Fundamentals of Economics & Core Issues in Economics

Amer N. Raja

FUNDAMENTALS of ECONOMICS

The Aim & Scope of Economics:

The study of economics is aimed at finding the natural law governing an economy and its scope is to find the ideal principles for the working of an economy based on those findings.

There is no such Thing as Free Lunch:

It is the most fundamental law of nature that every thing has either monetary or non-monetary value. Though generally things have both monetary and non-monetary aspects, never the less for the purpose of simplicity and understanding we only consider monetary aspect of things in economics.

INVISIBLE HAND

This is the most vital as well as an extremely difficult idea to logically explain, and however absolutely impossible to mathematically prove it. Perhaps in order to understand it one needs to think beyond logic and one may comprehend it after one's own peculiar experiences. How the invisible hand plays it role in making financial shifts among individuals, groups and even among nations can be understood by studying natural phenomenon viz., the animal world, the plant world, the rotation of the solar system, the rain, diseases, wars, natural disasters etc. Moreover the mental state of an individual changes continuously and mysteriously which affects one's decision making and other faculties that results in changes in one's economic/financial conditions. Uncontrollable and unpredictable invisible factors beyond human control brought financial changes.

Defining Economics:

Economics deals with the efficient management (by the individuals & entrepreneurs) of scarce resources to satisfy unlimited human wants by applying science & technology in the market.

* Efficiency can be defined as doing things in a best possible manner.

Basic Economic Problem:

Scarcity of Resources, Unlimited Wants & Choice:

It is a known fact that our resources (time, raw materials, land, human resources, machines, money etc.) are limited while our wants are unlimited and recurring therefore we have to make some choice among available alternatives to satisfy our wants.

Economic Resources:

Economic resources can be broadly divided into following four categories:

o Land & Raw Materials:
These are free gifts of nature. All things derived from nature are included in this category.

o Labor:
It consists of the contribution of human beings.

o Capital:
It consists of plant & Equipment.

o Mind/Entrepreneurial Ability:
Entrepreneurial ability refers to the ability to organize production and bear risks. Some people are more intelligent and have the gift of managing things better than others. It is due to their contribution that societies develop. Due to this reason we categorize this resource separately from labor.

Motivating Force - Self Interest:

It is the self-interest that makes us act. Here it is also very important to mention that economics cannot be separated from other fields of study. All knowledge is interrelated. Adam Smith, who has significant influence in formulating modern western economic thought, was a professor of moral philosophy, which deals with finding the ideal kind of life. It is a fact that every individual tries to gain best from his/her available resources to make one happy. It is assumed that individuals will follow his/her interest to make choice among different alternatives. It is also important to mention here that self-interest is entirely different from selfishness. As a general rule of life: "Enlightened Self Interest is the best interest".

*Selfishness is a short term while enlightened self-interest is a long-term phenomenon.

Logic & Logical Fallacies:

All interpersonal communication is based on logic. Likewise all human knowledge, that is experiences and views of all human beings since inception, is also communicated on the base of logic. Though logic fails at very minute as well as very huge levels, still because of human limitation in our interpersonal communication we are dependant on logic. Logic can be defined as a science of correct reasoning.

o Logical Errors/Mistakes:
Here we will mention the two main fallacies of logic that makes human knowledge erroneous. They are:

§ post hoc, ergo propter hoc fallacy (association as causation)
It occurs when one incorrectly assumes that one event is the cause of another because it precedes other.

§ Fallacy of composition
It occurs when it is incorrectly assumed that what is true for each individual in isolation is also true for an entire group.

Demand & supply:

In any economy prices of goods are determined by the interaction of demand and supply. All study of economics revolves around these two fundamental concepts.

o Demand:
Demand is a relationship between price & quantity demanded of a good in a given period of time while keeping other factors like tastes, preferences, status etc. constant i.e., considering only price as a determining factor.

o Supply:
Supply is relationship between price and quantity supplied of a good in a given period of time while keeping other things constant i.e., considering only price as a determining factor.

CORE ISSUES IN ECONOMICS:

Role of Government:

The proper role of government should be as minimal as possible. For efficient management, civil society is much more important and efficient than political society.

The market, by the interaction of demand and supply, not the state, should set wages and prices. Similarly monetary policy should also be set by interaction of market forces. Taxes levied by the government should be minimal. Lower taxes would provide the fundamental incentive for the entrepreneurs and individuals to work hard and to reinvest for greater profits that would consequently raise economic activity. The role of government should be as minimal as possible so government should do only those things private citizens can't do for themselves. The corruption level is extremely high in public enterprises and also the efficiency of public enterprises is much lower than that of private enterprises.

