Tuesday, June 28, 2011

Should Ratan Tata advise Mukesh Ambani about how to use his wealth?

A couple of days ago famous industrialist Ratan Tata commented about the lavish life style of another billionaire business tycoon Mukesh Ambani quoting his 27 storied Mumbai house viz., Antilla. Tata said that Mukesh Ambani's house Antilla represents the rich Indian's lack of empathy for the poor. His remarks: "The person who lives in there should be concerned about what he sees around him and [asking] can he make a difference. If he is not, then it's sad because this country needs people to allocate some of their enormous wealth to finding ways of mitigating the hardship that people have."

Is Ratan Tata right in his remarks or is he misguided in his judgements? Is he aware about the role of an entrepreneur in an economy or is he ignorant of this basic economic fact? Or is his remarks has some underlying assumptions which make those remarks perfectly apt for Mukesh's lifestyle? Let me deal with these questions one by one. I take two scenarios to carry out my analysis. In first scenario we assume that Mukesh Ambani is an honest entrepreneur and his profit comes from the market competition. In second scenario we assume that, Mukesh is not an honest entrepreneur and his profit comes from his business ties with government officials and his manipulation of the system of State. We see the implications of Ratan Tata's remarks under both these scenarios.

Scene 1: Mukesh is an honest entrepreneur

I first make an assertion and then go onto prove it. If Mukesh is an honest entrepreneur then his profit - which he earned in the market competition - is absolutely legitimate, and if he don't desire to do a philanthropist work then that is his voluntary choice. Ratan Tata has no right whatsoever to advise Mukesh about allocating his honestly hard earned wealth amongst the poor people or to comment on his lavish lifestyle.

As Ludwig von Mises explained, the only way in which an entrepreneur can make profit in the market competition is by serving and fulfilling the most urgent wants of his customers in the best possible way, and that best possible way is of providing top quality goods at the lowest possible price. Only those entrepreneurs succeed and make profit in the market process who can ascertain and fulfill the subjective wants of customers in the best way compared to his counterparts.

By producing and selling top quality goods at a lowest possible price successful entrepreneurs allow even the very poor people to buy his products. By allowing them to buy his products he lifts their standard of living; he lifts them out of their poverty even without raising their nominal meager income. That happens because with the falling prices in the market with the same amount of nominal income people can now buy more goods and services i.e., their real income rises. And no sane person will deny that this is the real way of increasing prosperity in the society; this is the true way of eliminating poverty and lifting the standard of living of millions of poor people.

Philanthropy, about which Ratan Tata is advising Mukesh, will only help poor people in a very short run i.e., for the urgent immediate consumption purposes. Such help to poor people will actually harm them in the long run by making them dependent on such easy free money. It will not cultivate any habit of hard work and independent living in those people. Redistributing the income will only exacerbate the problem of poverty because human nature is such that most people will always prefer the free goods. Such allocation of rich peoples' income will make everyone of us poor too because rich people play an important role of providing essential savings for the economy. And without savings it is impossible to sustain a labor population in present time which is involved in production of intermediate capital goods. And without capital goods it is impossible to increase the future production of final consumption goods, and without that progress (so-called growth) is not possible. Capitalist class - which includes people coming from all strata of society, and not just rich - plays a pivotal role of supplying this saving. If they are forced to allocate their saving to poor people, who will mostly use it for immediate consumption, then society and economy cannot progress and without progress everyone of us will be poor one day for sure.

And people should not forget another vital economic truth that, honest entrepreneur do not become rich by exploiting the public, but they are made rich by their consumers i.e., the same public. Consumers voluntarily buy the products sold by such sellers because they prefer their products over other sellers. And in this process they give their portion of income to these entrepreneurs making them rich in turn. Profit is a signal that the businessman is fulfilling the most urgent wants of his consumers in a best possible way, and that's why he is rich. On the other hand those entrepreneurs who make losses are not fulfilling consumers' wants properly and so they remain poor in turn by going broke! (to deeply understand the beautiful system of profit & loss I will advise my readers to read Mises' wonderful book, Profit and Loss).

So, if Mukesh is an honest entrepreneur then he has all the rights to keep and use his profit in whatever way he wants to.

Scene 2: Mukesh is a dishonest entrepreneur

But, if Mukesh Ambani is a dishonest entrepreneur and his profit comes solely from his friendships with the government bureaucrats and politicians then he has no right whatsoever on his wealth. Profit generated by such dishonest political maneuvering is immoral. In a system of government such businessmen are working not to serve their consumers but only to serve the politicians and bureaucrats who help them in restricting the market competition. They actively lobby government so to establish their monopolies in the market. Through these monopolies then they fleece the consumers. And because their profit depends on exploiting the political system they don't care about their consumers. In fact they go to any length to harm their consumers for making such illegitimate and immoral profits.

