Thursday, July 20, 2017

Should Indians Boycott Chinese Goods?

The on-going stand-off between the armies of the Indian and Chinese nation states on the Sikkim border has created quite a bit of ruckus in the, now very nationalistic, Indian public. People in India are calling for a total boycott of Chinese goods. This demand for boycott of Chinese goods is nothing new.

Economics of Boycott
The relevant question here is that, what consequences will follow if India’s nationalistic public actually decide to boycott Chinese goods? Without going into the details of numbers of what is the volume of trade between India and China etc., let us carry out a theoretical analysis of the consequences that will necessarily follow this action of boycott.

What will happen in India after the boycott?
The first thing that will happen in India is that the consumers will be at a loss immediately because they will not be able buy and consume the cheap Chinese goods now. They will have to spend more on acquiring the same product because similar Indian good will be of high price. This means their standard of living will now be lower compared to the situation of no boycott.
Second, now because consumers are forced to spend more of their limited income on costly Indian goods, they will be left with less income to spend on other Indian goods being produced by other Indian industries. This in turn will lower the demand and employment in these Indian industries. For example, if before the boycott I was spending 50 rupees on buying a Chinese bulb out of my total 100 rupee income and 50 rupees on buying Indian pen then now after the boycott I will be forced to spend 70 rupees on an Indian bulb leaving me with spare income of only 30 rupees which will not be enough to buy the 50 rupee Indian pen; this means the pen industry suffers losses and they either shutdown or downsize and fire some of their workers unemploying them. This in turn will result in pen producers and laborers spending less on other Indian goods in turn lowering income of other producers too. This will be a cascading effect engulfing the whole economy. A boycott basically will make everyone poor in India compared to the scenario of ‘no boycott’. This poverty will kill many in India; surely more will die compared to deaths right now in Sikkim border confrontation!
Third, investment activities in India will also slowdown because now saving will reduce due to the fact that the boycott forced the consumers to spend more on costly Indian goods. This lowered saving in turn will lower investment which in turn will lower the future income of Indians again making them poor!
Fourth, Indian producers will also suffer the same fate as consumers. They will also have to spend more on buying costly Indian capital goods for their businesses. This high cost will lower their efficiency and production. It is very much possible that some businesses will simply shutdown because they totally depend on imported cheap Chinese technology. This will again make Indians unemployed and poor. Again like consumers, because producers will be forced to spend more of their limited income on costly Indian capital goods, their saving and investment activities will suffer. This will again make Indians poor.
And last but not the least, as the French economist Frederic Bastiat said, when goods will not cross borders, armies will!   This boycott can actually start a real all out conventional war between the Indian and Chinese nation state. And we all are aware of the fact that war only means ‘death and destruction’. The Indian nation will be destroyed. All the progress that has taken place in last 70 years will turn into rubble in a matter of minute. India will be back in the dark ages.

All in all, if Indians want to be poor, hungry, unemployed and if they want to totally destroy their country then they can happily go ahead and declare a boycott of Chinese goods.

Monday, July 3, 2017

Should Indians pay taxes to become a developed nation?

The finance minister of Narendra Modi government Mr. Arun Jaitley recently, in the Institute of Chartered Accountants while celebrating Chartered Accountants  Day (sic), said that India should have a “new normal” with citizens ready to pay the taxes they need to pay and a new mindset to move from a developing nation to a developed one … During the time of demonetisation I have said that India now needs to define the new normal. And the normal is whatever taxes I have to pay, I need to pay”.

Is this true? Will paying taxes make India developed as a nation? Not at all. Quite the contrary. It will make India and Indians poor. Let us see why.

Any society, at a given time, has a limited amount of resources which it can use to fulfill various unending present and future consumption needs of its citizens. The first stage of any development process requires the fulfillment of basic material needs of people. A nation of hungry people can never develop. Now, a society can either use all its resources to fulfill the present consumption needs by consuming those resources immediately or use them to fulfill present as well as future consumption needs by consuming some and investing the rest of resources in accumulating capital (both physical and human). As any sound economist will tell us, the basic requirement for a growing (developing) economy is that it uses large part of its present resources in investment to accumulate capital so that the future growth can be higher. This is like our Mr. Robinson Crusoe, on an island economy, consumes 5 fish out of his daily 10 fish catch and saves 5 fish which he invests the next day when he is manufacturing fishing net for catching more fish with less effort the day after tomorrow. If Mr. Crusoe will consume all his 10 fish catch everyday then he will remain on the 10 fish per day standard of living forever because he can’t manufacture fishing net. Without the present investment (and sacrifice of present consumption), future cannot be better. In this process the government taxation is like Mr. Jaitley forcefully taking away 5 fish of Mr. Crusoe, which he saved for investment, and distributing it to some so-called poor Mr. Friday who will use it for immediate consumption because he is poor with many unfulfilled present needs. Mr. Jaitley’s taxation thus will make Mr. Crusoe and Friday both poor in future, and not rich or developed! The same economic process of this island economy takes place at a larger scale in a nation like India. Mr. Jaitley’s taxation will make all of us poor and not developed.

Also, the idea that Mr. Jaitley – i.e., the government – somehow knows where and how to invest Mr. Crusoe’s saved resources (fish) is false. Only and only Mr. Crusoe knows what he wants in his life. Only he knows what is good for him and what is bad. Only he knows well his subjective needs. No Mr. Jaitley can replace that subjective calculation of an individual citizen of any nation. If on one hand Mr. Crusoe wants fishing net then on other hand Mr. Jaitley will use Mr. Crusoe’s saving in starting a Smart Island or Swaccha Island or any such boondoggle project wasting that saving in things that no one wants!

In conclusion, as professor Mises said, the poverty of the backward nations is due to the fact that their policies of expropriation, discriminatory taxation and foreign exchange control prevent the investment of foreign capital while their domestic policies preclude the accumulation of indigenous capital (The Anti-Capitalistic Mentality, p. 83). Government taxation, no matter how small, wastes precious resources of a nation; it crowds out all productive investment activities in a nation, and so makes it poor and not developed. Mr. Jaitley either doesn’t understand basic economics or, as usual, he is taking gullible Indians for a ride!