Why Did The Industrial Revolution Happen In Europe – And Not India Or China?

WHY DID THE INDUSTRIAL REVOLUTION HAPPEN IN EUROPE – AND NOT INDIA OR CHINA?

How did the West become rich? Why did the Industrial Revolution happen in Europe - even though historically, India and China were more advanced in science? This is the biggest question in economic history. Economic historian Eric Jones answered this question in his book 'The European Miracle' (1981). The ultimate determinant of history is geography - and a unique combination of geographical factors put Europe on a unique path of political, economic and technological development:

1. Latitudes: India is in the tropical/sub-tropical zones, China and Europe are in the sub-tropical/temperate zones. The tropical and sub-tropical zones were prone to droughts and famines - which retarded India's and China's development. But North Europe (Britain, France, Germany - the growth engine of Europe) is in the temperate zone - so it did not have this problem.

2. Coastline: India and China have short/smooth coastlines - but Europe has a long/jagged coastline. So India and China did not give much importance to sea transport, but Europe gave it a lot of importance - and hence advanced in shipping. The earth's surface is 70% water - so Europe's advancement in shipping enabled it to reach all parts of the world, and conquer them.

3. Divisions: Both India and China are unified land areas. But Europe is divided by seas, rivers and mountains into separate geographical units - and these separate geographical units became separate countries (Britain, France, Germany, Italy, Spain, etc). And these separate countries continuously competed with one another technologically and economically - and put Europe on a path of technological and economic development. India and China, on the other hand, were ruled by single empires - and did not have this division and competition.

4. Central Asia: Central Asia is a vast grassland whose people were horse-riding tribals. And these tribals (Turks and Mongols/Mughals) invaded the nearby advanced civilisations of India (to the south) and China (to the east) - and retarded their development. But Europe is far away from Central Asia - and so escaped this problem.

5. Americas: North America and South America were thinly populated continents rich in natural resources. America is 10,000 km from Asia - but only 5,000 km from Europe (half the distance). So it was easier for Europeans to go to the Americas, occupy them and get their vast natural resources - which accelerated Europe's development.

Dharmonomics: Dharma And Economics

DHARMONOMICS: DHARMA AND ECONOMICS

Last month Daron Acemoglu, Simon Johnson and James Robinson won the Nobel Economics Prize for showing how institutions produce economic growth. In particular, they have shown the importance of 3 institutions:

1. Law and order 

2. Enforcement of contacts

3. Protection of property rights 

In ancient Indian philosophy, the concept of Dharma (order/morality) had 3 main components:

1. Satya (truth)

2. Asteya (not stealing)

3. Ahimsa (non-violence)

We can see that the 3 components of Dharma are similar to the 3 institutions that produce economic growth . . .

'Phulwanti' Movie Review

'PHULWANTI' MOVIE REVIEW

Based on the famous novel (of the same name) by the great Marathi writer Babasaheb Purandare, 'Phulwanti' is a beautiful meditation on the relationship between knowledge and the scholar (and art and the artist) - and also the real meaning of love. The script, direction, acting, set design, costume design, music and choreography are all top-notch. The movie has English sub-titles.

[An economist's irrelevant aside:

A civilisation that can produce a great work of art like Babasaheb Purandare's 'Phulwanti' is indeed a great civilisation. Where we have fallen short is in building efficient systems - like economic system, administration system, etc . . .]

Why Government Must Be Small

WHY GOVERNMENT MUST BE SMALL

What should be the size of the government? Should it be big or small? Liberals want a big government that provides a lot of generous welfare schemes to as many people as possible. Conservatives want a small government that only performs its core functions of maintaining law & order and providing public goods (because a big government has to be funded by high taxes - and taxes reduce the social surplus). And centrists/realists say that the government must be neither big nor small - but of the optimum size: ie, the size that maximises the long-term growth rate.

These ideological preferences aside, there is one argument in favour of a small government. And we are seeing it in today's Indian politics. The Congress Party is promising the expensive and wasteful Old Pension Scheme (OPS) in every state election - and government workers are voting for it. In theory, democracy is the rule of the majority - and must work for the good of the majority. But as the economist Mancur Olson showed in his 1965 classic 'The Logic Of Collective Action' (for which he shockingly did not get the Nobel Prize) small groups can hijack a democracy. And the voting behaviour of government workers in India is a perfect example of this phenomenon.

Thus if the government becomes big, then government workers will become a big and powerful lobby - and will vote for wasteful government programs like the Old Pension Scheme (OPS). So this is a good reason for keeping the government small . . .

