Welfarism 19: Consumption-led Growth and Direct Welfare

There was an old article in the WB blog that was posted by three friends -- an economist, a political scientist and an IT whiz guy -- in their facebook walls last week. I didn't notice that it was posted in February 2008, until I dropped a second comment to it, which the web administrator kindly posted.

The paper was entitled Rising growth, declining investment: the puzzle of the Philippines by Alessandro Bocchi. It is an attractive title and he showed this chart in his paper,

From 1980 to 2006, GDP growth was on up-down-up-down trend but with sustained growth, while investments as a share of GDP (I/GDP ratio) has been declining to less than 15 percent by 2006.

Mr. Bocchi offered these explanations why it happened:

1.    The public sector cannot afford it;

2.    The capital-intensive private sector (i.e.: those businesses that, when operating, utilize more capital than labor) does not want to expand that fast; and

3.    The rest of the private sector does not need it.

In my earlier article here, Fat-Free Econ 1: Macroeconomics for Micro Concerns last March 08, 2012, I noted that GDP growth was mainly due to our consumption-led economy. Going back to an Econ 11 basic macroecon formula, 

 Y = C + I + G + (X-M) 

C or private consumption expenditure is 73 percent of Y or GDP. So that even if government  consumption G, or public and private investments I, will grow slow or even flat line, ie, zero growth, but if C will grow fast, then GDP can grow fast. 

The writer probably forgot this equation, they just want to push more WB loans to the Philippine government to expand G and finance further more public I.

C mainly came from domestic household savings, but a substantial amount also comes from  OFW remittances. Lots of money from such remittances are converted into direct household consumption like food, housing, education, healthcare and cell phones/telecom services. Part of such remittances also go to micro I like buying a new tricycle, a jeepney, a tractor or pumpboat. Or putting up variety/sari-sari store, a rice mill, etc. which are often not tracked by the national accounting system. 

Another question will be: If OFW remittances will continue rising but formal I will flat-line or even decline further, can the C-led growth be sustained?

I think the answer is Yes, even though the assumption that I will decline further may not be correct. With more remittances, it is possible that domestic production for certain goods and services will remain flat, or ever decline, but C will remain high via larger importation of goods and services. It is hypothetically possible that there will be zero local production of computers and cellphones, not even an assembly plant, everything, 100% are imported. But since the foreign currencies are coming in regularly to pay for those huge importation, then lots of shops and malls of imported products will arise. The big amount of remittances will snap those imported goods and services, and GDP can grow. 

In short, there is no "puzzle" or mystery to the Philippines' GDP growth. 

People adjust to a corrupt and inefficient government here. Public education quality from elementary to tertiary levels is generally poor, except for a few like a science high school and the University of the Philippines (UP). So people invest in private education -- tutorials, private schools from pre-school up to university.

Public healthcare system is also of poor quality generally except for a few health centers, so people invest in private health insurance (HMOs) and high out of pocket spending, especially for diagnostic tests, physician fees and medicines.

Public roads and infrastructure are of poor quality too, so people invest in new cars, even SUVs with good suspension system to withstand many ugly roads. Or people take the toll roads, expensive rates but road quality is world-class.

These household adjustments to an inefficient and corrupt government help drive the C upwards. Household welfare is done by the households themselves. Government welfare programs are mostly directed to the political supporters of the politicians in power, especially those from the administration party.

Below is my comment to the WB blog article, and the reply of the web administrator.

Consumption led growth

SUBMITTED BY NONOY OPLAS ON WED, 2012-03-28 04:30.

This is the 2nd comment that I will post here, you disapproved or censored my earlier comment. There is no "puzzle", Remember your basic econ equation, Y = C+I+G+(X-M). Philippine economy is mainly C or consumption-led. C is 73 percent of GDP, so that even if I or G will grow slow, or even flat-line, but if C will grow fast, GDP can grow fast. What is puzzling about that?

Now you may ask, "is this sustainable?" Yes, it is, because a big source of C is OFW remittances, tens of billions of $ are coming in yearly, increasing trend. Many of those remittances are spent for household consumption like food, education, healthcare. But a big portion is also spent for private I like a tricycle, a jeepney, a sari-sari store, which the national accounting system is not able to properly account. No puzzle, no mystery. Only cute article title to grab public attention.

• reply

Re: Consumption led growth

SUBMITTED BY CLAUDIA GABARAIN ON THU, 2012-03-29 07:46.