This type of system is historically known as 'fascism' and sadly in today's world most of the businessmen, especially the big business houses are making their fat profits by this way only.

If Mukesh Ambani (also Ratan Tata and all others) is doing his business in cahoot with the government officials then his profit is illegitimate. If one day India becomes truly a free country then he should be stripped of his illegal profits (property) and should be convicted and punished for his crimes against the people. He and all such dishonest business tycoons should be incarcerated, may be hanged.

Conclusion

Looking at these economic facts, if Tata and Mukesh both are honest businessmen and they really want to help people of this country then instead of allocating their profit to the poor people they should use that capital in producing top quality goods at the lowest possible price. They should try to provide as many economic goods as possible to people of India through market competition. Tata and Mukesh both can profit by serving the needs of poor people. There exists a thriving market even in remotest rural poor areas of the world as C. K. Prahalad has shown. All capable entrepreneurs (existing and new ones) should provide top quality private schools, hospitals, private roads, electricity, water works, sanitation, home etc. goods in these areas at the lowest possible price. That will be the best possible moral way of making a difference in poor peoples' lives; that is the only way in which these entrepreneurs can help the poor in mitigating their hardships. Allocation/redistribution of wealth will only result in misery for all of us.

1 comments:

kapil69 said...: it's not about being honest/dishonest? it's about show-off lavish life style in a locality which is deprived & it doesn't make sense at all. Every entrepreneur can't be like Bill Gates, i agree & there is no need to be. Ambani can purchase Al Burj or anything like that, nobody will ever comment on that.; May 27, 2011 6:24 AM

Monday, August 24, 2009

Jesus crucified again in Reagans America

go here

Friday, April 17, 2009

banks rally

Bank Rally About To Be Tested

Peter C. Beller, 04.16.09, 06:45 PM EDT

Bank profits continued to surprise from Regions and JPMorgan but now Citgroup and GE Finance report.

Regions Financial Corporation

04/17/2009 9:32AM ET

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Wells Fargo & Co.

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Financial stocks will be in the spotlight Friday as banks continue to issue earnings reports that show surprising profits, and even growth, in the midst of recession and write-downs.

Investors will find out Friday ifCitigroup ( C - news - people) and General Electric ( GE- news - people ) will continue the recent spate of robust first-quarter earnings displayed by Wells Fargo ( WFC - news- people ), Goldman Sachs ( GS - news - people ) andJPMorgan Chase ( JPM - news - people ). (See "Trapped By The TARP." and "All That Glitters Is Goldman.") Citigroup will be closely watched as a barometer of the industry, and the economy. If it does poorly, investors might dismiss gains by Wells and Goldman as company specific.

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"They're a more diversified, and have felt more pressure from the weak economy and deteriorating credit markets," Mark Lane of William Blair said, referring to Citigroup as well asBank of America ( BAC - news -people ). "To see any signs of improvement would be a more positive sign for the broader economy."

Though known primarily as an industrial and media conglomerate, General Electric will be subject to a large degree of scrutiny due to its trouled financial arm, GE Capital. The unit, which provides loans for infrastructure projects, home sales and consumer credit cards, has been plagued by the financial crisis and global economic slowdown--particularly the real estate market.

Thus far, the suprisingly strong earnings reports have led theFinancial Select SPDR ( XLF - news - people ), an exchange-traded fund that tracks financial stocks, to advance 19.2% over the past five trading days, well ahead of the 2.7% gain made by the S&P 500 index.

Commodity traders can't take their eyes off China, which is scooping up copper, soybeans and other raw materials even as signs of global economic slowdown continue to show up. Soy hit a six-month high this week as China stockpiles the protein source, a situation all too familiar to traders in the copper market where Chinese buying has pushed prices up despite declines for other industrial metals. (See "Is China Hoarding Copper?")

The link between cheap fuel and more airline passengers appears to be unraveling in the face of recession. In the last two days both Southwest Airlines ( LUV - news - people ) and American Airlines ( AMR - news - people ) parent AMR reported quarterly losses despite significantly less expensive fuel prices. (See "Fuel Costs Are Down But Nobody's Flying") Unemployment and shaky consumer confidence are holding people back from spending, which could spell disaster for the industry if oil prices rise.

SOURCE

Friday, April 3, 2009

Jim Walker says ..

