leaders that cannot be profitable if done right. Who would seriously advocate ending free public education and going back to the days when schools were only open to those capable of paying tuition, and so only priests and the rich knew how to read? Can anyone claim with a straight face that that situation would be better for the overall economy?

Cheers,
Paul

How many years did you stay there? How do you support this? When you have audacity, use it wise.

Even if you are able to cite some instances in sub-continent, so is possible in U.S.

Sorry. I know I could have worded it better.

ha ha ha

Harry Toll’s rules are interesting because they’re better than what we have but there is also some debate on some of them.

1. Have the money supply grow in concert with economic growth
2. Don’t subsidize products or industries
3. Don’t tax capital
4. Enforce laws against fraud and monopoly
5. Don’t allow deposit-taking institutions to speculate
6. Don’t force banks to lend to people who cannot pay back the money or provide risk guarantees to create an incentive for them to do so
7. Maintain a balanced budget.

According to the Austrian School – Mises.org – 1. is wrong increases in the money supply aren’t helpful. They’re something the market has to adjust to. In fact the boom bust cycle is the market adjusting to increases in the money supply.
4. is correct if we accept that only the state or government can make something a monopoly.
5. One man’s speculation is another’s investment. The Austrian School holds that fractional reserve banking by creating money or credit out of thin air is what creates boom busts.

“In 1980, I had the privilege of advising Prime Minister Margaret Thatcher to ignore the demands of 360 British economists who made the outrageous claim that Britain would never (yes, never) recover from her decision to reduce government spending during a severe recession. They wanted more spending. She responded with a speech promising to stay with her tight budget. She kept a sustained focus on long-term problems. Expectations about the economy’s future improved, and the recovery soon began.” a quote from Mr. Allan Meltzer, professor of economics at Carnegie Mellon University, a visiting scholar at the American Enterprise Institute, and the author of “A History of the Federal Reserve” (University of Chicago Press, 2003 and 2010).

Second, Economics is bunk, or at least Mr. Athrea’s approach to it is bunk.

From long before he was an economist at Citi I was there, having founded in 1987 a business investing in the capital assets of cyclical industries that grew to $7BN in assests with $2.5BN of Citi proprietary equity, which never had a year with less than a 35% ROE (at Citi’s leverage) and lost less than $1MM over nearly 20 years. How was this possible? It wasn’t because I had a Phd in Economics from Harvard (I was trained as an engineer at Purdue). It happened because all that matters in economics is simple supply and demand. If there is too much of something, the price goes down, and vice versa. Full stop.

I have no problem with people who want to be Phd’s. I do have a problem paying their paychecks from the public purse to theorize about things they have no practical experience in and, worse, their attempt to make policy that will “manage” an economic process to some “greater good” (eliminate the business cycle, redistribution of wealth, whatever). We will lay to the side for now the issue of intellectual arrogance and the blindness to reality that it breeds, although Mr. Althreya would do well to bring his lofty self esteem back into the breathable atmosphere (his weak attempt at self deprecation was unconvincing).

As for economic policy, there are only seven rules to follow.

1. Have the money supply grow in concert with economic growth
2. Don’t subsidize products or industries
3. Don’t tax captial
4. Enforce laws against fraud and monopoly
5. Don’t allow deposit-taking institutions to speculate
6. Don’t force banks to lend to people who cannot pay back the money or provide risk guarantees to create an incentive for them to do so
7. Maintain a balanced budget.

If we do the above things consistently over a long (10 year) period, the volatility of the economy will stabilize. It will be boring, and the traders will have to find a new job with pedestrian bonuses (including Mr. Soros), so will the economists for that matter, but this will create a stable and sustainable economy.