Dear Nonoy, sorry we didn't notice the first time you sent your comment. These past few days we've been inundated with spam email and they just buried yours. Thanks for taking the time to write again.
By the way, Alessandro Magnoli, the author of the piece, left the Bank a while ago, so it's quite unlikely that he'll reply to it.
Thnx for your interest,

-- Claudia

Blog Admin

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See also:
Welfare Economics: Philippine Institutional Issues, November 14, 2011
Welfarism 18: Hong Kong's Expanding Government, March 27, 2012

Earth Hour 5: Celebrating Darkness is not Wise

Darkness is cool if you're in some far flung areas and want to commune with nature -- the fireflies, the infinite stars on a cloudless night, listen to various sounds of animals and bugs like frogs and crickets, and so on. But if you're in urban areas or in places where work is impossible without electricity (hospitals, malls, offices, etc.), darkness and power outage is a curse.

Now a big environmental NGO has spread a new fashion of turning off lights one hour each year, called the "Earth Hour" (EH) by the World Wildlife Fund (WWF), and many people around the world have rejoiced at their initiative. But their biggest fans actually are in North Korea and many cities in Africa. There, people have no electricity many hours a day, 365 days a year. They have very power plants and oil-fed generators that emit lots of CO2 that contributes to global warming and climate change. So the guys there are great saviors of the planet.

Before going to the EH campaign, I will post 3 brief papers from 3 different sources about the recent global temperature, the role of clouds on global temperature and climate (hey, it's been almost 3 weeks of cloudy sky here, sometimes rainy days, in the supposedly dry-hot-summer month of March), and Arctic sea ice extent. Is it true that the speed of ice melt there will soon result in an "ice-free" Arctic summer in just a few years?

This is a bit long post, so get your popcorn or sandwich and favorite drinks :-)
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(1) http://www.Real-Science.com/winter-that-wasnt-was-the-coldest-since-1993

“Winter That Wasn’t” Was The Coldest Since 1993

Posted on March 29, 2012 by Steven Goddard

Time Magazine called this past winter “the winter that wasn’t.” So did Joe Romm and lots of other insular global warming rednecks in the US.

Satellite data shows that winter 2011-2012 was the coldest globally since 1993, and eighth coldest on record.

www.remss.com/data/msu/monthly_time_series/RSS_Monthly_MSU_AMSU_Channel_TLT_Anomalies_Land_and_Ocean_v03_3.txt

(2) http://hockeyschtick.blogspot.com/2012/03/new-paper-shows-clouds-have-negative.html

MONDAY, MARCH 26, 2012

New paper shows clouds have a significant negative feedback on temperature

A paper published last week in the Journal of Climate utilized satellite measurements to demonstrate that European hot summers since the 1980s are associated with a reduction in cloudiness. These observations corroborate other recent papers showing that clouds exert a negative feedback on global warming. Alarmists [such as the 'Skeptical Science' site here] hypothesize that clouds exert a net positive-feedback leading to a 'runaway greenhouse effect', but observational data from multiple papers* have shown that clouds instead exert a strong net negative-feedback cooling effect on the climate.

*Lindzen & Choi, Spencer & Braswell, Allen, Tang et al [below], others

Journal of Climate 2012 ; e-View

doi: http://dx.doi.org/10.1175/JCLI-D-12-00040.1

European hot summers associated with a reduction of cloudiness

Qiuhong Tang¹

Institute of Geographic Sciences and Natural Resources Research, Chinese Academy of Sciences, Beijing, China

Guoyong Leng

Institute of Geographic Sciences and Natural Resources Research, Chinese Academy of Sciences, Beijing, China, Graduate University of Chinese Academy of Sciences, Beijing, China

Pavel Ya. Groisman

National Climatic Data Center, Asheville, NC, United States

Abstract

A pronounced summer warming is observed in Europe since the 1980s that has Been accompanied with an increase in the occurrence of heat waves. Water deficit that strongly reduces surface latent cooling is a widely accepted explanation for the causes of hot summers. We show that the variance of European summer temperature is partly explained by changes in summer cloudiness. Using observation-based products of climate variables, satellite-derived cloud cover and radiation products, we show that during the 1984-2007 period Europe has become less cloudy (except of northeastern Europe) and the regions east of Europe have become cloudier in summer daytime. In response,the summer temperatures increased in the areas of total cloud cover decrease, and stalled or declined in the areas of cloud cover increase.Trends in the surface shortwave radiation are generally positive (negative) in the regions with summer warming (cooling or stalled warming), while the signs of trends in top-of-atmosphere (TOA) reflected shortwave radiation are reversed. Our results suggest that total cloud cover is either the important local factor influencing the summer temperature changes in Europe or a 

major indicator of these changes.

