Viswanathan K's Thoughts

That the existing economic system isn’t perfect is obvious and undeniable, but most proponents of capitalism then fall back to paraphrasing Winston Churchill: “Capitalism is the worst form of economic systems – except for all the others that have been tried.”   I’ve never heard anyone explain a deep, structural problem with the system as well as Yanis Varoufakis does in Talking to My Daughter About the Economy . At one point, he quotes Agent Smith from the movie, The Matrix , who has this say to say about humans: “I'd like to share a revelation during my time here. It came to me when I tried to classify your species. I realized that you're not actually mammals. Every mammal on this planet instinctively develops a natural equilibrium with the surrounding environment but you humans do not. You move to an area and you multiply and multiply until every natural resource is consumed. The only way you can survive is to spread to another area. There is another organism on this

Why do we repeatedly see banking induced financial crisis? In poorer countries, and countries where a small group has inordinate control, one can see that the political top bosses force bankers to lend to their cronies, regardless of the viability of the loan. But banking induced financial crisis are a phenomenon of the West too. What exactly is the problem with banking?   Yanis Varoufakis answers the question in Talking to My Daughter About the Economy . It is all rooted in something we discussed in an earlier blog in the series – the need for debt (loans). Quick recap: One needs money now to build a factory, to pay for raw materials and employee salaries on a continual basis, in order to make a profit in the future . So how does one get that money now ? By taking a loan. From the banker, of course.   Put differently and vividly, Varoufakis says one can almost think of the entrepreneur as a “time traveller” –He goes into the future and gets money for his needs in the present

In Talking to My Daughter About the Economy , Yanis Varoufakis talks about the attitude of society towards debt, spending and saving at different times via 3 famous tales.   The first one is from the 16 th century. It is Christopher Marlowe’s tale of a demon who promises Dr. Faustus 24 years of absolute power and limitless pleasure. In return, at the end of that period, he must give his soul to the demon. Faustus agrees. (This is the origin for that phrase, “ Faustian bargain ”). But as the time approaches, he has regrets and tries to get out of the deal. To no avail. The tale ends with his soul being taken by the demon. A contract was binding – that was the mindset of the time.   The second tale is the same story, except it was edited in one important way by Goethe at the dawn of the 19 th century. What was the change Goethe made? Faust, when he has regrets as the 24-year mark approaches, performs lots of acts of public service. This time around, when the time came, God’s an

The profit motive did not exist always, writes Yanis Varoufakis in Talking to My Daughter About the Economy . Really? “No, it (profit motive) was not. Greed, yes.” How and why did the profit motive come to be?   With agriculture, the sequence was production à distribution à surplus. At some point, when industrial production began, everything changed. Suddenly land-owners found other uses of land, more remunerative than having serfs work the farms. Land too was now a commodity, to be sold or rented.   And so the serfs got evicted. Given how their lives had been, you’d think this was a good thing for the serfs. Not entirely. Until then, the serfs at least got some guaranteed employment and thus the basic necessities. But once evicted, how were they earn money? They had to offer their labour to whoever needed it. At the price that suited both parties. The labour market was getting started.   But now a new problem arose. An industrial entrepreneur could see that he would

Yanis Varoufakis explains how the economy operates in a conversational style, as if he were explaining/discussing it with his 16 yo daughter. Hence the title of the book is: Talking to My Daughter About the Economy .   A true economy, he says, needs a surplus: “Surplus is the extra bit that allows for accumulation and future use.” He points out that a hunter gatherer society cannot produce surpluses, only an agricultural one can. Why is that? Because hunter gatherer items like fish, rabbits and bananas rot quickly and thus cannot be preserved. Whereas agricultural outputs (corn, rice etc) can be stored for long periods.   Once surpluses became possible with the advent of agriculture, it set us of on the path to other things that changed mankind forever. Let us elaborate on that. Once enough people have surplus produce, it is efficient to build common granaries. That in turn creates the need for a mechanism to keep records – who stored how much – and thus written records ca

  Sometimes, when we don’t have change, we borrow the money from my 9 yo daugther. One time this happened, her friend was in the room, and told her, “Ask them to return it with interest ”. Talk about corrputing influences… Since my daughter still doesn’t know what “interest” is, I thought I’d fill her in. Later that day, I drew it up on a whiteboard. “Why would you put your money in a bank?”, I asked rhetorically, “Not just for safety, but also because they give you back something extra, something more than what you put in”. She was very interested (pun intended). “What do you think the bank does with your money?”, I asked. I had her undivided attention now, “You mean they do something other than keeping it safely?” . “Yes”, I said, “they lend it to other people”. “What?”, she was alarmed, “They give my money to others?” “Not ‘give’, they ‘lend’”, I repeated. Lending implied getting it back, but she was still not thrilled with this idea. I explained that when she deposits ₹100 i

