On historical erroneous beliefs and other misleading notions.
History was as is now full of fallacies. There is prudence which is prudent, and over prudence which is bad.
After an Australian management consultant toured many factories in a country, he told a government official whom invited him for comments:
“My impression as to your cheap labor was soon disillusioned when I saw your people at work. No doubt they are lowly paid, but they return is equally so; to se your mean at work made me feel that you are very satisfied easy –going race who reckon time is no object. When I spoke to some managers they informed me that is was impossible to change the habits of national heritage”.
He was in fact rather polite as his view was that the country he was visiting and the workers there did not have the right work ethic. He could have been blunt and just call them lazy. No wonder that country was poor he reasoned with average incomes of less then ¼ of Australia.
The German economist/sociologist Max Weber opined in his seminal work “The Protestant Work Ethic and the Spirit of capitalism that there are some cultures, like the Protestants, that are simply better suited to economic development then others”.
However, the country in question was Japan in 1915*. Odd how such a comment calling the Japanese lazy, comes from Australia, a nation known today for its ability to be laid back and have a good time. It was not a one-off statement either, others around that time have called the Japanese as “give an impression of being lazy and utterly indifferent to the passage of time”. As was stated by Sidney Gullick, whom spoke Japanese, taught at Japanese Universities, and lived there for 25 years. You can see this in his book “Evolution of the Japanese”.
And Beatrice Webb, the famous leader of British Fabian socialisms, described the Japanese as having “objectionable notions of leisure and a quite intolerable personal independence….there is evidently no desire to teach people there how to think”. She further described the Koreans as “millions of dirty degraded, sullen lazy and religion less savages who slouch about in dirty white garments of the most inept kind an who lie in filthy mudhuts”. Yet Japan and Korea are today among the most formidable examples of the post industrial world’s economic heroes.
And these were not just western prejudices against eastern people, as the British used to say/write similar things about the Germans. History books have such views amply state but which today turn out just the opposite. So there you go, if they were such bad cultures how did they get so rich? Fallacies are all around.
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Here is another real and contemporary fallacy: “inflation is terrible, inflation is cancerous and should be eradicated at just about any cost”. Such are the wise words of the parleurs in upper society of the West. As they nobly claim it first and most eats-up the incomes of the poor and the retired who are on fixed income”
Who can argue against this -or so called anti inflation prudence? But I ask how about when prudence isn’t being prudent, but serving the elites? There is a real cost pursuing an over restrictive monetary policy and that is: running an economy at less then what its potential is. That Bank of Thailand has been in such a mode for a long time here. Through its vast sterilization programs it has kept the Thai economy from its full potential. The sole aim of controlling inflation by an independent central bank in a developing country is the last thing they should do. It results over time of a potentially far faster growing still infant-economy "running on only 3 cylinders" and so hinders its ability/potential for higher growth so lower unemployment and more taxes for government and so better for the majority.
There are many examples of the past which supports this view. Take South Africa as an example, which declared in 1994 it would pursue IMF style macroeconomic policy. In order to keep price stability at all cost it kept very high interest rates in the last 1990’s and early 2000’s when the interest rates were 10 to 12%, all during a time when the world lowered rates to low single digits. Thanks to this, the inflation was contained right around 6% during these years, but this was achieved at a huge cost to growth and jobs. Given that the average non-financial firm in S.Africa has a profit rate of less then 6%, real interest rates of 10- to 12% meant that few firms could borrow to invest. No wonder investment rate as portion of GDP fell to 15% from over 20-25% in the past periods (in the early 1980 it was 30%). It also resulted in one of the highest unemployment rates in the world. Its very clear that tight monetary policy lowers investment which so crucial in a developing country**
Inflation of course is a bad -but so is over prudence and fanaticism in eliminating it. During the long period of the 60’s and 70’s Brazil had an average inflation rate of 42% per year. Despite this, Brazil was one other fastest growing economies in the world for those two decades. In contrast, between 1996 to 2005 when it embraced the “prudent”, neo liberal orthodoxy view, its inflation rate averaged a much “more desirable and so better” rate of 7.1%. But during that period per capita income in Brazil grew at only 1.3% per year, vs 4.5% for the previous period compared here.
During the economic miracle years of Korea, explosive growth in the same period of the 60’s and 70’s, yearly inflation average some 20%, or on average higher then in many so called hyper inflation countries of South America. In fact during this extraordinary growth period of Korea, its inflation rate was routinely higher then most S. American countries. **
Obsessing on inflation reduces future employment prospects and wage rates.
The point is not that inflation is OK. The point is that if low inflation is good, lowest is not better! And just like the sort of fallacy in turned out in the first part of my article here, there is currently the fallacy engrained by many (and pushed by Western countries) that inflation is the ingrained cancer with the view that any inflation is objectionable.
The fallacy that economies nor equity markets can’t do well during some moderate inflation. Shares of listed companies own mostly real assets, not monetary assets and so some inflation gives them pricing power and asset appreciation. But most of all it allows the economy to grow closer to its potential vs. holding it back at less the what it could be.
Earnings which grow twice as fast, demand rationally so triple the stock valuation. So equity markets underperform down to potentially much lower valuations if an economy is forced to grow less then its real potential.
And so through an excessive control of inflation results in a two edge sword for workers, as yes it protects existing income but it also reduces future ones. Stated again: Inflation does bite into workers current income but being obsessed in over taming it, has a high cost- as it so then much cuts into their ability to have higher future higher income. Thailand has for some time been running below it potential growth rate.
The historical record is clear and ample on this, but historical amnesia mostly ingrained by the gnomes of the West, fail to acknowledge the reality that some inflation is good. Does the Bank of Thailand look at this evidence? Perhaps not, because the established rich own most of the fixed income assets like bonds And strictly to those investors, yes, any inflation is bad.
Best Regards,
Paul A. Renaud.
www.thaistocks.com
* The quote above is from the “Japan Times”, August 18, 1915,
** Many facts refered to here are from the excellent book "Bad Samaritans. The guilty secrets of rich nations & the threat to global prosperity". By Ha Joon Chang 2007.