(2) http://www.drroyspencer.com/2012/03/could-arctic-sea-ice-decline-be-caused-by-the-arctic-oscillation/

Could Arctic Sea Ice Decline be Caused by the Arctic Oscillation?

March 22nd, 2012 by Roy W. Spencer, Ph. D.

While the IPCC claims that recent Arctic sea ice declines are the result of human-caused warming, there is also convincing observational evidence that natural cycles in atmospheric circulation patterns might also be involved.

And unless we know how much of the decline is natural, I maintain we cannot know how much is human-caused.

In 2002, a paper was published in the Journal of Climate entitled Response of Sea Ice to the Arctic Oscillation, where the authors (one of whom, Mike Wallace, was a co-discoverer of the AO) shows that changing wind patterns associated with the AO contributed to Arctic sea ice declines from one decade to the next: from 1979-1988 to 1989-1998.

The Arctic Oscillation involves sea level pressure patterns over the Arctic Ocean, North Atlantic, and North Pacific. Since sea ice moves around with the wind (see this movie example), sea level pressure patterns can either expose or cover various sections of the Arctic Ocean.

When there are many winters in a row with high (or low) pressure, it can affect sea ice cover on decadal time scales. Over time, ice can become more extensive and thicker, or less extensive and thinner.

There is a time lag involved in all of this, as discussed in the above paper. So, to examine the potential cumulative effect of the AO, I made the following plot of cumulative values of the winter (December-January-February) AO (actually, their departures from the long-term average) since 1900. I’ve attached a spreadsheet with the data for those interested, updated through this past winter.

Drug Innovation 1: On Cancer, Bioequivalence and Clinical Trials

To distinguish discussions related to intellectual property rights (IPR) like compulsory licensing, I am starting a new thread in this blog just on "Drug Innovation". This is slightly different from the thread on "IPR and Medicines".

My elder brother who died of prostate cancer more than five years ago would have been 57 years old this week had he survived the disease. His diabetes plus emotional sadness when his wife died several months earlier due to colon cancer further aggravated his condition.

My other relatives, wedding godparents, friends, family members of friends, also died of cancer. There are different types of cancer, probably about 200, and all of them are dangerous. Perhaps all of us have cancer cells in our body, but our immune system are just strong enough to kill those cells, or at least keep them at bay and prevent them from expanding and invading other organs of our body. Our immune system is our best physicians, our best medicines, our best disease examiner, all rolled into one. It is very important therefore, that we keep our immune system strong and efficient, by not injecting too many substances that can weaken them -- like cigarettes, alcohol, fatty food and so on. A little of these substances, like when we attend parties, would be fine and our immune system should be able to repair minor damages. It is the excessive use of such substances that can create more damages in our body.

Medicines and vaccines help boost our immune system in killing undesirable cells like cancer. Usually, old medicines are less efficient in doing this job as human understanding of each disease improve through time. Thus drug innovation is a must. Diseases mutate and evolve, so treatment against such diseases must also evolve.

The business of medicine innovation should be depoliticized whenever possible. There are existing rules governing patent, trademark, copyright and other IPRs, all players, innovator and generic manufacturers especially, understand those rules and do their respective business plans and marketing that are compliant with those rules. That is why I question and oppose moves or proposals that governments should issue compulsory licensing (CL) and related political schemes that disrespect private property rights.

What governments should do, is encourage the entry if not proliferation, of more innovator companies. If there  will be 20 or 50 different innovator companies that develop and roll out new medicines (on top of existing, off-patent drugs) per disease, then the patients will greatly benefit. Competition among such innovator companies will bring down prices of such innovator drugs. Then another round of competition will follow once the patent expires as dozens if not hundreds of generic producers come in to produce their own branded drugs for each disease category.

I am posting below three articles by Reiner Gloor in BusinessWorld on dates indicated. Reiner is the Executive Director of the Pharmaceutical and Healthcare Association of the Philippines (PHAP), the federation of mostly innovator pharma companies in the country. The three papers are:
1. Beating Cancer,
2. It all begins in innovation, and
3. The value of clinical trials.

The subject of bioequivalence and related tests for safety and efficacy of generic drugs before they will be introduced to the public are discussed. These are useful information that need to be shared to the public.