Government should control its expenditure and it should match expenses with revenue. Bigger government is the biggest problem. Therefore decentralization and only taking those tasks that private enterprise cannot perform; are highly desirable for efficient management.

Rules and regulations should be formulated with a view for maintaining justice among members of the society and law should be equal for all.

Tariffs and other barriers to trade should be completely abolished, gradually. Free trade can greatly and rapidly improve the general economic condition and consequently social condition of the society. In short, government governs best which governs least.

Entrepreneur & Entrepreneurship:

Entrepreneurship is a vital aspect for economic growth and development. Because of its importance this should be studied in depth. Entrepreneurs are gifted individuals who have the gift of managing resources and have keen foresight to visualize things much better than ordinary people. High growing economies provide viable environment and freedom for the entrepreneurship to grow that eventually led to the development and growth of economies.

Economic Growth:

An important element and field of study in economics is economic growth. Essentially the motive behind all economic activity is in raising the standard of living. We study that how standard of living is raised. Education plays a pivotal role in raising general standard of living in the long run. Capital formation results from prudently managing resources and by finding new ways to improve the present means of production by using new technology; that is a consequence of knowledge gained by acquiring education. Therefore capital formation is the key factor for economic growth.

Trade:

Exchange, monetary or non monetary, is an integral part of any human activity. Human exchange views/goods/services etc because they feel that they will gain by exchanging. However, in economics we are only concerned with monetary exchange of views/goods/services etc. It is wrongly assumed that our world is a zero-sum world where gain by some is loss of other. Factually and fortunately we are living in a positive sum world. If this had been the case then progress in our world would have never been possible. Never the less it does not entail that in all monetary exchanges both parties will equally gain. Moreover the value gained in an exchange between two individuals or groups can never be evaluated precisely by the third party because the value of an exchange is very different for different individuals.

Free and greater trade, free from force and coercion, would result in comparatively more fair deals and consequently the chances of greater gains by both parties are more realizable.

Factually accurate information is not fully known that results in greater imbalances from trade. As a hypothetical rule we can very easily infer that where accurate information is known both trading parties gain.

Competition:

The prevalence of competition in the filed of economics in world is universal, because of scarce resources and in numerous and recurring wants. Where competition has negative implications, it has also positive implications. It is the element of competition that drives different individuals to excel from others, which results in greater discoveries, technological advancements and pursuit for finding new ways to earn greater profits that consequently raise general prosperity level in the world. It is unethical aspects of competition where some individuals initiate force and fraud that causes violence in the society. Competition can never be eliminated from any society; rather any attempt to eliminate competition would result in regression and more violence. Therefore, check should only be imposed on negative effects of competition.

Cooperation:

For the efficient management of the resources (time, skills, natural etc) human need to cooperate to make optimal use of these resources. Moreover most of the natural resources need to be transformed for use and to make them valuable. Groups need to cooperate to be successful. Cooperation juxtaposed with positive competition is an ideal combination for efficiency.

Specialization & Comparative Advantage:

Natural inequality among humans is a fact of life. Economics aims at efficient management; therefore to make best use of human resources different individuals specializes in those particular fields in which they can be better than others because of their natural abilities. Due to this reason some individuals have comparative advantage over others.

Information:

Information is very important for making informed rational decisions. However accurate information is impossible by any individual because of the human mind, because every human being is unique, and also due to unpredictable future. Information about market behavior is extremely diverse and ubiquitous. Therefore it is not possible for any individual to accrue the available information and our decisions about future at best are mere estimate with enormous possibilities.

Profit & Loss:

The expectant and prevailing profit and loss are the determining factors for the investments. It provides the criteria for the goods and services to be produced. Where in the short run demand of the products is the primary factor in stimulating the investment trends, profit or loss is the litmus test for products produced in the long run.

Trade Off:

It's a general principle that in order to gain something one needs to loose something. The most important resource for an individual, time is limited. Therefore no one can do all the things oneself, so a rational individual focuses one's time on those tasks where one can perform best. However it is quite impossible to precisely quantify the time one put in some particular activity is equal to the forgone activity/activities. Nonetheless for the purpose of understanding this concept economists assume that the price of engaging in some activity is equal to the cost of the other activity/activities one has forgone.

