State vs Market: (Keynes vs Hayek)

John Maynard Keynes

1883 — 1946

Friedrich A. Hayek1899 — 1992

By:Arpit Jain 09Ravi Kumar Chaudhay 15Raktim Kar 32Varun Mangalvedi 41Neeraj Gaur 49Kuldeep Singh 73

THEORITICAL BACKGROUND OF DEBATE State role in economy through fiscal and

monetary policy Keynes, Hicks etc favoured state role in

economy Hayek, Friedman etc favoured no state role Keynes’ Circular Flow of Income

Framework Hayek’s Means End Framework Two groups: Keyensian and Monetarists

CIRCULAR FLOW OF INCOME

KEYNSIAN CROSSEX

PEN

DIT

UR

ES

INCOME

ΔY

EXCESS INVENTORIES

C + I

C = a + bY

Yfe

The IS-LM Curve

- Fiscal policy: increase I, increase Y -Monetary Policy: Increase M, increase Y

PHILIP’S CURVE

HAYEK’S THEORY

Views economics as a sequence of accidents Views economic problems as coordination

problem – in time and level dimensions Integrates three theories - Price, Capital and

Monetary Price is a communicator Capital explained by Hayekian Triangle Money supply should be market driven Deliberate injections create artificial booms

which go bust later

STAGFLATION – MODIFIED PHILIP’S CURVE

MAIN POINTS

KINDLY DON’T INTERFRE, MONEY

VELOCITY IS CONSTANT

HIGH INFLATION RATE COUPLED WITH

LOW UNEMPLOYMENT IS

THE MANTRA

LOOK AT STAGFLATION

!

OH, BUT I MUST! MONEY VELOCITY IS NOT CONSTANT. AT LEAST, NOT IN THE

SHORT RUN

WE WERE NEVER

MARRIED!

I WANT DIVORCE!

Monetarist

Keynsians

INDIAN BACKGROUND OF THE DEBATE

• Nehru (State) v/s Patel (Market)• Nehru started 5 year plans starting from 1951 • Patel died in 1950, couldn’t draft 2nd 5 yr plan• 2nd 5 yr plan focused greatly on PSUs• Planning commission became very, very

powerful• P.C. Mahalanobis model: focus on pivotal

sector and rest will grow automatically• Results - Public sector undertakings,

investments - Core sector became paramount• Only in 1990s did the economy open up to

non governmental investment

ADVANTAGE MARKETISM

Perfect competition – no state monopolies

Competition strictly on value proposition Price lower and uniform Product quality improvement Product variety improvement All in all – a complete customer

satisfaction

ADVANTAGE MARKETISM

Efficiency improvement Greater productivity Competition forces technological

advancement State monopoly shield removed implies

greater customer focus in production

ADVANTAGE MARKETISM

Transparency in business due to stakeholder demands

Greater disclosure norms for public Entry Barriers for new entrants limited ‘License raj’ had always hindered growth

of industry rapidly Entrepreneurship and creativity

rewarded

ADVATAGE MARKETISM?

Is it really a perfect competition? ‘Information Asymmetry’ Some customer know more than others Some manufacturers can hide information Speculative trading can be rife using

information Market manipulation using information Insider trading Share market scams

ADVANTAGE STATE

Stability Return risky,

Meeting collective objectives by individual sacrifice building a heavy industry at once in an

underdeveloped economy Does not suffer from business cycles Does not experience crises of overproduction Utilities for everyone – cross subsidization Public spending for infrastructure necessary in

rural areas Financial inclusion Affirmative action for deprived sections

ADVANTAGE STATE

Regulation of market necessary Market is not jungle to be left to ‘animal

spirits’ Fair market to be maintained RBI, TRAI, SEBI etc regulatory bodies

have made the markets inclusive and effective

Telecom sector

Reduction in Tariff from Rs 15 in 1995 to 30 paisa /min in 2009

Competition – Resulting New services and improvement

Capital Investment ( Tower Infrastructure)

Penetration in rural India

Banking

Professional approach ICICI leads to Change in

SBI working Monopoly is over Technological

Improvements Internet Banking ATMs

Education

Demand Supply Mismatch in Education

No professional approach in many government institutes

Sleeping Primary school teachers

In many Higher education colleges, results are not Officially Declared even after Year

ISB Hyderabad Govt Vs Private School

Telecom Sector (State Perspective)

SMS rates are set to crash - Telecom watchdog TRAI An expose by TOI on November 5 2009 that SMS

tariffs are 50 to 100 times higher than what it costs service providers.

BSNL, MTNL players in market to prevent cartelization Provide services in rural areas Provide services at low cost

• Fed is the US central bank and controls its monetary policy• Some banks are too Big to Fail• Bail Out by Fed• Claim that the Federal Reserve benefits "Wall Street“ but not "Main Street."• RBI fully owned by Government of India

Banking (State Perspective)

•overusing and polluting of the common groundwater, •giving toxic sludge to farmers as fertilizer,•selling contaminated soda to the citizenry, leaving Indians at risk of dehydration, starvation, and poisoning, and

CSR???

RURAL TARGETING BY FMCG

FMCG companies are targeting rural Improving their lives HUL, ITC and P&G targeting rural

consumer ‘Fortune at the Bottom of the Pyramid’ Arvind Eye Hospital

Clean Development Mechanism Lack of government support for climate

change mitigation Market route to clean environment Lot of focus on alternative forms of

energy Winds, biomass, hydel etc Development work at host countries China, Brazil, India and Mexico at

forefront

Creativity or Cut & Paste

Creativity or Cut & Paste

FORTUNE AT BOTTOM OR MIDDLE?

C.K. Prahlad – Non Executive Board of Director of HUL CavinKare was the first entrant in rural markets not

HUL Annapurna salt was actually due to government

propaganda for iodised salt Arvind Eye Hospital is sustained by NGO donations Business really sustainable at present?

Melamine in Chinese milkSlave-labour involvement accusations Genetically-modified organisms Bottled waterNestlé Purina in Venezuela The baby milk issue

WHAT’S COMMON WITHIN AND BETWEEN THE GROUPS?

MARKET BECOMES STATE IF UNCHECKED

CONCLUSIONS

Mixed economy is perhaps a good solution The correct mix of state and market A hassle free market overlooked by the

state State retaining control of key sectors for

social welfare Performing well in Brazil, Russia, India,

China,