The most expensive drugs are those that do not work and hence, do not kill a particular disease, no matter how cheap they are. Because an ailing patient would have more complications as the disease inside his.her body is not treated and allowed to expand and inflict more damage in other internal organs of the patient.
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(1) http://www.bworldonline.com/weekender/content.php?id=46080

Posted on 06:05 PM, February 02, 2012

Medicine Cabinet -- By Reiner W. Gloor

Beating cancer

Major non-communicable diseases were among the important health issues that gained the attention of world leaders in 2010. In a United Nations summit, political leaders agreed to a plan of action that sought to address alarming trends involving four major non-communicable diseases (NCD) that have developed to become the world’s biggest killers.

The four major NCDs are cardiovascular diseases, diabetes, chronic respiratory diseases, and cancers that have altogether prematurely claimed the lives of 38 million people, representing about 63% of the total global deaths in 2008. Studies indicate that the major NCDs are affecting the developing world and lower-income populations hardest.

This is particularly true for cancer, which accounted for about 7.6 million global deaths in 2008. By 2030, cancer deaths are also expected to soar to 11 million worldwide. The World Health Organization (WHO) also disclosed that about 70% of all cancer deaths occur in low- and middle-income countries.

Cancer can affect any part of the body. A defining feature of cancer is the rapid creation of abnormal cells that grow beyond their usual boundaries, and which can then invade adjoining parts of the body and spread to other organs. This process is referred to as metastasis which is the major cause of death from cancer, the WHO said.

Locally, the Department of Health recently led the observance of the National Cancer Awareness Week in a campaign to boost public consciousness on the disease. Such an awareness drive is important specifically for the Philippine Society of Medical Oncology (PSMO), which considers information as a keystone to preventing and treating cancer.

The need to raise awareness on cancer has become more evident with the GLOBOCAN Project report, which estimated that there had been more than 51,000 cancer deaths in the Philippines in 2010.

The GLOBOCAN Project, which provides global incidence of, mortality and prevalence from major types of cancer, reported that leading new cancer deaths among Filipinos in 2010 include those involving the lung, liver, breast, colon/rectum, leukemia stomach, cervix uteri, brain, prostate and pharynx.

Among Filipino men, lung and liver cancer comprise 43% of all new cancer deaths. These top two killer cancers affected more than 12,000 Filipino men.

On the other hand, breast cancer was the number one cause of new cancer deaths among Filipino women also in 2010. It is estimated that more than 4,000 Filipino women died of breast cancer or 18% of all total deaths during the same year. Around 2,197 women and 1,984 others succumbed to lung and cervical cancers, respectively.

Breast cancer also topped the list of new cancer cases in 2010 followed by lung, liver, colon/rectum, cervix, leukemia, stomach, prostate, brain and ovarian cancer. The top 10 leading sites comprise 68% of all new cases.

Despite the threats posed by cancer, the disease can be reduced and controlled by implementing strategies for prevention, early detection and care for patients with cancer. These include modifying key behavioral and dietary risk factors as well as early detection and screening tests which are important in the diagnosis and treatment before cancer becomes advanced. Vaccination against human papilloma virus (HPV) and hepatitis B virus also help in cancer prevention.

PSMO President Dr. Felycette Gay Martinez-Lapus explained that the fight against cancer requires a collaborative effort among the physician or physicians, the patient, the patient’s family and friends.

She added that treating cancer is a delicate balancing process. The general aim is to reduce tumor growth while ensuring that any potential side effects do not compromise the patient’s quality of life to the extent that the treatment does more harm than good.

Dr. Martinez-Lapus acknowledged that in recent years, there has been a surge of innovative drugs which has forever changed the landscape of cancer treatment.

She said that as opposed to about 40 years ago, life expectancy have increased with new medicines that target the cancer cells directly. Today, targeted therapy is more precise in that it is formulated to act against a specific type of cancer unlike previous treatments.

At the moment, researchers are working on more than 800 innovative medicines that are either undergoing clinical trials or regulatory review. Due to these developments, cancer can now be better managed and even beaten.

Welfarism 18: Hong Kong's Expanding Government (Lion Rock 1)

Hong Kong is generally known for its free port, free trade economy. Certain goods and services that are not available, or available but at a higher price in many countries, are accessible in Hong Kong. That's the main attraction of this small population but big north-east Asian economy, aside from its promulgation of the rule of law.