Price Theory:

Demand for and supply of products determines their prices in the market. It is wrongly asserted by the majority of the people that cost of goods determines the prices of the product. In actuality it is the marketing activities of the producers and the perception of the consumers about the products that determine the prices of the products. As a general rule higher the prices lower will be the demand and vice versa. However in some cases due to the nature of the product and the marketing efforts of the producers higher prices lead to higher demand.

Causality -- Cause & Effect:

Despite limitations of logic, causality is the most important phenomenon in understanding economic theory and practice. Excluding mega-microscopic and mega-macroscopic phenomenon, every cause has some effect and that effect is a cause of some other effect ad infinitum. Due to this cause and effect relationship in a world of numerous individuals and groups their actions has great impact on other elements in the economy. Despite the complexity of this relationship that is also chaotic, understanding this relationship can help enormously in making good estimates about the future and to form comparatively sound opinions about the market trends.

Labor Economics:

In this field we study that how wages are determined. Like all other markets the wages are set by the interaction of demand and supply. Higher wages can only be achieved by greater investment and economic activity in the long run. Employment and unemployment are also the key issues that we study in this field. Ups and downs in the economy are the facts that cannot be avoided. Higher consumption level asks for greater capital investments that will raise general wage level and results in lower unemployment.

Uncertainty:

No one knows the future. It's the fear of future that is an integral part of our lives and also an impetus for human activity. This factor of uncertainty gave birth to the idea of risk. There is always degree of risk in all human activities. As a general rule: "higher the risk, higher the reward". Uncertainty is also nature's law of rewarding and punishing the human actions. Moreover it is also a way of nature of teachingand making known new ideas to the new participants and making room for the new and efficient members.

Public Finance:

The filed of public finance is directly related with role of government. Bigger the government, larger the funds are needed to finance it. The accountability principle is of pivotal importance in public enterprises because the ownership of these enterprises has no personal owners. Moreover, fund should be received from those who get benefits from that service.

Money & Banking:

Banking in an economy is the determining factor for gauging its performance. Money is the medium of exchange that facilitates transactions among participants of an economy. Banks play the role of intermediaries. Interest rates and value of currency with relation to other international currencies is set by central banks. However ideally it is best that market forces of demand and supply determine them.

Consumption & Saving:

Raising the consumption level is key factor to all economic activities for reducing costs, creating employment, raising standard of living and eliminating poverty.

On the other hand, raising consumption greatly can result in undue depletion of resources in a given market and cause inflation. If this situation prolongs that would result in recession to depression. Therefore a sagacious policy of moderation is the ideal combination.

Marketing:

Marketing is the key for stimulating demand and consequently enhancing economic activity. Entrepreneurs have the sharp ability of marketing to understand the economic environment and knowing the customer demand ahead of time and finding new segments that would consequently raise general standard of living.

Cost & Production:

Every thing entails cost. Finding the best methods to produce goods at minimum possible cost is essential for firms to earn profits and compete successfully.

Technology:

Technology makes the difference between the present age and the previous one. The problems faced by humans in all times are quite similar yet the technology of their respective eras determines the mode of production as well as way of living. Technology is of utmost importance for understanding economics because by applying it we enormously reduce costs and even reach new markets that could not have been possible with out technology. Moreover it raises standard of living by simplifying the complex tasks.

Poverty:

The problem of poverty is the focal point in the field of economics. Ignorance is the main cause of poverty. The best way to eradicate poverty is by spreading knowledge.

Should the Fed Push the Dollar Down?

Luc Vallée

Not according to Ronald McKinnon, economics professor at Stanford and a senior fellow at the Stanford Institution for Economic Policy Research. In Wage Increases: The Win-Win Answer on China Trade, published in the Wall Street Journal, McKinnon argues that "High Chinese productivity will lead to higher (Chinese) pay and a reduced trade surplus—but not if Washington keeps pressuring Beijing to fiddle with the dollar exchange rate."

We most often hear about the opposite position from the likes of Paul Krugman. These economists are advocating a depreciation of the US dollar on the ground that it would allow for a quick re-balancing of the American trade deficit with China. Nothing is less certain. The plea made below by contrarian economist Ronald McKinnon, against pushing the dollar down, is based on sound arguments that rely on letting "nature run its course".

Anyways, keeping a stable exchange rate with China could prove to be a more sustainable policy in the long run. Rather than engage in a currency war with the Chinese, forget about the trade deficit with China, let them drive their own show and let us focus on adopting an appropriate monetary policy for America.

