Let's play a game....

Here is where I continue from my previous blog post about the current economic downturn.
So which economic theory will last the test of time ? The answer is without doubt CAPITALISM :D

"See, the whole free market is collapsing before your eyes"
"The collapse of the US market and the subsequent meltdowns in Asia and Europe show that Capitalism is failing"

What can you say about the above statements ? Firstly , they are inherently flawed.
The FREE MARKET HAS NOT AND WILL NEVER FAIL.
GOVERNMENT INTERFERENCE IN THE PROCESS MAKES IT FAIL.

Let us see how communism works using Game Theory. For those familiar with Game theory, here is a small intro. Game theory is used to capture how humans respond in various strategic situations. There are many outcomes, but however, in a lot of cases, the best possible outcome is not what really happens.


In this case, we consider A and B.
A is a person and B is the rest of the society.
W => Work
NW => No Work/Dont work

In every square, the top portion represent results obtained by A and the bottom portion represent results obtained by B.

Consider that you are the person 'A'. Whatever u work will be pooled in with the work of the society 'B' and then the results will be equally distributed. A doesnt know how hard the society is working. Similarly , each and every one in the society will not know how the hard the other person is working. If we consider the boxes, we have 4 scenarios.

Scenario 1 : Both A and B (society) work hard and end up with profits.

Scenario 2 : A works well , but the rest of the society's output is not good enough. So, compared to what effort A put in, he will not get the results to compensate that. So, A ends up with a loss.
The society enjoys a small profit at the expense of A's hard work.

Scenario 3 : A doesn't work hard , but the rest of the society manages to put in effort and create some output. So, ultimately A makes a small profit, because he is getting something without doing anything. B takes a loss, because people like A are a burden to society.

Scenario 4: A also doesnt put any effort. The rest of the society also doesn't work. So there is no profit for anyone and no loss for anyone.

What is the ideal case here ? Scenario 1 of course. Both A and B will end up with profits and live in harmony ever after.

But very sadly, game theory proves that that never happens.
Why is that ? That is because of underlying human nature. Here , the 2 participants A and B have no idea of what each other is doing and cannot trust each other.

A will think --> "what if i put in effort and then end up with a loss because other people in society have not worked hard enough ?"

similarly, each person in the society will have the same thought as A. They fear that they will end up with a loss if other people in the society dont work as hard as them.

So, what are the options before A ?

If he works, he will get either Profit, or a loss
If he doesnt work, he will get a small profit, or wind up with no profit-no loss

The same are the options before B.

It is proven that both A and B will go for the option of not working, BECAUSE THAT WILL WORK OUT BETTER FOR THEM ON AN AVERAGE.

So, we will wind up with scenario 4 , where noone does any work.
What will result ? massive stagnation, absence of any development and abject poverty.

Now u know why capitalism works :))

- Tejas

Marx my words !

"Democracy will ultimately collapse into socialism(communism)" - Karl Marx

Before embarking on writing this blog entry, I would like to emphatically proclaim that I am a proud free-marketeer who believes in the tenets of capitalism.
Yes , this blog is going to be about economics (yawwwnnn :) ). Well, I would be deceiving myself if I were to believe that this topic would appeal to most people. But however keeping in mind the current economic downturn, it would be nice to delve into the reasons that got us here.
I consider myself a layman in financial issues (but however, it is also one of my passions). Lemme try to explain what I understood from this financial chaos.

What exactly happened

Let us consider a guy called ABC and a bank called XYZ. ABC has seen that property prices are going up everywhere. So, he decides to buy a house. The house costs Rs. 70 lakhs. Even though ABC is unemployed, the bank XYZ gives him a loan of 70 lakhs. Why ?
Isn't giving a Rs.70 lakh loan to an unemployed person risky ? how will he give the money back ?

The beauty here is that the banks never expected to get their money back :)

what the bank XYZ thought ---> "ok...this guy will not give the money back. So, we can seize the house when he defaults on the loan. By the time the guy defaults, he defaults, the house price would have shot upto Rs.80 Lakh. We can sell the house at that price and make a cool Rs.10 lakh profit "

well, in a few months, the price went upto 80 Lakhs.

What ABC thought--->"ok, the price of the flat has shot up to Rs.80 lakh. I have already got a loan of 70 lkahs from the bank. Now, let me borrow another 10 lakhs. With this new loan of 10 lakhs, let me buy a huge car and go on a vacation. Afterall, if something happens, I will sell the house at 80 lakhs and give the money to the bank. "

The bank XYZ gives this 10 lakh loan, because, after a few months , the house will be worth 90 lakhs rite ????

What actually transpired ----> The housing bubble burst. Housing prices collapsed. The house that ABC bought at 70 lakhs is now worth 30 lakhs, and sinking fast.
ABC has no option but to file for bankruptcy , or default on his payment.
Remember, ABC actually owes the bank 80 lakhs (70+10). So, the bank seizes the house. But finds that it is worth only 30 lakhs.
Bank has a loss of 30-80 = 50 lkhs

Now, banks are facing huge losses. So, they stop giving loans to people like they used to.
But if people dont get the money they want , they are pissed. What do they do ?
They vote out the government.

what the government thinks -----> "Damn ! if we dont get these banks up and running and lending to people again, the people will get pissed and not vote for me. Hmm...there is one way out. Whatever tax money I have got out of the people, I will give it to these banks so that they can lend more money to undeserving people."

So, this is how money gets transferred from law abiding, non risk taking , hard working citizens to jobless people (remember XYZ) who took unbelievable risks

It is interseting to note that the same thing is happening with "BIG FIRMS"
Firms like General motors, Ford etc having huge losses. Why ? They had labour unions which demanded a large pay for a small amount of work. So, their cars became expensive.
So, in such a downturn, people stopped buying these cars and went in for Japanese cars which were cheaper. So, what happened ?
GM and Ford are facing huge losses. They have 3 million workers working for them directly and indirectly. They have no choice but to file for bankruptcy. But if they do, some other company will take them over. If some other company takes over, they will fire 1.5 million and retain the other 1.5 million workers.
So, 1.5 million are unemployed. They are pissed.

What the Government thinks ----> "Oops, if i dont pump more money into GM and Ford (which are practically dead), I will lose 1.5 million votes. So I will take tax-payer money and give it to GM and Ford "

Money which should have been used for development and other purposes goes for propping up a failed business which hardly deserves any sympathy.

But why are communism and socialism collosal failures ? I shall try to explore that next :D

-Tejas

The news that Isn't

What do you do when one of your best frds has no time even to respond to your offlines/chat messages/sms's etc ?
Here is an innovative idea.

NEWS REPORT

Mr.Keshav Kandhadai Mukund hailing from Chennai has broken the world record holder for the maximum number of hrs worked in a day. KM Keshav or 'Sloth Kamnaati' as he is popularly called, clocked 25hrs , 4mins and 30 seconds of work on a single day.
Keshav had managed this unbelievable feat by working on different time zones during the same day (or some crazy shit like that)
Part of this marathon feat was a 1hr telephone call from an abusive caller in the United States. It was later learnt that the caller was one of Mr.Keshav's best friends and that Keshav had mistaken him for a customer. Some of Mr.Keshav's most vocal detractors allege that his achievements are bloated because of the sheer volume of prank calls made by anonymous female admirers. When contacted, a spokesperson for Mr.Keshav categorically rejected the allegations as baseless and untrue. Mr.Keshav himself could not be contacted for a statement on the issue as he was troubleshooting a windows-2009 bug for Bill Gates.

- The abusive caller from the USA