A score and a few more years ago, I had the good fortune of seeing an elderly Pakistani gentlemen (seemed like a seer of some kind) speak about the modern economic scenario on TV. I could not watch the whole talk - there was something else that needed to be done that day - but what few lines I caught stayed in my mind for a very long time.
The speaker was suggesting that we need to think more carefully about the idea that money always grows. He said that this idea originated from agriculture, where it was clear that if we consumed a few less seeds and sowed them back into the farm, then we would get many many more seeds and plants back tomorrow. From there on, he said, expectations have somehow been set in such a way that whenever we put money into a bank, regardless of where the money gets invested, we expect that the money will grow - there is no other possibility. He seemed to be asking the audience to think more carefully before necessarily expecting such outcomes always and everywhere.
All through my university days - and even when I was writing a paper on empirically estimating the impact of interest rate policy shocks on the macroeconomy - I never found the time to discuss or think about this view. Today, I want to open up this discussion with all of you even though I have not done much thinking or research on it - since you are all my friends. So this is very much "small talk" and please take it as such.
There are, of course, academic economists who have written on the topic on why (and under what assumptions) zero interest rates are good but I think we can take that up some other day since it will involve some formal arguments too. Here, I only want to explore what it really means for money to grow - in other words, what this "real interest rate" really is, beyond the agricultural scenario where not eating up all seeds today and sowing them back produces many more seeds and plants tomorrow, and to that extent, the term "real" interest rate has an obvious and clear meaning.
In the case of the services sector, it is now-a-days not uncommon for corporate leaders to emphasize learning and development of capabilities throughout one's career. To some extent, this is required, because as people retire or feel the need to move to different roles, we "need" others to take their place and this would be very difficult without some additional development of capabilities over time. However, it seems that this is not really growth from the point of view of the company (or the world) as a whole, because the resulting output seems to be the same - only the retired or bored worker gets replaced by someone else who is less aged or less bored. Output stays constant.
Similarly, when an increase in our capabilities allows us to compete better against others in the market, we are again speaking more about (a) redistributing the pie than growing it or (b) taking credit for doing things more efficiently, which frees up resources for potential increases in output. However, even (b) is only a "potential" increase in the world's output - not yet a realized gain. Of course, consumers benefit if they get the same thing at a lower cost but the world's output is still the same, so the output-gain is more potential than real. On the other hand, if investment in capabilities led to a situation where additional services could be provided over time - things that were not being provided before - then we are talking about real returns to investment for the world as a whole. I feel sure that the cyber revolution and many other innovations of the past are examples of such true gains. The potential harmful effects of such technologies have probably already been more than adequately overcome and so the world has probably gained unambiguously. However, the ordinary worker in an office seldom knows what the next such revolution is, which could help him contribute to real world-wide growth in a big way. For them, the way to contribute to real growth is a set of small additional services they can provide every year in their offices.
Did your office just buy an upgraded version of a software tool (a word processor or a statistical software)? Do you think the company can or would be investing in comprehensive training of staff on the upgraded version? Did you just write a code which can be used with typical software packages and improve the life of several customers worldwide? Do you think someone else was going to be hired to provide that specific code? If not, then there's a good chance that we can make real additions to the world's output by taking time out to explore the latest version of the software or the latest technique which needed to be coded, and share whatever seems to be useful with everyone around us. Chances are, you would have contributed to improving service quality somewhere, without snatching away's someone else's share.
As the example brings out, real growth can happen without being necessarily accompanied by monetary returns. No one really knows whether these additional quality improvements or services provided will necessarily bring high additional monetary returns to the particular person or company which provides them. However, it seems obvious that such additional services lead to enhanced output or better quality output for the world as a whole, and constitute more than simple "redistributions of the pie." Money can be made to grow even outside of agriculture, and real growth can be ensured, but it is not guaranteed that this variety of real growth will always be accompanied by monetary growth.
The speaker was suggesting that we need to think more carefully about the idea that money always grows. He said that this idea originated from agriculture, where it was clear that if we consumed a few less seeds and sowed them back into the farm, then we would get many many more seeds and plants back tomorrow. From there on, he said, expectations have somehow been set in such a way that whenever we put money into a bank, regardless of where the money gets invested, we expect that the money will grow - there is no other possibility. He seemed to be asking the audience to think more carefully before necessarily expecting such outcomes always and everywhere.
All through my university days - and even when I was writing a paper on empirically estimating the impact of interest rate policy shocks on the macroeconomy - I never found the time to discuss or think about this view. Today, I want to open up this discussion with all of you even though I have not done much thinking or research on it - since you are all my friends. So this is very much "small talk" and please take it as such.
There are, of course, academic economists who have written on the topic on why (and under what assumptions) zero interest rates are good but I think we can take that up some other day since it will involve some formal arguments too. Here, I only want to explore what it really means for money to grow - in other words, what this "real interest rate" really is, beyond the agricultural scenario where not eating up all seeds today and sowing them back produces many more seeds and plants tomorrow, and to that extent, the term "real" interest rate has an obvious and clear meaning.
In the case of the services sector, it is now-a-days not uncommon for corporate leaders to emphasize learning and development of capabilities throughout one's career. To some extent, this is required, because as people retire or feel the need to move to different roles, we "need" others to take their place and this would be very difficult without some additional development of capabilities over time. However, it seems that this is not really growth from the point of view of the company (or the world) as a whole, because the resulting output seems to be the same - only the retired or bored worker gets replaced by someone else who is less aged or less bored. Output stays constant.
Similarly, when an increase in our capabilities allows us to compete better against others in the market, we are again speaking more about (a) redistributing the pie than growing it or (b) taking credit for doing things more efficiently, which frees up resources for potential increases in output. However, even (b) is only a "potential" increase in the world's output - not yet a realized gain. Of course, consumers benefit if they get the same thing at a lower cost but the world's output is still the same, so the output-gain is more potential than real. On the other hand, if investment in capabilities led to a situation where additional services could be provided over time - things that were not being provided before - then we are talking about real returns to investment for the world as a whole. I feel sure that the cyber revolution and many other innovations of the past are examples of such true gains. The potential harmful effects of such technologies have probably already been more than adequately overcome and so the world has probably gained unambiguously. However, the ordinary worker in an office seldom knows what the next such revolution is, which could help him contribute to real world-wide growth in a big way. For them, the way to contribute to real growth is a set of small additional services they can provide every year in their offices.
Did your office just buy an upgraded version of a software tool (a word processor or a statistical software)? Do you think the company can or would be investing in comprehensive training of staff on the upgraded version? Did you just write a code which can be used with typical software packages and improve the life of several customers worldwide? Do you think someone else was going to be hired to provide that specific code? If not, then there's a good chance that we can make real additions to the world's output by taking time out to explore the latest version of the software or the latest technique which needed to be coded, and share whatever seems to be useful with everyone around us. Chances are, you would have contributed to improving service quality somewhere, without snatching away's someone else's share.
As the example brings out, real growth can happen without being necessarily accompanied by monetary returns. No one really knows whether these additional quality improvements or services provided will necessarily bring high additional monetary returns to the particular person or company which provides them. However, it seems obvious that such additional services lead to enhanced output or better quality output for the world as a whole, and constitute more than simple "redistributions of the pie." Money can be made to grow even outside of agriculture, and real growth can be ensured, but it is not guaranteed that this variety of real growth will always be accompanied by monetary growth.
Focus on the real, sadhu, and let monetary theorists worry about the outer veil of money!
Sadanand Tutakne
Sadanand Tutakne
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