Tag: central planning

Categories
Economics

[2441] No target, no central planning

Milton Friedman once visited Hong Kong in 1963. He met John Cowperthwaite, the financial secretary of Hong Kong, whom was credited for enabling Hong Kong to become Asia’s foremost financial center through his free market policy. Friedman asked him “about the paucity of statistics” in Hong Kong. Cowperthwaite replied, “If I let them compute those statistics, they’ll want to use them for planning.[1]

Statistics has its uses and it does help us understand our society better. It describes phenomena objectively instead of forcing us to rely on conflicting anecdotes that are dependent on point of views. First and foremost, statistics has descriptive power.

But not all individuals believe in only the descriptive power of statistics. Some believe too much in the prescriptive aspect. Statists tend to belong in the latter group. PEMANDU is afflicted with it too, arrogantly trying to manage the economy when the economy itself is organic.

I reject targets placed on something as organic as the economy. While the government does have a role to play, to set a target on the economy mistakes the economy as a business entity or a firm, pretending as if the planner is the CEO, where there is none really.

The dangers of having a set of targets like having specific real GDP growth rate are plenty. One of them is the incentive for the government to spend too much just to meet its target. There is a conflict of interest when the target is set by the very entity that is meant to achieve it (this is also partly the reason why I am skeptical with a lot of KPIs set by the government: incentive to set them low to make themselves good).

This adverse incentive is bad for public finance and ultimately, for taxpayers.

More generally, having those targets encourages central planning.

But this entry is not meant to bash PEMANDU. I think I have criticized PEMANDU so much that I am bored of it already. This entry is meant to criticize Anwar Ibrahim.

Anwar Ibrahim is smart. When he realizes that the Najib administration is targeting possibly an unrealistically high real GDP growth rate given the global economic circumstances, he challenges it and demands accountability from the federal government. He wants a special parliamentary sitting to meet if the federal government fails to meet their target later in the year.[2]

I disagree to the demand for accountability. It is not so much I would like to give the Najib administration a free ride. It is only because I disagree with having a target in the first place. To demand accountability only strengthens the path to the target. That means central planning.

This is a case where accountability is not so hot.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved
[1] — The difference in the economic policies followed by Hong Kong and Britain was a pure accident. The colonial office in Britain happened to send John Cowper-thwaite to Hong Kong to serve as its financial secretary. Cowperthwaite was a Scotsman and very much a disciple of Adam Smith. At the time, while Britain was moving to a socialist and welfare state, Cowperthwaite insisted that Hong Kong practice laissez-faire. He refused to impose any tariffs. He insisted on keeping taxes down.

I first visited Hong Kong in 1955, shortly after the initial inflow of refugees. It was a miserable place for most of its inhabitants. The temporary dwellings that the government had thrown up to house the refugees were one-room cells in a multistory building that was open in the front: one family, one room. The fact that people would accept such miserable living quarters testified to the intensity of their desire to leave Red China.

I met Cowperthwaite in 1963 on my next visit to Hong Kong. I remember asking him about the paucity of statistics. He answered, ”If I let them compute those statistics, they’ll want to use them for planning.’’ How wise! [Milton Friedman. The Hong Kong Experiment. Hoover Digest. July 30 1998]

[2] — KUALA LUMPUR, Oct 10 — Datuk Seri Anwar Ibrahim today demanded Parliament reconvene for a ”special sitting” if Putrajaya fails to meet its ”unreasonable” gross domestic product (GDP) growth forecast.

The opposition leader today poured cold water over Datuk Seri Najib Razak’s Budget 2012 tabled on Friday, claiming the prime minister’s predictions and his administration’s alleged penchant for unbridled spending would likely worsen the country’s deficit.

Anwar also predicted the Najib administration would table a supplementary supply bill by mid-2012, seeking for additional funds just as it did in June this year. [Clara Chooi. Anwar wants special Parliament meet if GDP aim unmet. The Malaysian Insider. October 10 2011]

Categories
Liberty Science & technology Society

[2377] Technology, central planning and the fate of organic organization of society

There are several reasons why organic decision-making is better than central planning. The complexity of the world is one. By complexity, it means nobody has the ability to absorb all relevant information in a timely manner to react effectively. In some ways, this is the economic calculation problem. It is an argument against the communist economic system in favor of the free market, the free price system specifically.

While this particular reasoning has stood well against the test of time to defend the libertarian case, I do not think it will stand forever. It has stood well against the case for central planning because there is a limit to calculation processing.

An individual can solve his or her own problems but a central planner must solve all problems that exist in the world. The central planner has no capacity to solve for the general equilibrium. There are billions, trillions or even more variables and data points to consider. The problem of central planning has always been an optimization problem however complex it is. How many can we calculate? How fast can we calculate? Can we calculate it at all?

None in the past and at the present time has done that in a grand scale or for a long time successfully.

The date when technology overcomes the restriction will arrive. When that happens, the libertarian case may approach an expiry date.

The seeds are already here. Thomas Friedman writes in The World is Flat of a global supply chain. Detailed record of inventory is kept. The workflow is traceable. Orders, stock and production all around the world of a particular company can be tweaked easily. All relevant information crucial to production is available on the spot all the time.

It is not hard to imagine how that capability can be expanded beyond the boundary of a firm. As technology progresses to make that possible, the prospect of effective central planning is enhanced.

With technological progress, eventually, whatever superiority the organic method has can be replicated by a central planner. Perhaps, the central planner can produce superior outcome in some cases where asymmetric information is present. After all, with the relevant sufficiently advanced technology, there can be no asymmetric information problem.