If China keeps interest rates too low for too long to maintain the Yuan undervalued, it will end up importing inflation which eventually will lead to an appreciation of the Yuan in "real" terms. In time, this real appreciation should cause the American trade deficit with China to improve. If on the other hand, Chinese inflation does not rise, it probably justifies keeping interest rates at their current level and arguing with the Chinese to increase rates is a waste of time. Conversely, trying to be more accommodating than the Chinese in the hope of engineering a weaker dollar goes against the conduct of a sound and non-inflationary monetary policy. It could affect upward US inflation expectations which would truly be disastrous.

Here is the piece:

"Recent Chinese labor strikes—particularly in the heartland of manufactured exports in Guangdong and the Pearl River Delta—have taken most observers by surprise. Labor shortages in and around Shanghai and Beijing are also widespread. Many local governments, especially on the developed eastern seaboard, have increased minimum wages by 15% to 20% this year.

"A wage explosion fed by labor militancy is obviously disconcerting to Beijing. But in the long term China's wage increases should reflect its remarkably high productivity growth in manufacturing. Higher wage growth would have two great advantages for China and the rest of the world.

"First, Chinese wages would become closer to those in the more mature industrial countries, thus reducing protectionist pressures. Second, higher wage settlements would reverse labor's declining share in China's national income. With a shift away from business profits—which have become exorbitantly high in recent years—to greater household disposable income, consumption would naturally rise and reduce China's trade surplus.

"For wages to grow less erratically, what should China's long-term exchange-rate policy be? Much of the world, particularly Asia, is on a dollar standard. Most Chinese exports and imports are invoiced in dollars, as are international financial flows. China's net saving surplus is manifested mainly in a huge buildup of liquid dollar claims. In this dollar-based world, a fully credible fix of the yuan/dollar rate is the key to encouraging sustained high growth in Chinese wages that matches productivity growth.

"In contrast, bashing China to appreciate its currency is counterproductive. If Chinese employers fear that the yuan will be higher in the future, then they become loath to grant large wage increases in the present. Producers of export products could be bankrupted if they granted high wage claims in yuan only to find out afterward that the yuan had also ratcheted upward, making the effective wage increases much larger in dollar terms.

"In a world where competing goods from other countries (including the U.S.) are all invoiced in dollars, a safely fixed yuan/dollar rate allows a Chinese employer to estimate more precisely what wage increases are commensurate with expected future growth in labor productivity. If any one employer offers less, others could well bid away his most prized workers.

"The earlier experience of Japan shows the importance of the yen/dollar rate in determining wage growth. After the inflationary chaos and disorganization following World War II, in 1949 the Japanese government with American financial assistance unified the battered currency (got rid of multiple exchange rate and payments restrictions) and fixed the central rate at 360 yen per dollar.

"With this dollar anchor, the postwar Japanese miracle unfolded: From the early 1950s to 1971, GDP and labor productivity in manufacturing began to grow by about 9% per year while growth in money wages was in excess of 10%, more than twice as high as in the U.S. With stable wholesale prices, trade was roughly balanced and so was international competitiveness.

"But in August 1971, President Richard Nixon shocked the world by forcing the other industrial countries—Japan, Canada and those in Western Europe—to appreciate against the dollar. Nixon imposed a tariff on all industrial imports until the other industrial countries agreed to appreciate, which they all did by the following December. Japan appreciated by 17%. As early as 1970, the expectation of dollar depreciation caused huge hot money flows out of the U.S. Foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating more than what was agreed to with Nixon. The result was a world-wide loss of monetary control, great inflation, large business cycle fluctuations, and slow economic growth in the 1970s into the '80s.

"Because Japan had by then emerged as America's foremost industrial competitor, the U.S. mistakenly began "bashing" Japan to force further yen appreciation. The yen rose to a high of 80 per dollar in April 1995 from 360 per dollar in August 1971. Hot money inflows first contributed to land- and stock-market bubbles in Japan in the late 1980s. But after these burst in 1990 and the overvalued yen rose even further, the economy was thrown into a deflationary slump from which it has yet to recover. By the end of the 1970s, money wage growth had slumped to less than in the U.S.—and Japanese wages are actually falling in 2010.