There is one free market think tank in HK, the Lion Rock Institute (LRI, www.lionrockinstitute.org). The founders and key officers there are my friends, like its Chairman and Executive Director, Bill Stacey and Peter Wong, respectively. LRI has been engaging the HK public and government officials of the free market advantage of their economy and that it should not divert from this policy. LRI has campaigned against the politicization of wages via the minimum wage law, the creation of a new bureaucracy called the anti-trust commission, among others.

Below is the most recent article written by LRI Chairman, on the threats of an expanding HK government. He said that government expenditures now have reached 21.4 percent of GDP. This is is unusual for a supposedly free trade economy.

Some groups here in the Philippines will now say that our government expenditures of about 17 percent of GDP is now smaller than that of HK. This is wrong of course. That figure is only for the national government. Expenditures by local government units (LGUs) -- provinces, cities, municipalities and barangays -- are rising as they have various sources of local revenues like the real property tax, business permit taxes and fees. The bureaucracies in many LGUs are actually expanding faster than those of many national governments.

The expansion of the HK government, or any government in the planet, is mainly related to its welfarist and forced equality goals. Mandating a minimum wage law for instance would mean expanding the existing labor Department/Ministry bureaucracy to have more personnel who will inspect or monitor hundreds of thousands of private enterprises. Expanding government infrastructures when private toll road companies can do the job with the minimum politics involved, would mean expanding the public works/infrastructure bureaucracies.

Below is Bill's article.

PS: Hong Kong is the nearest foreign economy to Manila, just 1:40 hour by plane, or about the same flying time  from Manila to Davao City in the south. Everyday, thousands of people fly between these two cities served by dozens of daily flights from different airlines.
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http://www.lionrockinstitute.org/english/index.php?option=com_content&view=article&id=268:too-much-government-is-corrupting&catid=40:opeds-a-columns&Itemid=3

Too much government is corrupting

Next Magazine (Second opinion A002, 2012.3.15)

By Bill Stacey *

The people of Hong Kong look at their government and many see slippage of standards and question whether the civil service and officials any longer share their values.

The crescendo of allegations about building code violations, conflicts of interest on committees, travel and accommodation and the connections of officials may have varying merits, but all undermine the confidence of the people in a government that they see less as their own. Yet by focusing on the drama of punch and counterpunch, we risk missing the broader point of the show that the puppets are playing a role that is inevitable. This is a drama where the constantly expanding role of government in Hong Kong inherently produces growing conflicts of interest and old rules of conduct from an age of constrained government will often be found lacking.Think back to a time in Hong Kong where government had little involvement in business, a meagre budget and no more than a prudent buffer of reserves. Then there would have been few reasons to worry about the close connections between officials and businessmen at club, alter, lodge and racetrack because there would have been little advantage from those links. Due process meant that government could do little that was not specifically outlined in laws and legislation that were slim volumes transparently available to scrutiny by all.

It is our institutions that are now failing us, more than the people holding office. As government spending is set next year to have increased by 70% from 2007-8 to 21.4% of GDP, the advantages to be gained from grabbling a share of that money have expanded enormously.Administrative discretion from laws conferring more power on statutory authorities and officials creates more incentive to lobby for decisions to go your way. New legislation like the competition law proposes unprecedented discretion to investigate, penalize and reshape businesses in competitive markets.Government now determines the minimum price for labor and mandates savings by employees. It gives little choice about who will manage the money. These imposts are a burden on the poorest and risk unemployment to the advantage of more organized labor.Growing business subsidies through concessional access to land, government financing guarantees, specific industry grants, labor market support programs and massive infrastructure spending provide more incentives for business to get close to government.Direct involvement of government in business as the owner of interests in our airport, the MTR, the largest property developer (MTRC, URA), exhibition companies, mortgage insurance and securitization, the stock exchange, education, health care and some utilities all go to make government one of the biggest suppliers and consumers of goods and services in Hong Kong, thus turning the government into the dispenser of potentially lucrative jobs and board positions.

The government's infrastructure investments have become far bigger than any private developments and initiatives in the SAR. The government thus in effect sets the price for and becomes the firstcall on the capabilities of the major contractors and professionals in the construction industry.As government stretches its role more, businesses and vested interests increasingly spend more time andresources trying to manage and influence the decisions of the government. In a small town, this creates potential conflicts of interest and corruption.Perhaps we have reached a point where our government has become so pervasive that conflicts of interest are unavoidable, the perception of favor is inherent in every government decision and along with it a growing risk of real corruption. The answer is not more honest people. People of integrity are likely equally prevalent in every generation. The answer is much leaner government and a program of reform that takes our government out of involvement in business, returns the largest projects to the private sector and leaves more money in the hands of taxpayers. Only then will we see impartial decision making with equal treatment of all before a government driven by laws not men.We have created a system where government does so much that even an honest official will struggle to show that he has favored no one and given no undue advantage. Choosing the Chief Executive is less important than reforming our institutions, reducing regulation, shrinking excessive government ambition and returning money to the taxpayers of Hong Kong.


* Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.
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See also:
Tax Cut 8: Comparing HK and Philippine Taxes, March 04, 2008
Free Trade 6: Unilateral Free Traders HK, Georgia, Who Else? March 30, 2008
China Watch 10: Is China Still a Communist Country? December 21, 2010

Welfarism 10: Spanish Problem, the Euro or the State?, December 01, 2010
Welfarism 11: Bureaucratizing Entrepreneurs, April 12, 2011
Welfarism 12: Denmark's Shrinking Entitlements, January 17, 2012
Welfarism 17: Personal Irresponsibility and Government, March 15, 2012

Hayek 12: Friedrich Hayek's 20th Death Anniversary

After a long hiatus, I am resuming my discussion series on Friedrich Hayek. I used to have a separate blog called "Hayek Reader" to focus on the writings and discussions about him, but I could not sustain it, so I reposted those papers and moved them in this blog, and closed that blog.

Here are those papers, posted here last May 19, 2009:

Hayek 1: Liberty and liberties
Hayek 2: Freedom, spontaneity and accidents
Hayek 3: Inequality and progress
Hayek 4: Freedom and responsibility
Hayek 5: Merit vs. value
Hayek 6: Dangers of majority rule
Hayek 7: Rule of law means no exception
Hayek 8: Safeguards of individual liberty
Hayek 9: Hayek and Easterly
Hayek 10: Hayek and Keynes
Hayek 11: Rule of law and rule of the lawless

Three days ago was Hayek's 20th death anniversary. I am reposting here a paper from the Austrian Economics Conference, about a brief biography of Hayek. I know that he has written several dozen books plus several hundred scholarly articles, but I have read only two of them, The Road to Serfdom and The Constitution of Liberty. Most of the papers I wrote above were taken from several chapters of the latter.

I remain a fan of the man, definitely one of the brightest minds of the last century.
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FRIEDRICH A. von HAYEK (1899 -1992)
A Short Appreciation 20 Years after his Death
by
Kurt R. Leube*

“Before we explain why people commit mistakes, we must first explain why they should ever be right." F.A. von Hayek

I

It is 2012, and lest we forget one of the most seminal minds of our times, we should recall the important work of Friedrich A. von Hayek who died 20 years ago, on March 23, 1992.

F.A.von Hayek grew up in a typical Austrian family that could lay claim to an academic tradition of well over three generations. At the age of 18, to avoid his failing at several schools in Vienna he voluntarily joined the Austro-Hungarian Army and served as an artillery officer until the end of WW I. Immediately after his return from the Italian front, Hayek enrolled in the University of Vienna and, only three years later obtained his law degree (Dr. jur.). While Hayek studied for his second doctoral degree in Political Science (Dr. rer. pol.) which he earned in 1923, he began to work under Ludwig von Mises’ directorship in the “Abrechnungsamt”, a Vienna based office for the settlement of pre-war debts. As the most eminent scholar of the third generation of the Austrian School of Economics, Mises (1881-1973), soon became Hayek’s mentor and in 1927 they succeeded in founding the “Austrian Institute for Business Cycle Research” which soon gained high academic reputation under Hayek’s and later Oskar Morgenstern’s leadership.

II

The culturally vibrating climate of interwar Vienna provided the stimulating background for many scholarly circles and schools, such as the “Vienna Circle of Philosophy”, the “Vienna School of Psychoanalysis”, or the “Mises Private Seminar”. This famous “Seminar” which between 1921-1934 von Mises conducted off campus in his Chamber of Commerce office was the nucleus of the fourth generation of the Austrian School, the most important representative of which was Hayek. It is remarkable that far more than half of its participants later became world-famous in their respective academic fields. Yet, with the Nazi terror on the rise and almost no prospects of ever gaining access to an adequate academic position, all but a very few of these uniquely talented scholars left Austria for good. Schumpeter and Hayek were the first, many others were soon to follow. This “brain drain” lead to devastating consequences in the intellectual life in Austria and Germany which still can be felt.

