Tag: international trade

Gold: Currency or Commodity?

In today’s Hindu Business Line, S Gurumurthy of the Swadeshi Jagran Manch has an insightful article on the Indian affinity for gold. In this, he talks about gold being the preferred form of savings among the poor and mentions that the preferred form of financing for poor and/or rural households is the “gold loan” (loan issued keeping gold as collateral), often arranged by an informal moneylender. He argues that attempts to regulate gold imports are futile and what instead needs to be done is formalization and regulation of the gold loan industry.

The question one needs to answer when trying to regulate gold is whether it is a currency or a commodity. Or, to “segment along another axis”, whether it is a “conventional asset” or “financial asset”. The thing with “conventional assets” (as opposed to financial assets) is that demand decreases as price increases (most goods and services fall under this category). “Financial assets” on the other hand see the reverse relation – price increases are usually followed by an increase in demand.

Conventional wisdom which governs gold regulation in India (and elsewhere) is that it is a commodity, and a conventional asset. Gurumurthy’s argument is that it should rather be treated as a currency or a financial asset.

The concept of gold being a currency is not new. In fact, if you look at the way currencies were traditionally traded (by the “gold standard”) gold was a de facto currency. The gold standard can be described as gold being the only convertible currency, which could be converted to any national currency at a fixed rate. In the era of the gold standard, it can be argued that all international transactions were effectively priced in gold, and only notionally paid for by means of a national currency.

Despite this background of gold being a currency, however, in India it is regulated as a commodity. Take for example, the customs duty on gold. Drawing an analogy, think of what would happen if a “15% customs duty” were imposed on US Dollars. In other words, every time I converted my US dollars into Indian Rupees, I would have to pay 15% of the value of the transaction to the government as “customs duty”. You might say that is absurd. However, that is exactly what is happening with the customs duty on gold, with the result that gold has started being imported via illegal channels.

The problem with gold is that world over it now behaves like a commodity (after the abolition of the gold standard). In India, however, it behaves more like a currency. Because it internationally behaves like a commodity, standard modern economics treats it as one, and the Indian regulations also treat it such. However, given that gold is (I agree with Gurumurthy) more of a currency than a commodity in India, none of these regulations have worked.

It is time regulators started thinking of gold as a currency and financial asset.

 

Comparative advantage and competitive advantage

So there are two reasons why you could be employed. Comparative advantage and competitive advantage. Let me explain.

In international trade, there is a concept called “law of comparative advantage“. Let me explain with the classical (and simple) example. Robinson Crusoe is marooned on an island with Friday. Now, let us assume there are two productive activities on the island – catching fish and cutting wood. Now, Crusoe can catch 10 fish an hour, while Friday can catch 5. On the other hand, Crusoe can cut 3 trees an hour, while Friday can cut 2. Clearly Crusoe “dominates” Friday, and the latter is much more inefficient. So does that mean that Crusoe can just have Friday for dinner one day?

While the intuitive answer might be a “yes”, the law of comparative advantage shows otherwise. While Friday might be inferior to Crusoe in both activities, he is “less worse off” at chopping trees than he is at catching fish. For example, let us say that if left to himself, Crusoe would spend 3 hours fishing and 2 hours chopping wood every day. That would produce 30 fish and 6 trees of wood.

Now, if Crusoe were to spend all his 5 work hours exclusively catching fish, he will have 50 fish and no wood. He can trade the extra 20 fish for 8 logs of wood from Friday (Friday demands 5 fish for every 2 logs of wood, since that’s his opportunity cost). So net-net Crusoe is better off by 2 logs of wood. The trade similarly leaves Friday also better off (compared to the situation if he were alone on the island). Now you see why Friday keeps his job.

So in a “comparative advantage” job, you keep the job only because you make it easier for one or more colleagues to do more. You are clearly inferior to these colleagues in all the “components” of your job, but you don’t get fired only because you increase their productivity. You become the Friday to their Crusoe.

On the other hand, you can keep a job for “competitive advantage“. You are paid because there are one or more skills that the job demands in which you are better than your colleagues. You have a “competitive advantage” in those skills, and that is what you are paid for. Here you can expect to be treated better than your comparative advantage colleague would. You can even expect for some of your “comparative advantage” colleagues to be assigned to you to take your load off on those tasks you don’t enjoy a competitive advantage in. And again I’m not saying you need to “dominate” your colleagues.  All you need is one “axis” along which you are clearly superior. And you’ll get the “competitive” treatment.

Pause for a moment and ask yourself why your job exists. Check if you work because you have a competitive advantage, or if it is merely because of the “comparative advantage” – that your presence frees up time for the more efficient people. If your job belongs to the latter category, I think you have reason to be more worried.

Theory of comparative advantage and chutiya kaam

Suppose you and me together have to do two tasks A and B. We need to decide who does what (let’s assume that we need to pick one task each). Now I’m a stud and you are a chutiya so I’m better than you at both A and B. So how do we split? It all comes down to the degree to which I’m better than you in each of these tasks. Suppose I’m marginally better than you at A, but significantly better than you at B. Theory of comparative advantage (commonly used to describe international trade) says that I should do B and you should do A – this way, total productivity is maximized. I suppose this makes intuitive sense.

You have a number of people cribbing about what is popularly knonw as “chutiya kaam” – approximately translates to bullshit work. Work that is uninspiring for them, but which they need to do because it needs to be done. Sometimes you have otherwise fairly intelligent and efficient people assigned to chutiya kaam – with the explanation that there is no one else who is well-enough equipped to do it. And these people find that less intelligent nad less efficient people are being given better work.

The reason the more intelligent and efficient person might get the chutiya kaam is that he is better at that than his colleagues, even if he is better than his colleagues in the more intelligent stuff. So I suppose if you want to avoid chutiya kaam altogether, one of the ways of doing it is to prove yourself to be a chutiya at that. To be inefficient and incapable of doing that, and in the hope that it will then get palmed off to someone else who is perceived to be better.

But then this is a double edged sword. There are people who believe that all kinds of “chutiya kaam” are inferior to all non-chutiya kaam. And that if you are not good at chutiya kaam you cannot be good at everything else. I’m reminded of this guy in my class who was captaining the class team for a day and who refused to let me open the bowling because I’d dropped a catch. “You can’t even catch properly, and how can you expect to bowl?” he had asked.

The unfortunate thing is that a large number of people are like this. They refuse to accept that chutiya and non-chutiya kaam are not comparable, and require different skill sets, and that they will neeed to apply trade theory to figure out who does what. They look at your skills in one and use that to judge you in another. And allocate resources suboptimally. And when faced with this kind of people, the strategy of trying to be chutiya at chutiya kaam may not work.

So I suppose the key is to figure out what kind of person your boss is. Whether he appreciates that different jobs can take different skills, and no one job “dominates” another. And whether he applies trade theory when it comes to work allocation. If the former, you can’t really do anything. If the latter, you can try being chutiya at chutiya kaam.

Postscripts

“chutiiya kaam” is not a homogeneous term. Some jobs are chutiya for some people but non-chutiya for others. It varies from person to person.

I have grouped all “chutiya kaam” together just for the sake of convenience. There are differnet kidns of chutiya kaams and all of them require different skill sets.

Each non-chutiya kaam also requires its own skill set. I’ve again grouped them together for the sake of convenience of argument

I firmly believe that principles of economics that can be useful in real life (such as demand and supply, trade theory, game theory, etc.) should be part of the 10th standard economics syllabus, rather than teaching kids to mug up GDP growth rates for different states for different decades

I have resisted the temptation to bring in the studs and fighters theory into this analysis