Second Issue of Athena-a periodical by The Economics and Finance ...

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Contents 1- Cover Story: Reworking Capitalism 2- Interviews Dr. Subir Gokarn Prof. Aswath Damodaran Mr. Manoj Patil 3- Guest Articles The Shadow of Depression Blaming Capitalism for Corporatism 4- Faculty Article: The 'Mantra' for High Achievers 5- Student Articles Divergent Issues Faced by States in Energy Policy Formulation in the face of Climate Change Capitalism-US, India & inequality Education, Awareness & Choice Nepal: After two decades of globalization Child malnutrition in India Indoor & Outdoor air pollution Economics of Crises 6- Additional Features Book Review: The Intelligent Investor by Benjamin Graham Highlights of the Budget 2012 Actuaries on the big screen Key Indicators
Cover Story : Reworking Capitalism “Capitalism historically has been a very dynamic force, and behind that force is technical progress, innovation, new ideas, new products, new technologies, and new methods of managing teams,” Dr. Manmohan Singh Since the dawn of civilization, capitalism has remained one of the most efficient forms of social organisation. Testimonies to this effect come from it’s characteristic feature of efficiency in allocation of resources. Capitalism has been a dynamic force behind growth, supported by the virtues of entrepreneurship, “progress,” laissez faire and liberalization. It has resulted in tremendous growth and sustained and increased wealth. With the expansion of capitalism, competition has increased and promoted efficiency in the production and utilization of resources. It led to diversification of goods and greater consumer choice, not only in goods markets but also in financial markets. United States of America, a perfect example of a capitalist nation, exhibits liberal and free trade policies and a competitive framework for firms coming up in the markets. But a series of recent crises in the US economy calls for a revisit to ‘sustainability of capitalism’. A study undertaken by Boz and Mendoza in 2010 reveals that the financial products as a result of the “financial innovation” was one of the major factors behind the U.S credit crisis. The subprime mortgage crisis, caused by unregulated expansion of credit to people in the real estate raised alarm for international community to look back what went wrong! Financial Innovation essentially includes anything innovative that reduces costs, risks and provides an enhanced service that meets participants’ demand in a better way. Adjusted- rate mortgages, exchange traded index funds, online securities trading, internet banking, electronic record keeping of securities, credit scoring are few of the innovations. From a myopic perspective it may seem that these innovations add to the welfare of the society but on a greater front these can lead to adverse social outcomes, where the successive sunk investments cost would outweigh the achieved reduction in the marginal cost. Besides, the process of duplicating the patent races has a net negative social-welfare outcome. Apart from this, the information generation and the related innovations are rent seeking in nature which has a negative social value. And these innovations in the long run lead to more transactions and churning leading to instability in the financial and securities markets. (Frame and White, 2004) The issue which needs to be addressed immediately is unregulated finance, (which James Crotty and Gerald Epstein have referred to as the result of “animal spirits” of financiers), which has its root in the same capitalist framework that promotes efficiency and growth. The Emerging Market Economies that went through liberalisation grew at a good pace in the initial years. With increased international trade and flexible exchange rates the global economy became much more integrated, not only through trade, but also through finance. But due to immature and imperfect institutions in the EME’s, the fruits of growth were cornered by a few people. This made the inequality indices to worsen. However in addition to global economic integration, the markets were now exposed to greater volatility and uncertainty. With such a rapid proliferation of financial markets and it’s intertwining with the commodity markets lead to undesirable commodity speculation which has been one of the worst fallouts of derivatives business, says Dhar (in an article in Mint). This had adverse consequences in terms of skyrocketing food prices. The planning commission report points out that the derivatives are like dynamite, if used properly in construction they can move out mountains, used improperly can cause tremendous damage. Speculation in financial markets has been a major worry for policymakers as well as private players. The volume of financial transactions has far exceeded the number of transactions actually needed to finance production taking place in the real sector. This is clearly a sign of increased speculative activity in the global financial community. Ofek and Richardson (2003) document that during the internet bubble of the late 90’s, Internet stocks represented six per cent of the market capitalization but accounted for 20% of the publicly traded
Page 2 and 3: Acknowledgement We, at the Economic
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Page 10 and 11: An interview with Prof. Aswath Damo
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Page 16 and 17: was five years ago. Rather, the ris
Page 18 and 19: ise and fall almost instantaneously
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Page 22 and 23: Divergent Issues Faced by States in
Page 24 and 25: to really agree to avoid reaching s
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Page 32 and 33: Child malnutrition in India Shikha
Page 34 and 35: Indoor & Outdoor air pollution Eshi
Page 36 and 37: Economics of Crises Divya Midha Neo
Page 38 and 39: which innovation and reasonable ris
Page 40 and 41: mutual funds that offer SIP’s, pe
Page 42 and 43: Actuaries on the big screen An Actu
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