Category Archives: markets and efficiency

On Cows and Central Tenets of Capitalism!

Santosh Anagol has been doing interesting research on several phenomena concerning the Indian economy. In a recent paper, he and his coauthors estimate that returns to owning a cow in India are negative and hence the continued existence of cows violates the central tenets of capitalism.

Daron Acemoglu and James Robinson discuss these findings in their extremely interesting blog here. They argue that social embeddedness could help us understand why cows are still a part of a typical Indian farmer’s portfolio. I think that their arguments certainly makes sense, however, one might also look at new monetarist economics for an answer to this question. For example, Lagos and Rocheteau (2008) analyse an economy with money and capital as competing media of exchange and their model I think could explain this puzzle that Anagol pose.

In their economy, agents over-accumulate capital in a non-monetary equilibrium because the capital asset performs the function of a productive asset as well as a liquid medium of exchange when needed. The introduction and use of money therefore allows the liquidity use to be separated from the productive use and corrects the inefficient over-accumulation of capital. Thus, fiat money plays a welfare enhancing role in this economy. However, that precisely does not seem to be happening in India and that is the puzzle that Anagol and his coauthors are referring to.

So why do Indian farmers seem to be preferring to invest in an asset that has negative returns, despite the availability of a liquid medium of exchange? Here, it is important understand what constitutes return on capital. Lagos and Rocheteau propose that return to capital in such an economy can be thought of being comprised of two parts: a liquidity return referring to capital’s role in exchange process and the intrinsic return associated with the productive use of cows. Anagol’s analysis seems to be capturing only the intrinsic return while cows continue to have a liquidity return (premium) in the minds of Indian farmers. Ideally, this perceived positive liquidity return for cows should not prevail if fiat money does provide the necessary insurance against uncertainty. The fact that it does implies that the insurance provided by access to fiat money is not enough.

Anagol and his coauthors do raise this point but dismiss it citing the proliferation of different forms of microfinance institutions in rural India increasing access to savings. However, research has shown that actual use of these institutions is quite uneven and tends to depend on factors that could be explained using the economics of networks. For example see Matt Jackson’s work here. I think the factors mentioned above still continue to influence the basic uncertainty that farmers face in a substantial way. I am not sure if microfinance would be able to provide enough insurance in case of a crop failure for example. Because provision of funds in such case may require access to a mechanism to transfer funds from non-affected areas to affected areas to meet the demand and microfinance in its current state most likely is not in a position to handle that.

I still think that social embeddedness plays an important role. On the one hand traditional socioeconomic relationships have broken down reducing the access to mechanisms that could serve as partial insurance mechanisms and on the other hand access to modern monetary economy is still hard to come by. Lack of roads, absent storage and refrigeration facilities, ineffective or absent land reforms, inadequate irrigation facilities keeping agricultural output sensitive to rainfall shocks, all imply that the benefits from participating in the market economy only add to the existing uncertainty that these farmers face. Till these issues are addressed Indian farmers will continue continue to hold cows despite their negative intrinsic return.

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Filed under indian economy, macroeconomics, markets and efficiency, money search, social perspectives

On Pareto improving trades!

When I first came to US (suburban CT), the idea of thrift stores was totally new me. At first, I had no idea what these stores were about.The name suggested that one could possibly save money by shopping at such stores. It was only later when I actually visited one in NYC that I realized that much of what these stores sold were used clothing, books, kitchen stuff, shoes, etc. The stuff was indeed cheap and sometimes even brand new, probably chucked of someone who got bored with the purchase. As an international graduate student on a shoe string budget it was a great boon to have one right near where I lived.

As a student of economics the question that intrigues me  was why are there thrift stores? It was particularly interesting because stuff from China and other developing countries had already made sure that goods are available at dirt cheap prices. Also, if you are not picky and can be patient, then you could get all that you wanted at a price that is affordable. But I think there in lies the answer. There are consumers who are obviously poor and benefit from thrift shops. But then there are others who are not that poor but would like to have things now and thrift stores provide an opportunity for them. Later, as I finished my studies and moved to other town for a job, I became a donor to these shops. This was stuff that I had acquired over the years, brand new and used, but did not see me using it anymore. So the thrift store provided an avenue to reduce clutter and then buy stuff that I would need for the new phase in my life. I am sure mine is not a peculiar case and many people at some or the time have been on either the consumer or supplier side of thrift stores.

When I moved to south east Massachusetts, I came across another variety of stores called consignment stores. This was a version of a thrift store but only somewhat pricier. Here the stuff is actually consigned by owners to be sold for them. So the products are not donated. The quality is overall better than a thrift store and at times you just might get lucky with a latest fashion shirt or a jacket!

So what the thrift and consignment stores seem to be doing is provide an opportunity for a beneficial trade (people who want to get rid od stuff and people who do not mind using it), clear the markets( reduce the price to ensure sales) and in the process create sustained demand for new products. Given this, I think they are an integral part of a market based economy. Do we see these kind of stores in other countries? I can speak for India. Markets for used automobiles are every where. You can also buy used books and other second hand goods sometimes through stores and at other times through personal and social networks. In my home town there is also this network of people who buy junk, exchange old clothing for new sundry items like utensils, crockery, etc and then sell the junk and old clothing to people who are in need of them. So the markets may not be as organized as in the US but they are certainly there and there might be an argument for making them more visible and ubiquitous to improve economic efficiency.

I have not come across any studies on this phenomenon but then that is just a good excuse to dig deeper, is it not?

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