Hayek’s first book Monetary Theory and the Trade Cycle (1929) at once set a standard in modern business cycle theory and is still valid. One of the most striking characteristics of the “Austrian” business cycle theory is Hayek’s insight that any shortage of capital immediately causes a crises. While classical economic theory never elucidated what causes such a shortage, Hayek made it clear that any overinvestment leads to “scarcity of capital”, unavoidably compelling a decline in investment and hence leading to the loss of a part of the real capital, produced because of the excessive investment rate.

Impressed by Hayek’s new business cycle theory, Lord Robbins invited him to lecture at the London School of Economics in the winter of 1931. The lectures where so successful that he was offered the position of “Tooke Professor of Economic Science” almost immediately thereafter and he accepted almost without hesitation. At this time, when J.M. Keynes’ new theories began to dominate academic and political life it was unavoidable for Hayek not to be immediately drawn into a fundamental debate with Keynes. Due to their inflationary character Hayek opposed these theories vigorously and thus became the leading intellectual force against Keynes and his followers. However, in view of a recession with huge unemployment rates it became politically obvious that Hayek’s approach of “waiting out the crisis“ was doomed to be overshadowed by the theoretically seriously flawed yet politically attractive “Keynesian Revolution” with easy “solutions” and massive government interventions. It is a regrettable but undeniable fact that economics much more than any other academic discipline is liable to the periodical reintroduction of popular fades and irrepressible superstitions.

While being deeply involved in these heated debates, Hayek at the same time opened yet another intellectual front and published the three famous essays which forever shattered the foundations of socialism. These essays were later collected in his Individualism and Economic Order (1948). The painful collapse of socialism as a viable political system in 1989 is the belated empirical proof of Mises’ as well as Hayek’s insights. Hayek’s interest in technical economics culminated in his The Pure Theory of Capital (1942) which must be rated as one of the most penetrating books ever published in this complex field.

Weekend Fun 32: Angry Birds, Angry Taxpayers

Angry Birds cartoons are fun. My older daughter used to love them.
Lower photos: angry cat, angry dog, and angry satanic leaf-tailed gecko...

The angry grasshopper, angry horse, angry squirrel, angry lions...

Below, clockwise from left:... And the angry taxpayers, angry dinosaur, angry monkeys, and angry motorist.

Happy weekend.

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See also:
Weekend fun 15: Political jokes, March 12, 2011
Weekend Fun 31: Filipino Shop Signs, March 17, 2012

Provincial Notes 2: Sugarcane Economy of Negros Island

I was born, grew up, studied up to high school, in Cadiz City, Negros Occidental. My parents and two siblings are still living there. Cadiz is on the northern most part of Negros Island, which is composed of two provinces, Negros Occidental, predominantly Ilongo speaking and the capital is Bacolod City, and Negros Oriental, Cebuano speaking and the capital is Dumaguete City.

My province is known for huge sugarcane plantations. As far as the eyes can see, one can see sugar plantation from the seaside to the foot -- sometimes up to 1/3 -- of mountains. Our house, like most houses in the province, is just beside a sugarcane farm. When we were young, if we needed to munch sugarcane, we just enter any part of a farm and get any type, any size, of a sugarcane. Or we would hunt spiders there. Life was cool.

Below is the new Silay-Bacolod airport. Silay is actually two cities away from Bacolod and the airport is built on a previously sugarcane farm. So when you land at, or take off from the airport, one will see wide sugarcane plots around it. Mt. Silay can also be seen from the airport terminal.

More photos of sugarcane farms below. At harvest time, when the soil is soft and muddy and the trucks cannot go in the middle of the farm, carabaos (water buffalo) would haul the sugarcane to a nearby road where the trucks are waiting.

Trucks that carry the sugarcane to a sugar milling company are usually large. While the most common trucks are still six-wheelers, many trucks now have 10 or 18 wheels. So one can imagine the heavy burden on public roads.

When the farms are prepared for another cycle of planting. Tractors are used to till the soil. Soil erosion is heavy in sugarcane farms because the soil is tilled yearly, and those tractors plow about 1 foot high of soil.

I'm not in the mood to inject numbers and statistics about the sugarcane economy, I just showed photos here. It's deja vu for me whenever I come home to visit my old and sickly parents. I like to sit in front of a car or a bus whenever I travel from Bacolod to Cadiz and back. The sight of those wide sugar plantations, something I cannot see anywhere in the Philippines, or in many other Asian cities or American cities that I have visited so far.