Working Hours, Stress And Salary In India

WORKING HOURS, STRESS AND SALARY IN INDIA

(The Dichotomy Of The Indian Economy)

Anna Sebastian Perayil, a 26-year-old chartered accountant at Ernst & Young, sadly died in July due to overwork and stress. Many people are asking: "Why didn't she quit?". Well, this question applies not just to her but to almost all middle-class Indians in metropolitan cities - who are doing high-stress jobs. According to a survey conducted by the Confederation of Indian Industry (CII) 60% of Indian workers suffer from high stress - the world average is 20%. So the question arises: Why don't all these people quit their jobs and do jobs that are less stressful?

Graph 1 shows an ideal economy:

1. There is a linear relationship between working hours/stress and salary (blue line). As working hours/stress increases, salary also increases - but linearly.

2. Most of the jobs pay a salary that can support a middle-class lifestyle (red line) for a family.

Graph 2 shows today's Indian economy:

1. The relationship between working hours/stress and salary is not just non-linear but exponential. The salary increases only at a high level/value of working hours/stress. 

2. To live a middle-class life in a metropolitan city (ie, house + car + etc) you need that high salary.

In the ideal economy (Graph 1) people can choose the combination of working hours/stress and salary that they are comfortable with - and still live a middle-class life. That is - they can give up some salary in return for lower/lesser working hours/stress. The choice can also be dynamic: People can do high-stress/high-salary jobs when they are young - and switch to medium-stress/medium-salary jobs when they are middle-aged. But in today's Indian economy (Graph 2) there is no choice. If you want to live a middle-class life, you *have to* do a high-stress/high-salary job. You are forced to choose between two extremes: low-stress but low-salary jobs versus high-salary but high-stress jobs - there is nothing in between.

Real development means building the economy shown in Graph 1 - so that there are no more tragedies like Anna's . . .

Why Socialism Is Illogical And Unnatural

WHY SOCIALISM IS ILLOGICAL AND UNNATURAL

(The Logical Mistakes Behind The Conception Of Socialism)

Around 1800, the Industrial Revolution started in Britain. It consisted of two major changes:

1. The 3 factors of production are land, labour and capital. During the Agricultural Age, the most important factor of production was land. With the Industrial Revolution, capital (ie, machines/factories) replaced land as the most important factor of production.

2. During the Agricultural Age, capital consisted of small/simple tools like the plough. And these tools were owned by the workers. Example: Farmers owned their ploughs. With the Industrial Revolution, big/expensive machines/factories became the new capital. And these were owned not by workers but by rich merchants - ie, a separate group of people: the 'capitalists'.

Thus the new economic system was dominated by both capital and capitalists. Hence it was called 'capitalism'.

During the Industrial Revolution, the condition of the factory workers was bad. Wages were low, the work was hard/long and working/living conditions were bad. So some social thinkers of 1800s Europe (mainly France and Britain) said that these problems were due to the private ownership of capital. Hence the solution was the opposite of this - ie, the social ownership of capital. That is - they proposed an alternate economic system: 'socialism'.

The socialists made two mistakes. First mistake: These social thinkers were all city people. So they saw only the problems of the factory workers - who were also in the cities. But who were these factory workers? They were farm workers in villages who had moved to the cities and become factory workers. The condition of the factory workers was bad. But the condition of farm workers was even worse. That is why they had left their farms/villages and moved to the cities/factories. But since the socialists were city people, they did not see the poverty of the farm workers in the villages. This was a cognitive bias - ie, the selection bias.

Second mistake: The socialists jumped to the conclusion that the bad effect of capitalism (ie, the bad condition of factory workers) was due to the most visible/glaring feature of capitalism: the ownership of capital by capitalists, or the 'private' ownership of capital. They did this without any logical (let alone scientific) cause-effect analysis. [The truth was that the bad condition of factory workers was just the first stage of capitalism. Over time, capitalism would reform itself and the condition of factory workers would improve. And this is exactly what happened in Europe in the 1800s. Thus capitalism is a self-correcting economic system] So here the socialists committed a logical fallacy - ie, the causal fallacy.

Thus socialism was the product of a cognitive bias (selection bias) and a logical fallacy (causal fallacy). And Karl Marx took this one step further - he turned 'social ownership of capital' into 'government ownership of capital' . . .

Donald Trump Vs Kamala Harris Debate Highlights

Highlights from the just-finished debate between Donald Trump and Kamala Harris:

Issue: Economy and cost of living

Kamala: "I will give tax cuts to middle class families and small businesses"

Trump attacked Biden and Kamala for increasing inflation.

Question to Trump: "Your proposed import tariffs will increase prices"

Trump: "No, they will not. And Biden has not removed the tariffs that I had put earlier"

Kamala did not say anything about Biden not removing Trump's tariffs - and instead attacked Trump's policies.

