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Wealth, Market Economics & Entrepreneurship – The Case for

Hilights


Money, Finance & Taxation,Public Arena

A world wide Gallup Poll of people living on less than 1990’s US $ 2/- a day, surprisingly found that people were not asking for handouts but for a “good job” that would then allow them to choose what they desire and to live with dignity. So we too should move away from loan subsidies to venture capital.

Small entrepreneurial ventures are the biggest job creators and poverty reduction agents. The employment of the growing workforce in a world population that has grown from about 2.5 bn, in 1950, to over 8 bn today is the proof of the poverty reduction.(See – “Swadeshi – Self-sufficiency/ Protectionist Policy”).

Robert Samuelson noted that – ‘Every 3 months, 7 to 8 million US jobs disappear and roughly an equal or greater number are created’. The situation is similar even in India and trying to keep the old jobs alive is like trying to keep the dying leaves of a tree from falling off, a futile and wasteful effort. Unprofitable assets in the Public Sector need to be sold off and not kept on ‘life support’ for the sake of a few employees or for ideological reasons. (See- ‘Garibi Hatao!’

It should also, be recognized that the value of all global financial assets has increased from about $ 12 trillion in 1980, to well over $ 200 trillion today. In 1980 the world’s financial wealth was roughly equal to the “World’s Assets”, today they are nearly 20 times the World’s Assets. It is therefore evident that positive control by a Government, trying to micro manage allocation of resources over the global economy, is increasingly impossible. The global liquidity can swamp unprepared markets with disastrous consequences and the best a Government can do is to try and prevent or control major in and out surges.

Learning from J. M. Keynes – The Interest rate is used to ensure equilibrium between Savings and Investments, finding a point low enough to encourage investors but high enough to reward savers. In a slump, enterprise needs stimulation through low interest rates, but as the Central Bank also, needs to maintain the value of the currency in the international system it may not have the flexibility to reduce the interest rates as required to stimulate enterprise. also, though inflationary adjustments are easier to allow, deflationary adjustments through high interest rates to bring prices down is not so easy. It then becomes necessary to promote a programme of domestic investment and control consumption through taxes (a comprehensive Goods & Services Tax/GST).

Today, claims that higher interest rates cause inflation no longer holds true, there are too many other factors in the equation. Globalization with its effect on the price of Commodities, Goods and Capital flows has held down inflation. Technological advances that produce more from the same resources and reduce logistics and service costs have a deflationary / anti inflationary effect. The flow of capital, from global savings, into countries offering lucrative opportunities for private sector investors result in greater employment which again has a deflationary effect. All this not only makes inflation statistics unreliable and makes it no longer possible for the Central Bank to control growth rates by manipulating interest rates as it did in the past.

Free digital connectivity for information and some non- market services that were never counted in GDP, now need to be factored in to obtain a better overall picture.

However Fredrich Hayek’s warning about easy credit leading to bad investments into over ambitious projects or overvalued and non productive assets should also, be borne in mind.

Easy credit does not lead to greater investment but only encourages greater consumption, especially of unproductive assets eg: property etc, thus creating asset bubbles that soon collapse.

Easy credit does not lead to greater investment but only encourages greater consumption, especially of unproductive assets eg: property etc, thus creating asset bubbles that soon collapse. However, using the taxation policy to generate funds out of more comprehensive taxation (on consumption -GST), to generate employment and even to subsidize unemployment support is justified and practical as it also, restrains excess consumption power out of the economy thus controlling inflation. Interest rates should be kept low and stable to encourage investments / entrepreneurship. Consumption tax now GST rates can however, be varied to control inflation / deflation vide a Cess on the basic tax, which can have both Central and State elements that can be changed regularly (even weekly say at midnight each Sunday) in the manner the interbank rate is fixed and on basis points. This will be a better way of controlling inflation while allowing the interest rates to be kept stable and at levels attractive to both investors and savers. The emphasis should be on encouraging circulation of currency into productive enterprises to increase jobs.

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