Ever since the financial crisis of 2008 broke out, bankers became the hated lot who (nearly) brought the system down with their greed. But even more than their greed, the point that gets most people riled up is the fact that they had no skin in the game. When things were doing well, they got their commissions and bonuses; but when things went horribly wrong, the losses went to the suckers who bought their products (And don’t even get people started on the bailouts that followed). As Alan Shore said in Boston Legal , the common feeling is: “If Shakespeare were alive today he might say, “First thing. Let’s kill all the bankers.” The knee jerk reaction might be to go medieval with the rule book, a la Hammurabi’s Code: “If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.” But that would be like turning the clock back a fe

In response to my blog on how George Soros made a billion in a day , my dad had posted his comment including the following line: “Economics is too much for me! I find even the most advanced physics a lot easier!!” My dad must be the rare person from the physics domain to say that. Sheldon's (of The Big Bang Theory TV series fame) response when asked by Penny if he knows economics is representative of how most physicists talk about other fields: “I'm a physicist. I have a working knowledge of the entire universe and everything it contains.” Hell, there's even an interdisciplinary research field called econophysics ! The term was coined by Eugene Stanley, to describe the large number of papers written by physicists in the problems of (stock and other) markets. You can imagine how deeply physics has tried to “infiltrate” economics by the fact that there are even terms like classical economy, quantum economy and quantum finance! (But before you get too carried away

During the 2008 financial crisis, central banks all over the Western world pumped money to bail out the very financial firms that were responsible for the crisis. As John Dickerson scathingly described : “Risk is supposed to be about choice and consequence. You take a chance and you win or you lose…companies that helped cripple the financial system were repaid by the government bailout. They took a chance, and lost—but they still won.” Now contrast the above with how the British government responded to the infamous Irish potato famine in 1845: they ascertained the high severity of the issue and then decided to do nothing ! Why? It was a time when Adam Smith’s theory ruled Britain with an iron fist. Felix Martin in his book, Money: The Unauthorized Biography : “Adam Smith had proved that it was allowing private self-interest to operate as freely as possible that most efficiently achieves the social good…Within seventy years of its publication, Adam Smith's theory of moneta

I’ve always held that economics is not a science. I don’t mean that in a derogatory way. I say that only in an apples-are-not-oranges kind of way. The latest Nobel prize for economics just proved that (let’s set aside the stupidity of the Nobel committee at times, that’s a topic for another day). This year’s winners for Economics are Eugene Fama and Robert Shiller. In case you haven’t heard of either (and so don’t get the absurdity), let John Kay explain the ridiculousness of giving them the prize jointly: “Prof Fama made his name by developing the efficient market hypothesis, long the cornerstone of finance theory. Prof Shiller is the most prominent critic of that hypothesis. It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not.” Kay says that people are neither hyper-rational (as Fama says) nor “slaves to our psychological weaknesses” (the Shiller model). Rather, he

S&P’s downgrade of the US government’s credit rating is all over the news. Will that be the straw that pushes the US into Round 2 of the recession? And if the US situation worsens, will it take down most of the world with it? Who can say? So I’ll just stick to some other aspects linked to the downgrade. Even as S&P downgraded the US rating, the US treasury officials pointed out a $2 trillion error in S&P's math . S&P has acknowledged the error. So how reliable is the downgrade assessment then? (I don’t know how big an error that is with respect to the US, my only reference is that $2 trillion is the size of India’s GDP!). Secondly, the other rating agencies haven’t downgraded the US… yet. Then again, all these rating agencies were assigning high ratings to all the crap that the investment banks sold before 2008. So how much trust should one put on anything they say? Or are the rating agencies now in the “boy who cried wolf” situation? Maybe it’s a case of nobody bel

Can the future be predicted? When it comes to inanimate things, the answer is yes to a pretty large extent. How about the actions of human beings? Can those be predicted as well? t If the answer is yes, it implies that there is no such thing as free will. And if there is no free will, does it make sense to hold anybody accountable for any action? In a universe devoid of free will, how can you punish anybody for anything? After all, that guy whom you are punishing had no control over what he did. He was pre-programmed to do that act. Unless, of course, you too are pre-programmed to punish him for his pre-programmed action. Things are getting very twisted! Then there’s the fallout of predictability on God. Most religions describe God as both omniscient (having unlimited knowledge) and omnipotent (having infinite power). Being omniscient, God knows the future. And being omnipotent, God can change the future. But being omniscient, God would have known that He would change the future at