Issue: Abortion

Trump: "States must decide this matter"

Kamala: "Trump is responsible for the Supreme Court striking down the Roe Vs Wade verdict (the right to abortion)". Kamala attacked Trump aggressively with emotional examples - because this is an important issue for women (who are 50% of the voters).

Question to Kamala: "Illegal immigration reached an all-time high under the Biden government - and you were in charge of border security. Why did you act only in the last 6 months?"

Kamala did not answer the question - and instead attacked Trump's policies.

Trump counter-attacked Biden and Kamala.

Question to Trump: "You plan to deport all illegal immigrants. How will you do it?"

Trump did not answer the question - and instead attacked Biden and Kamala.

Kamala counter-attacked Trump.

Question to Kamala: "You have flip-flopped on a lot of issues - like banning fracking"

Kamala: "I will not ban fracking". She did not say anything about her other flip-flops.

Trump attacked Kamala.

Question to Trump: "Do you have any regrets about the January 6 riots by your supporters?"

Trump did not answer the question - and instead attacked the Democrats.

Kamala attacked Trump.

Question to Trump: "Do you accept that you lost the last election?"

Trump: "No, I do not accept"

Question to Kamala: "Do you think Trump will suppress the vote this time?"

Kamala did not answer the question - and instead attacked Trump.

Issue: Israel-Gaza war

Kamala: "I want a two-state solution that gives Israel security and Palestine freedom". A balanced answer.

Trump: "Kamala hates both Israel and Arabs" (!)

Question to Trump: "Do you want Ukraine to win its war against Russia?"

Trump: "I just want the war to end"

Kamala attacked Russia and Trump.

Question to Kamala: "Do you accept responsibility for our retreat from Afghanistan?"

Kamala defended the retreat - and attacked Trump for creating the problem by negotiating with the Taliban.

Trump defended himself - and counter-attacked Biden and Kamala.

Question to Trump: "Why do you talk about Kamala's race?"

Trump: "I don't care about her race"

Kamala attacked Trump as a racist.

Question to Trump: "What is your alternate plan to the Democrats' health insurance program (Obamacare)?"

Trump did not give any specifics - and just attacked Obamacare.

Question to Kamala: "You have flip-flopped on health insurance policy"

Kamala attacked Trump and defended Obamacare.

Question: "What will you do to tackle climate change?"

Kamala: "I will revive America's manufacturing". A very strange answer to give.

Trump attacked Kamala.

Closing statements:

Kamala: "We have very different philosophies - I look forward and he looks backward"

Trump: "Why didn't she do anything for 4 years as Vice President?". He attacked Biden and Kamala. 

Summary:

# Trump was his usual self - with his personal attacks and sweeping statements. But his simple language appeals to most ordinary Americans.

# Kamala is a good debater - and was well-prepared with data-points and specific policies. But she was weak in defending her and Biden's track record.

# The moderators conducted the debate well and were fact-checking both the candidates - especially Trump.

'Capitalism': The Natural Economic System

Karl Marx told two big lies:

1. He called the natural economic system (which is free and efficient) as 'capitalism' - to make it look unnatural.
2. He proposed a government-controlled economic system (which is unnatural and inefficient) called 'socialism' - and said it is better than 'capitalism'.

Today the whole world's economic debate/discussion is about Marx's second lie - ie, which economic system is better: 'capitalism' or 'socialism'? Half the people say 'capitalism' is better, and half the people say 'socialism' is better.

But there is zero debate/discussion in the world about Marx's first lie. Very few people realise that the so-called 'capitalism' is nothing but the natural economic system. Funnily, this includes even the people who support it (because it is efficient).

Karl Marx thus succeeded beyond his wildest dreams. In fact, his ghost is laughing even today . . .

PS: Capitalism is the natural economic system. So capitalism the system came first - and capitalism the word/idea came later. Socialism is the unnatural economic system. So socialism the word/idea came first - and socialism the system came later . . .

India Budget 2024-25: Analysis

INDIA BUDGET 2024-25: ANALYSIS

# Fiscal deficit is decreasing from 5.6% of GDP (2023-24) to 4.9% (2024-25) - a decrease of 0.7% points. This is good.

# Nominal GDP is estimated to increase in 2024-25 by 10.5%.

The 4 Budget components are changing from 2023-24 to 2024-25 like this:

1. Revenue Receipts (good income - ie, taxes)

This is increasing by 14.7% - which is more than the GDP growth rate (10.5%). This is good.

2. Capital Receipts (bad income - ie, loans)

This is *decreasing* by 1.3% - which is very good.