"What is the lesson for China? Exchange rate appreciation and money wage growth are substitutes in the long term. But an erratically appreciating exchange rate with the associated hot money flows does long-term damage to the economy. Best to keep the exchange rate safely fixed near 6.83 yuan/dollar—as it had been for two years through mid June. Then gently explain to would-be China bashers that Beijing fully respects—and even encourages—workers to bargain in good faith for higher wages to match high productivity growth in manufacturing, which Chinese employers can more readily accept if they expect the yuan/dollar rate to remain stable.

"Nevertheless, the U.S. Congress is again threatening to impose punitive tariffs on imports from China unless the yuan is appreciated. To contain the political risks from trade protectionism, the People's Bank of China bowed to this pressure on June 19 and depegged the yuan in favor of managed floating against an (unspecified) basket of foreign currencies. Whether this ambiguous "float" will succeed in defusing U.S. protectionist pressure remains to be seen.

"But any systematic yuan appreciation—or threat thereof—will immediately restart the hot money inflows and, in the longer term, slow money wage growth. Moreover, a discrete sharp appreciation won't defuse the situation because it would be unlikely to reduce China's trade (i.e., net saving) surplus on which the Americans are so focused.

"Behind this unnecessary political crisis is a widely held but false economic belief: that the exchange rate can be used to control any country's trade balance—the difference between its saving and investment. The imbalance actually arises from a large saving deficiency in the U.S.—with very large fiscal deficits and low personal saving—coupled with "surplus" saving in China from high business profits and buoyant government revenue.

"The yuan/dollar debate that continues in Washington is more than a distraction. The threat of appreciation may well impede the natural process by which Chinese wages rise as fast as labor productivity in manufacturing, leading to greater unrest and perhaps even a Japan-like Chinese bubble."

How can Portugal push its GDP

Bhasker Siddharth (*)

After Greece, Portugal can be the next big prey of the recent recession. What new can Portugal do at this stage? How can it push its GDP?

GDP = C + I + G + X – M, how can Portugal play around with this equation to increase the GDP?

The challenges in front of Portugal are

1. Portugal’s public debt is 77% of GDP (2009) and external debt is a whopping 223% of GDP (2009). In these circumstances there is no easy way of spurring the economy through Government spending or Government investment.

2. Gross national saving has gone below 10% of GDP which shows unavailability of domestic saving for investment.

3. Devaluing their currency to boost export is not an option.

4. With stringent labour laws it’s hard to see productivity rising in near future.

Thus it is clear that it’s hard to find more money for domestic investment either from household or from the Government. The challenges don’t end here. Even if Portuguese start saving more and Government gets a relief package from EU, the next question would be where to invest. Where should the Government be spending money?

The usual suspects may not be the ideal options. For example, Portugal’s road density is already amongst the highest in the world (Length of motorway per capita; Portugal: 249.3, USA: 253.05; 2006 OECD data). Portugal fairs well in most of the other such development parameters. Thus, starting new infrastructure projects may not bring desired results, although they can bring inflation over time (Read point #5 here to understand why). Portuguese households are saving less and consuming more. Domestic production hasn’t been able to keep pace with consumption, which has resulted in a trade deficit which stands at € 1.6bn today. So giving more money in the hands of consumer will not solve the problem as the money can just end up increasing the value of imports, exactly the way it has happened in the USA. In the age of open economy the increasing domestic demand can very well be satiated with foreign imports, thus not doing enough to spur up the domestic industries.

Perhaps I am pointing towards the simple sounding way of doing something about the factors of production in order to ensure that the domestic industry create more goods and services. However, these factors are either too constrained (Land for obvious reason, Labour due to unfavourable but popular labour laws, Capital due to the challenges described above) or take a long time and effort to start showing results (Labour and Enterprise). Also, two or three of these factors must work together to show desired results.

So what can be done now? The question is still unanswered. While increasing domestic production will need both capital and time, where can the Government focus in the mean time to avoid slumping further down?

The answer lies in exploring the Balance of Payment Accounts, specifically the foreign savings or savings of rest of the world.

When your total domestic savings is not enough to meet your domestic investment, then the savings of the Rest of the World needs to flow in. So the first thing is clear, the current state Portugal is in, it needs to get money from Rest of the World. Now, the rest of the world can pay for 2 things

1. Portugal’s export

2. Portugal’s domestic investment

As briefly discussed above, boosting export would mean increasing productivity and reducing cost and it may take a longer time. Second way is to get the Rest of the World invest in Portuguese economy. Again a tricky option keeping the current economic situation in mind where Portuguese economy is said to be looking straight down the barrel.