Business & Tech

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Pundit: China's Economic Growth Could Stop

By MICHAEL SCHUMAN / HONG KONG Tuesday, Feb. 03, 2009

Migrant workers wait for employers on a street in Chengdu, Sichuan province, on February 2, when Beijing announced about 20 million migrant workers have lost their jobs because of the economic downturn

Reuters

At a time of nearly universal dismay over the business outlook, there are few experts anywhere who can out-gloom Jim Walker, an economist at an independent Hong Kong research firm called Asianomics. In his thick Scottish accent, Walker predicts the worst global recession since the Great Depression. GDP in the U.S., he says, could contract as much as 5% in 2009, and Europe by 2%. He is no more bullish about the economies in his area of specialty: Asia, a region where most of his colleagues foresee more buoyancy. China won't see GDP rise more than 4% in 2009, he says, and the country's economy may not grow at all. "There is going to be precious little growth anywhere," Walker says.

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Before writing off Walker as just another member of a growing Greek chorus of dispirited prognosticators, consider that he has a history of detecting worst-case scenarios before they came to pass. Back in 1995, Walker, then an economist at brokerage house CLSA, penned a report entitled It's Life, Jim, but Not as We Know It: Asia Decoupling, in which he and his team of economists warned that Asian currency regimes, if not reformed, could be susceptible to Mexico-style meltdowns in two to three years. Two years later, the region plunged into the 1997 Asian crisis, which was triggered by the rapid decline of currencies such as the Thai baht.

In this current downturn as well, Walker's dim views, which at first seemed on the fringe, now appear less farfetched. The International Monetary Fund (IMF) in late January revised its forecasts for 2009 sharply downward, predicting the slowest global growth rate since World War II, at only 0.5%. IMF chief economist Olivier Blanchard said he expects "the global economy to come to a virtual halt." Even China would record only 6.75% GDP growth in 2009, according to the IMF.

Walker has been arguing for months that China was in trouble. As the U.S., Europe and Japan suffer through a recession in 2009, Walker expects Chinese exports to contract. In a sign of how much damage the global slowdown is causing in China, the government this week estimated that 20 million migrant laborers have lost their jobs. But just as important to Chinese growth is private investment. Corporate profitability in China was deteriorating even before the worst of the global financial crisis hit, and that will soften investment, which makes up more than 40% of GDP. In the first 11 months of 2008, profits at 350,000 enterprises in China grew a mere 4.9%, down from 37% in the same period in 2007. "We're already seeing a huge swing in the fortunes of Chinese companies," Walker says. "When people see a very different investment environment, they actually cut their investment. That's the real danger China is facing at the moment."

Other economists believe China's massive stimulus plan will keep growth at a high level despite the global downturn. In November, Beijing announced a $586 billion package, much of it new spending on infrastructure. Wen Jiabao, China's premier, said recently that he expects China to meet its 8% growth target for 2009. Walker, however, is much more skeptical about the government's ability to rescue the economy. "What the government has to contend with is a slowdown in every other sector of the economy," he says. Since the Chinese government accounts for only some 20% of GDP, "how it will make up for a slowdown in the other 80% is beyond me."

The China crunch will have repercussions for the rest of the region and the world. The hope among other economists was that trade within Asia, with a stable China at its core, could spare exporters such as Taiwan and South Korea from the worst of the recession in the West. That hope, Walker argues, has evaporated. A major downturn in China "takes the floor away" from growth in the rest of Asia, he says, leaving the region more exposed to the woes of the U.S. and Europe. Most vulnerable are Asia's smaller, trade-dependent economies. He forecasts Taiwan and Singapore could see GDP sink by 5% to 10% in 2009, while Korea's economy could contract by as much as 5%. "We're still in the very early stages of the downturn in Asia," Walker warns.

There are some bright spots. Walker is relatively bullish on India, which he believes could growth 3% to 5% in 2009, possibly making it the world's fastest-growing economy. The reason, he says, is India isn't as exposed to the global downturn as China. "India has not been growing in the past decade because of excess world growth," Walker says. "Domestic demand is the strong component." He also argues that Asia could take the lead in a global recovery, and might show signs of an upturn by early 2010. The turnaround will be sparked by Asian companies, which generally are in healthy shape. "They are much less leveraged" than in the past, Walker says. "There has been an aversion to taking on debt in Asia since 1998. There is less vulnerability to a downturn in economic activity." As interest rates around the region fall, Asian companies will begin to seek loans and invest, jumpstarting regional growth. "In that sense, the region is in actually quite a good position to springboard back into recovery" ahead of the U.S. or Europe, Walker says.

Still, Walker worries that the pain caused by this global crisis will lead to "a de-globalization move" over the next two years by Asian governments. Countries looking to preserve their own economies could become less eager to promote global trade, he says, and could resort to protectionism as competition for export markets becomes cutthroat. There will be "much more introspection, especially in emerging markets, about joining the party with as much gusto as in the past," Walker says. "There is going to be a lot of questioning about capital market opening. The old model is broken and they don't know what to replace it with."