3. Revenue Expenditure (bad spending - salaries, schemes, subsidies)

This is increasing by 6.2% - which is less than the GDP growth rate. This is good.

4. Capital Expenditure (good spending - ie, infrastructure)

This is increasing by 17.1% - which is more than the GDP growth rate. This is good.

So overall we can say this is a good Budget . . .

2024 Election Analysis

2024 ELECTION ANALYSIS

"The inflation and unemployment of the last 5 years brought BJP down from 303 seats to 240 seats" - this is the consensus opinion of all political analysts about the election. But if this was the case, then BJP/NDA's seats must have come down in every state. However, NDA increased its seats in several states (see table) - including in states like Madhya Pradesh and Chhattisgarh where there was hardly any room for improvement. So inflation and unemployment are only half the story. The other half of the story is the state-level variation in the constituency-level factors like performance of the MPs, selection of the candidates, caste equations, etc . . .

Narendra Modi

NARENDRA MODI

Liberals: "Getting less than a majority will destroy Modi!".

Do they have any idea who they are even talking about?

This is NOT a man who has become Prime Minister by being born in a political dynasty.

This IS a man who has risen from being a poor tea-seller to become Prime Minister.

This is NOT a man who had power handed to him on a golden plate in a golden palace.

This IS a man who has fought a thousand battles in his life to get to where he is today.

This is NOT a man who is the puppet of a few rich and powerful people of the world.

This IS a man who has been chosen by the crores of poor people of India as their leader.

This is NOT a man who is the agent of India's enemies - both inside and outside.

This IS a man whose historical mission it is to restore the Indian civilisation to its lost glory.

Aum Bharata Matayai Namah . . . !

2024 Election, Economic Reforms And Modi

2024 ELECTION, ECONOMIC REFORMS AND MODI

Now that BJP has been reduced to 240 seats, what will happen to economic reforms? In a FICCI meeting in February, Finance Minister Nirmala Sitaraman had said: "In our third term, we will carry out factor market reforms - ie, land reforms and labour reforms". What will happen to them now?

One view is: "Now it is a coalition government - so forget about economic reforms". But the Vajpayee government (1998-2004) was also a coalition government. In fact, then BJP had only 182 seats - as against 240 seats today. And Prime Minister Atal Bihari Vajpayee did carry out economic reforms, including one of the toughest reforms of them all - privatisation (something which the Modi government with a clear BJP majority has not been able to do for 10 years - with the one exception of Air India).

So political will is more important than numbers. So the real question is: How strong is Narendra Modi's political will? In his first term, he carried out demonetisation and GST. In his second term, he tried to implement three agricultural reforms. Demonetisation was a mistake. GST was great - though its implementation could have been better. The three agricultural reforms were also great - but Modi underestimated the power of the Arhatiyas (middle-men) of Punjab and Haryana. All the three moves were politically very risky. So Modi is not short of courage. We can question the way he used his courage - but we cannot question the courage itself.

As for the coalition partners, the two biggest parties are Chandrababu Naidu's TDP and Nitish Kumar's JDU. Naidu has been one of India's most pro-reform Chief Ministers. Nitish may not be very pro-reform, but he is not fundamentally anti-reform either. In any case, land is a state subject and labour is a concurrent subject. So both land reforms and labour reforms will have to be carried out in partnership with the states. So a coalition government at the centre is not really an excuse for not carrying them out.

Finally the most important point is this: Narendra Modi wants to go down in history as India's greatest Prime Minister (currently this place belongs to P V Narasimha Rao - who carried out the 1991 economic reforms). And he can do that only if he carries out land reforms and labour reforms. And he knows this.

So let us cross our fingers and hope for the best . . .

India, China, Europe: The Economic Race

INDIA, CHINA, EUROPE: THE ECONOMIC RACE

East Asia (Japan, Korea, Taiwan) modernised in the second half of the 20th century. This story is the Bhagavad Gita for growth/development economics. But East Asia basically did a crash-implementation of the Western techno-economic model. And this Western techno-economic model developed in Europe over a period of 1000 years (starting from 1000 AD).

The graph shows the per capita income for India, China and Europe from the year 1 AD to 1800 AD. Data is from Angus Maddison's Contours Of The World Economy: 1-2030 AD. Till 1000 AD, all the 3 civilisations had the same per capita income. But after that, Europe's per capita income started shooting up. This was due to technological advances like wind-mills, water-wheels, horse-ploughs, etc.

So studying the 'East Asian model' is a good shortcut to understand growth/development economics. But to really understand the fundamentals of growth/development economics, we have to study the techno-economic history of Europe from 1000 AD onwards . . .

