Sunday, September 20, 2009

Economics @ Home © Volume 1 Issue 9

Output and Growth - Part 2

Last week, we discussed what output means for an economy and for an individual and also the importance of maximizing output. To recap, the output for an economy is a measure of income for all the participants in the economy, and I do not have to elaborate on the importance of income to you.

Things are a bit more complicated when it comes to estimating output for an individual. While the literal meaning of output implies that a product or a service that is provided, the value of the goods produced would seem intangible and difficult to estimate. However, it is sufficient to say that the salary paid to that person for his services is the value of his output, so says conventional economic theory.

Carrying this assumption with us, it is then obvious that not only do we want to maximize output, but also to grow the amount of output. There are two ways to grow output and I briefly touched one of the methods in last week's issue.

Efficiency is key to maximize output with a set of given resources. For an economy, its resources include money, natural resources, human capital and some other things that may or may not exist. It is easy to see that our country is far from being efficient. A quick look in any newspaper would make us sick to the bone with respect to how our hard-earned money is being wasted everyday. I am referring to taxpayers money that is spent on great big white elephants. I will spare you the torture of reliving the horrors of how our blood, sweat and tears are being wasted. Corruption is still rampant. Rent-seeking is the chief wealth-building activity of the rich bumiputeras in this country. To add to our pains, we are told that this is the evidence that the NEP is working.

Pointing out inefficiencies is easy. Explaining why these inefficiencies exist could even be entertaining, but most definitely unproductive. I will only get all emotional about how poorly the government is allocating resources. Keynes was right that in the short run, market failure is inevitable, thus justifying government intervention. In Malaysia, government intervention leads to poorer efficiencies than if we had let market forces steer our course with its possible failures. This part, Keynes was wrong. He assumed that all governments could allocate resources rationally and efficiently for the greater good. If only...

So to maintain my efficiency and not dwell on fruitless efforts, perhaps I can share some light on how we can improve efficiency and hope that someone who knows someone who knows someone will read this and shares it with someone who knows someone who might actually have the guts and intelligence to implement it. I say guts because some of the problems that need to be tackled are so deeply rooted within our society that any change would be severely unpopular and cost the government even more votes in future elections.

Anyone who has had a brief encounter with economics, even at the secondary school level can tell you that efficiency is derived from competition. Only one word, "competition". When we learn about perfectly competitive markets, we learn that every supplier in the market is a price taker. That is to say, the suppliers have no pricing power and can only sell their goods at the current market price. To put it in context, let us begin by examining students. If all students understood that there was no such thing as a free lunch, don't you think they would work hard? What is this free lunch that I am talking about? Well, for starters, easily available university entrance via matriculation courses and the quota system for scholarships for students who are immensely less deserving than others. If bumiputera students keep getting handouts, what is their incentive to become effective?

The buck doesn't stop there. When the students graduate from universities, because of the poor foundation that was caused by the handouts given by the government, they cannot find jobs in the private sector. So what does the government do with all the unqualified and unemployed graduates? Create jobs for them in the public sector. MORE handouts! This inevitably leads to the promotion of these graduates to decision-making positions and what happens when someone unqualified is placed in a position of power? Well, if you can't decide what is good or bad, what do you do? Pick one that you think works out the best for yourself. So what is best for the decision-maker is how much money he can pocket through whatever he has to decide on.

So now, some of the good and beneficial projects do not get approved because some unqualified jackass was given a place in university and subsequently a decision-making job only knows how to evaluate project based on how much rent he is going to receive for approving the project.

In short, not all the best students are given the necessary support, not all the best graduates are trained to do the important jobs that require making tough decisions and not all the best ideas are utilized. This is clear evidence of sheer inefficiency. Competitive markets will leave no room for pretenders. If you do not have the best abilities, services, ideas, products, or grades, you are redundant and will be subsequently substituted. Competition is an automated system to encourage effectiveness.

Extrapolating the idea of perfectly competitive markets to the individual at a micro-level entails the same conclusions. However, advocating this dog-eat-dog culture surely isn't perfect. This is where Keynes comes in. Markets do fail in the short run. Competing for oneself sometimes ignores the bigger picture of positive and negative externalities. This is why Keynes calls for government intervention. Or else, who would build the roads and the street lamps? Education would be extremely costly. Smoking and drinking would be rampant without regulation. Is that what we want? So of course, competition has to include common sense, bearing in mind the greater good. This is how effectiveness is achieved, building on each others' achievements to climb greater heights.

Next week, I will deal with the other factor of output growth, which is via growing our resources. Briefly, output is a product of resources and efficiency. While we have dealt with how to improve efficiency, so we will move on to the less intuitive idea of growing resources in order to multiply output growth. In short, we hope to build a bigger base so that we can build higher. We will explore how we can widen our base next week.

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