State vs Market: (Keynes vs

Hayek)

By:
Arpit Jain 09
Ravi Kumar
John Maynard Friedrich A. Hayek Chaudhay 15
Keynes 1899 — 1992 Raktim Kar 32
1883 — 1946 Varun Mangalvedi
41
Neeraj Gaur 49
Kuldeep 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 CROSS
EXPENDITURES

C+I
EXCESS INVENTORIES

C = a + bY

ΔY

INCOME
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
OH, BUT I MUST!
KINDLY DON’T MONEY VELOCITY IS
INTERFRE, MONEY NOT CONSTANT. AT
VELOCITY IS LEAST, NOT IN THE
CONSTANT SHORT RUN

HIGH INFLATION
RATE COUPLED WITH Keynsian
Monetarist LOW s
LOOK AT
STAGFLATION UNEMPLOYMENT IS
! THE MANTRA

WE WERE
NEVER I WANT
MARRIED! DIVORCE!
 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
Banking (State Perspective)

• 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
CSR???

•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
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 milk
Slave-labour involvement accusations
Genetically-modified organisms
Bottled water
Nestlé 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,