Well, there is another simple and straight forward way of attracting the foreign savings. Specifically the household savings of rest of the world and that is through tourism. This can be one simple straight forward way to ensure that the savings of rest of the world’s comes to your country. Portugal surely has a rich historical heritage and numerous breathtaking natural views to attract savers (people) from all around the globe. This is one area which must be focused by the Portuguese Government at this moment.

There are parts of developing world which are getting richer by the day with increasing disposable income. There is scope for Portugal to place itself amongst the top tourist destinations in the world and in the process firmly plant themselves in the radar of tourists looking for new destinations. Tourism not only brings foreign capital to fund domestic investments but also helps create direct employment and supports multiple other industries indirectly. Thus it can be an ideal sector for initial investment the Government can look for in order to ensure a healthy flow of fund.

I hope the Portuguese government sees the potential in this sector and provide the backing this industry deserves. This could be the first realistic step towards a sustainable recovery.

(*)Mr. Bhasker Siddharth is Master in European Business. Today works like Senior Business Analyst at Efficio

Infosys Founder Nilekani On the Future of India

India is complex, complicated and very difficult to understand. Yet, it is a fascinating country full of fascinating people. My trip to India was certainly the most revealing and insightful one I have ever made. Who could make sense of it? In this TED Talk, Nandan Nilekani, co-founder of outsourcing pioneer Infosys presents his ideas to help rethink India’s economic and social structure in order to allow it to pursue its phenomenal growth.

Nilekani stepped down from Infosys in mid-2009 to head a three-year government program to provide every Indian with a unique identity card. Prior to that Nilekani had published a book, Imagining India, about India's economy and the crucial issues it will face to reach its economic potential. He proposes a framework to help India maintain its demographic advantage, to promote democracy and education and to protect the environment for the next generations.

In the TED site Thomas Friedman is quoted as saying: "Seattle has Bill. Bangalore has Nandan. What makes Nilekani unique? For me it comes down to one phrase: great explainer."

Nilekani had also exposed many of his ideas and written many insightful comments about economic life in India in his short-lived blog, Nandan's Blog.

Also you can find out more information about the latest TEDIndia events by clicking on the link.

The End of Globalisation

Luc Vallée

Globalisation, a force for good in general, is at risk of losing its status ... again! But this time the threat may not come from youths eager to demonstrate and/or unionized workers wanting to protect their high paying jobs. Although these segments of the population are likely to participate in the second wave of attacks on globalisation, the core of the protests is likely to come from much more powerful interest groups: business leaders, high skilled workers, consumers and even government.

In the past business leaders have been ambivalent about opening boarders. In the one hand, they recognized the value of competition and valued the opportunity to grab new markets by expanding internationally. Yet, on the other hand, those businesses that had the hardest time adapting to this changing environment have been more reluctant to embrace free-trade and supported at least some form of protectionism.

High skilled workers have also generally benefited from globalisation and the more so when their skills could be protected by intellectual property rights. For a while this protection seems like it would offer a permanent bonanza to makers of “content” but the Internet and the Napsters of this world are rapidly changing the rules of the game. And the rest of high skilled workers who could not benefit from such dynamics increasingly feel the heat of Chinese and Indian Ph.D.s. Already an engineering degree which requires years of investment in education and hard work (compared to finance for instance) has become a commodity. As a result, most engineers in America earn next to nothing compared to other (protected) professionals. This has incited many to enrol into costly MBAs and other management programs to pull themselves out of an increasingly miserable situation.

Moreover, consumers who were the major benefactors of cheap goods until recently are now indebted or jobless. The other side of the split personality of consumers (they need to work as well in order to consume) is taking over and making many realize that they are puns in a game which is not being played with their genuine interests in mind; in spite of the rhetoric from the multinationals and their lobby.

Finally, governments which have been backing free trade for several decades are sensitive to the new found preoccupations of their constituents. And while they had to assume more powers to deal with the financial crisis, their interest and incentives to intervene in the affairs of the markets have increased substantially. Regulation is making a come back and free trade will not be exempted from its grip.

The danger is that this new coalition of protectionists tips the balance of power too far into the other direction and kills the goose laying the golden eggs. Unbridled emotions of the mob combined with justified moral outraged could produce a swing of the pendulum that would kill incentives and destroy the benefits provided by the efficient allocation of resources of a market economy.

Free Traders are indeed in need of a plan. Body of the Article