* See also Provincial notes 1: Negros Occidental, April 25, 2011

Rule of Law 13: Freedom Barometer 2011

(Note: this is my article today in the online magazine, http://www.thelobbyist.biz/perspectives/less-gorvernment/1288-freedom-responsibility-and-freedom-barometer)

Freedom is absence of coercion. A person is free if he can do what he wants so long as he does not harm or prevent others from pursuing their own freedom. This includes the freedom to put up a bakeshop, a barbershop, other entrepreneurial activities with the least restrictions and regulations possible. But freedom does not include the right to stab or kill another person over some disputes.

Coercion is a matter of degree. A child is not free to watch tv all he likes if the parents will limit his exposure to tv. A person is not free to get somebody else’s property without the consent of the other person on a voluntary exchange contract, like someone buying a product or service.

Most coercion are unjustified, like the various coercion imposed by governments: taxes, fees, fines, regulations and other prohibitions. Trade protectionism for instance prohibits the citizens from buying certain goods made abroad at the cheapest price possible because government has imposed tariff, import and related taxes that make those imported products become expensive. Entrepreneurship is hindered when various levels of government offices, from local to national, will impose many different permits with their corresponding fees and taxes.

To estimate how much freedom people enjoy in different countries, certain studies and indexes on economic freedom, press freedom, political freedom are done by various groups and think tanks around the world.

In Asia, a new index was developed by the Friedrich Naumann Foundation for Freedom (FNF) called the Freedom Barometer (http://freedombarometer.org/). The index they devised is composed of three factors and these are their sub-components:

1. Political Freedom: (a) Free and fair elections, (b) Absence of unconstitutional veto players, and (c) Press freedom.
2. Rule of Law: (a) Independence of the Judiciary, (b) Corruption, and (c) Protection of human rights.
3. Economic Freedom: (a) Security of property rights, (b) Size of Government – expenditures, taxes and enterprises, (c) Regulation of credit, labor and business, and (d) Freedom to trade internationally.

More freedom means higher score (0 to 100). A government in one country may give more economic freedom to the citizens, say they put up any shop any day and anywhere with the minimum restrictions and regulations, but people have limited political freedom, they cannot publicly criticize or blog negative things about the government.

A composite score is then derived to get the degree of freedom that people in a particular country in Asia. And here is the result for 2011:

Source: http://freedombarometer.org/ranking/

The Philippines ranked 9th out of the 12 Asian countries surveyed with complete datasets in 2011. The same rank was also obtained by the Philippines In the 2010 Freedom Barometer, The high incidence of media people who have been murdered – most especially during the “Maguindanao massacre” – gave us a low score in press freedom. The high degree of corruption in the country, from the Executive to Legislative to Judiciary, also gave us low score in the Rule of Law category.

There is a big challenge for the Philippine government, especially under a liberal administration – the only Liberal government in Asia actually – to improve these poor performance.

It is good that the FNF has taken this initiative to remind Asian governments hat more and more eyes and minds are looking at them, watching their current policies and programs if they promote more political and economic freedom, if they respect and promulgate the rule of, or not.

But more than expecting governments to reform by themselves and let go of certain unnecessary restrictions and coercion, it is the citizens’ obligation, it is individual responsibility, to guard whatever freedom they have from being stolen and deprived by their governments. And to reclaim and take back previous freedom which have been hijacked and taken away from them in previous laws and regulations.

Freedom and responsibility, rights and obligations. They are two sides of the same coin. People who are afraid of responsibility are afraid of freedom itself.
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See also
Rule of Law 1: Entrepreneurship and Government Permits, September 16, 2008
Rule of Law 2: Property Rights and Lefts, March 02, 2009
Rule of Law 3: AIG Bonuses, Government Bail-outs, March 18, 2009
Rule of Law 4: On Thailand Crackdown, April 18, 2009
Rule of Law 5: Lawless State, Corruption and Coercion, August 01, 2009
Rule of Law 6: Discussions in Facebook, January 10, 2010
Rule of Law 7: Property Rights and IPRI 2009 Report, February 27, 2010
Rule of Law 8: Purpose and Supremacy of the Law, June 15, 2010
Rule of Law 9: Laws, Prohibitions and Corruption, June 30, 2010
Rule of Law 10: On Wang-wang and Government Laws, July 04, 2010
Rule of Law 11: RoL Index, October 15, 2010
Rule of Law 12: Gloria Arroyo, Travel Abroad and the SC, November 16, 2011