2 posts tagged with "economics"

I recently came across an old AMA by Sridhar Vembu, where he talks about his interests in economics, and how it helps him put things in perspective. In his words:

Economics is a highly  contentious discipline. I will recommend what I personally am drawn to.  This may not agree with the “mainstream” (for example Paul Krugman would  disagree!):

To get started, I would go with this excellent and practical book  (and also free!) – How the Economic Machine Works, by Ray Dalio.

I would get deeper into political and economic philosophy with The Road to Serfdom, which explains why liberty is important.

Then spend time browsing through https://mises.org – there are a lot of books there

Hayek & Dalio are some of my favorite thinkers in economics. I have written a post in past which was summary of one of the chapters from Road to Serfdom.

Why the worst get on top in politics and governance? Why don't intellectuals and more moral candidates succeed? Some thoughts here 👇 https://t.co/1U2nTRaekW — Pranay Prateek (@pranay01) April 5, 2020

Read Mises has been on my list for a long time, but I have not managed to go through the whole text. Here are few of my notes from reading Ludwig von Mises' magnum opus Human Action

“The ultimate goal of human action is always the satisfaction of the acting man's desire”

Human actions are the key to all decisions. Humans take actions to exit from a state of uneasiness, i.e. go from a state of less pleasant state to more pleasant state. How this "happier" state is defined is completely up to them. It could be earning materialistic wealth like money, property, etc. It could be helping other or it could be contributing to see some ideas be brought to fruition.

“For to do nothing and to be idle are also action, they too determine the course of events.”

Austrian Economics puts individual interests at the centre when thinking about economic questions. The insights they come up with with just this minor change is very impressive.

We are all pretty stressed now, aren't we? We don't know how long will this COVID-19 caused lock down will last. Even when the lock down is lifted, surely the economy will go under recession. It will take sometime to speed up to normal level of consumption. Sitting where I am now, everything looks bleak. And the uncertainty is the real bummer! We don't know if this would last for  3 months or 1 year.

But if you look from a more objective long term perspective, the world operates in cycles. Period of booming growths have seeds for recession in them, and period of recessions have seeds of coming growth.

For example, in boom time, the economy is doing good and banks start lending more leniently thinking that good times would continue. This leads to increasing NPAs and when the music stops, the house falls down like a pack of card.

On the other hand, periods of recessions, makes the financial systems lean. Bloat is reduced, businesses become more efficient. Extra employees are laid off. Businesses become more capital efficient and hence, show increased growth few years down the line and voila, economic growth returns!

So, if you think carefully - Booms are not entirely bad nor busts are entirely bad. It is like the Yin Yang figure above. One is intertwined with other. Also, if you observe carefully - the Yang has a sliver of Yin in it, and vice versa.

This is a pattern which is not specific to economies, but is consistent across many human systems. Amish Tripathi famously talks about masculine and feminine way of life. If you check his Siva triology, he clearly distinguishes between two types of govt.

The “masculine" way hinges around a strong leader who assumes all  responsibility for society. There is clear direction and purpose for  society as a whole.

The “feminine" way is a loose democracy, with the leaders asking  their followers for solutions, or letting them go by their own  decisions. Questioning, debates, arguments and analysis form the basis  of governance decisions, and creativity—however unconventional—is  encouraged

And there is no right or wrong way. Both these elements need to be in balance for the society to function properly. But it seldom happens. At any one point of time, one element is dominant. When masculine element is dominant, the creativity in society reduces. Discipline increases. But soon discipline leads to militarism - which people find excessive and somebody revolts to bring back the feminine elements. More participative and accomodating democracy.

I guess, then the only question is - why don't we keep these two elements in balance? Why is it that one element takes over and we realise that we had moved too far when things go out of hand? Why don't banks controls NPAs in boom time.

Well, the only answer I can think of is that humans are short term thinkers. When going gets good we fil to recognise, that things will not always be good and indulge in excesses. Similarly, when things get bad, we loose hope that things will get good again and we over react. Since, this pattern repeats in almost all complex systems involving humans - I would argue that this is a feature of human beings which interact in the system, rather than the specific systems in question.

Ray Dalio explains how economic cycles work in this beautiful video. You must give it a watch. As you can see economy also moves in a cycle. How the Economic Machine works by Ray Dalio