India Interim Budget 2024-25: Analysis

INDIA INTERIM BUDGET 2024-25: ANALYSIS

Budget has 4 components:

1. Revenue receipts = Good income (mainly taxes)

2. Capital receipts = Bad income (mainly loans)

3. Revenue expenditure = Bad spending (salaries, schemes, subsidies, interest payments, etc)

4. Capital expenditure = Good spending (mainly infrastructure)

So how should a Budget ideally be?

1. Revenue receipts (good income) must increase at the same rate as the GDP (nominal).

2. Capital receipts (bad income) must decrease - or increase as little as possible.

3. Revenue expenditure (bad spending) must decrease - or increase as little as possible.

4. Capital expenditure (good spending) must increase as much as possible.

The table shows that in this Budget:

1. Revenue receipts (good income) has increased by 11.2% - which is close to the increase in nominal GDP (10.5%).

2. Capital receipts (bad income) has decreased by 1.5%.

3. Revenue expenditure (bad spending) has increased by a modest 3.2%.

4. Capital expenditure (good spending) has increased by a high 16.9%.

Finally the most important thing: The Budget is reducing the fiscal deficit from 5.8% of GDP to 5.1%. So overall, we can say that this is a disciplined Budget . . .

The Paradox Of India's Trade Deficit/Surplus

Every month, India's trade data comes out - and the media reports the change in our trade deficit. It reports an increase in our trade deficit as bad news - and a decrease in our trade deficit as good news.

Ideally a country must have a trade surplus - or at least, not have a trade deficit. So by extension, an increase in the trade deficit is bad - and a decrease in the trade deficit is good. And vice versa for trade surplus. But this is in the long run. In the short run, there is a paradox in the relationship between:
1. The change in a country's trade deficit/surplus
2. The country's economic growth relative to the world
This follows from a basic law of economics:
1. A country's imports are proportional to its economy's output
2. But its exports are proportional to the world economy's output*
(everything else remaining the same)

Scenario 1: A country's economy does better than the world economy - ie, the country's growth rate increases and the world's growth rate decreases. Here the country's imports will increase (because its growth rate has increased) and its exports will decrease (because the world's growth rate has decreased) - so its trade deficit will increase (or its trade surplus will decrease).

Scenario 2: A country's economy does worse than the world economy - ie, the country's growth rate decreases and the world's growth rate increases. Here the country's imports will decrease (because its growth rate has decreased) and its exports will increase (because the world's growth rate has increased) - so its trade deficit will decrease (or its trade surplus will increase).

Thus we have the paradoxical situation where a country's trade deficit increases when its economy does better than the world economy - and decreases when its economy does worse than the world economy. And vice versa for trade surplus.

Of course, in the long run, we must improve our competitiveness (especially in manufacturing), increase our exports, reduce our trade deficit - and eventually become a trade-surplus country. But till then, we must take negative news-reports about an increase in our trade deficit (and positive news-reports about a decrease in our trade deficit) with a pinch of salt . . .

Caveat: This analysis is based on the assumption that everything else remains the same - which never happens in the real world. Trade is a system of equations with many variables. Example: Our trade deficit usually increases in the festival season (Oct/Nov) due to an increase in gold imports.

*[More correctly: A country C's exports are proportional to the weighted average of the outputs of its export markets - where each export-market's weight is its share in the total exports of country C. I have used the terms "world economy", "world economy's output" and "world's growth rate" as approximations]

'Main Atal Hoon': Movie Review

REVIEW:

'Main Atal Hoon' is not just the inspiring journey of a man from swayamsevak to RSS pracharak to BJP leader to Prime Minister. It is the electrifying saga of the rise of modern nationalism in this sacred land. It is the soaring epic of the birth of a strong state in this ancient civilisation. Script-writer Rishi Virmani and director Ravi Jadhav deserve the highest praise for telling us this story in a powerful and exciting way. The movie also shows us Vajpayee's personal life in a very mature and dignified manner.

As for Pankaj Tripathi, he is a great actor who has given many great performances - and will give many more. But this is the greatest performance of his career - and one of the greatest of all time. He disappears completely right in front of our eyes - and brings Atal Bihari Vajpayee to life fully. We even forget that an actor called Pankaj Tripathi exists in this world.

My only criticism: The movie does not even mention Vajpayee's greatest achievement - privatisation. But economics is interesting only to economists - and to everybody else, it is the most boring subject in the world. So this omission is understandable.

'Main Atal Hoon' is basically the story of a man who loved India with all his heart. So watching this movie is like bathing in the sweet waters of Mother India's love. Pranaam, Atal-ji . . .