This is a scary notion for libertarians. It should be a scary notion for all who believes in individual liberty. It will give birth a full and perfect information aggregator that is an omniscience state or anything that may function as a state. It will create a god none can disobey. Everything the god says is for the best. This will be the real god.

My question is, when the time comes, will the case for organic organization of society be obsolete?

After considering that, I think any case in support of libertarianism cannot be dependent on technology. Else, it puts an expiry date on the philosophy.

Whenever the expiry will be, I am inclined to believe that it is will be far off into the future, possibly making the technology-dependent argument useful still.

Categories
Economics

[2294] Of favoring the fat over the fit

The prime minister has said it so many times. His administration wants to turn Malaysia into a high-income country.  One of several initiatives that the administration believes can help in that direction is the introduction of minimum wage through the establishment of the National Wage Council. In promoting its supposedly market-friendly and market-driven policy, the federal government embarks on central planning without even flinching at the contradiction. For others, they will do more than flinch because as with any effort at central planning, there are side effects. One of them is the creation of an uncompetitive market.

In the free market, some firms have more market power than others do. That is inevitable due to various factors that are only too natural. Some are just larger than others are and they may have better access to resources and may be able make use of it more efficiently than others do, thus allowing them to sustain their prominence in the market.

That, however, does not prevent smaller firms from competing against their larger counterparts in the same industry successfully. There is enough flexibility in the free market to enable smaller firms to succeed. That flexibility creates free competition and that competition in the free market exacts punishment on mistakes made by anybody, even by larger firms. It gives others the opportunity to rise up.

This competitive force may no longer be true if the wage council dictates wages. The focus here is not the minimum wage itself but rather, the mechanism at which the council dictates the wage.

Consider the possible composition of the wage council. For it to be truly representative, it has to have all stakeholders in the labor market represented. This includes firms of all size and industries. There will be representatives from the labor unions and the government as well.

Consider now the interest of each side given an industry. The government wants to turn Malaysia into a high-income nation and believes the introduction of minimum wage can help. The labor unions want higher wage for its members and are strong advocates of minimum wage. The larger firms do not like competition and can afford higher wages. Finally, the smaller firms do not like competition as well but unlike the larger ones, they cannot afford to pay the kind of wages that the larger firms usually can.

One can see that at least one aspect of interest of the government, the labor unions and large firms coincides and then competes directly against the interest of small firms. Given this setup with the wage council, smaller firms are likely to lose out.

What begins as a problem of low wages or wage stagnation — what has been the rationale for the proposed formation of the wage council and the introduction of minimum wage in Malaysia — that is partly caused by unequal bargaining power between employers and employees is transformed into something else. It turns one problem into another.

While it attenuates the difference between employers and employees, the council amplifies the bargaining power differential between firms. The incentive mechanism of the free market is tweaked, or rather mangled, to give more leeway to larger firms to make mistake and less for smaller ones.

To put the implication more starkly, the wage council encourages the creation as well as the continuance of monopolies in the market. It creates an uncompetitive market, on top of the inflexibility created by the minimum wage policy.

What makes this all the more unpalatable to those who actually believe in market-driven policy is that many pre-existing monopolies in Malaysia are government-linked companies while the smaller companies are likely to be privately held. And when the monopolies are not government-owned, many of these monopolies came to being not because they were competitive, but because of past government policies of lemon socialism that privatized profits but socialized losses.

The concern for lemon socialism and privately-owned monopolies aside, the dynamic of the wage council is stacked against privately-held companies in favor of larger as well as government-linked companies. The role of the state in the market increases with the establishment of the wage council.

This is an example of Najib administration’s supposedly market-driven policy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on December 28 2010.

Categories
Economics

[1697] Of oh, enlighten me about purchasing power parity please

I was reading the Mid-Term Review of the Ninth Malaysia Plan:

During the 2006-2007 period, real GDP expanded by 6.1 per cent per annum, exceeding the target of 6.0 per cent. Per capita income increased by 10.6 per cent per annum to RM23,066. Per capita income adjusted for purchasing power parity increased at a higher rate of 14.2 per cent to RM46,478 in 2007. This growth was achieved in an environment of stable prices. Unemployment stood at 3.3 per cent in 2007, reflecting the full utilisation of labour resources. [Full speech in Parliament by Prime Minister Datuk Seri Abdullah Ahmad Badawi when tabling the Mid-term Review of the Ninth Malaysia Plan. The Malaysian Insider. June 26 2008]

Someone, please enlighten me: why does the income per capita figure need to be adjusted to purchasing power parity?

So far, I see no reason why it should be adjusted. PPP is usually used to make comparison between countries. When there is only one country in question and we are dealing in terms of just a currency, why on earth would we need to adjust it for PPP?

Is the statement “higher rate of 14.2 per cent to RM46,478” meaningful at all?

Also of interest to me is this:

11. The nation’s robust economic growth has been spearheaded by the private sector, with private sector investment growing at a rate of 8.6 per cent per annum. Foreign direct investment also increased by 39.3 per cent to RM29.1 billion in 2007. At the same time, public sector investment grew by 8.9 per cent per annum following vigorous implementation of development projects under the Ninth Malaysia Plan. [Full speech in Parliament by Prime Minister Datuk Seri Abdullah Ahmad Badawi when tabling the Mid-term Review of the Ninth Malaysia Plan. The Malaysian Insider. June 26 2008]

Increased government spending typically crowds out private investment. I wonder how much the public sector grew at the expense of investment growth in the private sector.

Another question: how much of export has been sacrificed so far due to increased government spending?