So, given the huge market for knick-knacks you want to protect with stabilizers, making stabilizers is a profitable enterprise. Sure enough, there are several brands out there. In fact, it's safe to say that the stabilizer business makes a steady contribution to the economy.
But think some more: why do we need stabilizers in the first place? Because the voltage of the electricity that's supplied to us fluctuates wildly. That happens because of inefficiencies in the generation and transmission of electricity. In India, we are so used to these fluctuations that we don't even think they are abnormal: we simply buy stabilizers and use them like any other consumer product. Hell, they are just another consumer product.
We likely also don't think, as we buy stabilizers, that we are pumping up the GDP of the country, which we are. But if we did think of that, we might find a small perversity here. Since we tolerate inefficiency in one part of our economy -- the generation of electricity -- we need devices whose production and purchase shore up another part of our economy.
Too simple-minded a view for you economists out there? But this is essentially what is happening. A whole industry, for a wholly unnecessary product, has grown out of inefficiency. What's more, if our electricity supply ever did become stable -- a goal worth striving for, certainly -- that whole industry will become redundant.
Put another way, inefficiencies boost the economy. Correct those inefficiencies, which we should, and we damage the economy.
Look at your voltage stabilizer in that odd light. (But before the voltage dies down and snuffs it out).
Now all of us are infatuated with the GDP. Asking for votes, political parties will promise "rapid" or "double-digit" yearly increases in the GDP, as if that is an unquestionably desirable thing. Yet GDP is really only a measure of market activity: money changing hands. Every single money transaction adds to the GDP. This has become the barometer of the health of a nation. The greater the GDP, and especially the faster it grows -- the more transactions happen that pump it up -- the better a country is said to be doing.
No wonder political parties promise to raise it.
But all the infatuation leaves the stabilizer questions unanswered: how is it that we must consider inefficiency as a positive influence on the economy? Should we not account for the kind of transactions made? Should there not be some totting up of the costs to the country of certain sorts of market activities?
Look at it like this. You buy a computer. Doing so, you add to the GDP. Days later, the unstable electricity supply in Sheikh Sarai fries your sleek machine (which once happened to me here in Bombay). You either repair it or buy a new one. Whichever you do, you add to the GDP. This time, you are wiser: you buy yourself a stabilizer as well. With that purchase, you add to the GDP again.
Instead of just one purchase, you have made three, all of which feed the maw of the Indian GDP. You have contributed, three times over, to making India's economy a booming, vibrant one; to making India itself prosperous.
Why, you may wonder, are you also three times as annoyed?
Postscript: Meant to say, I will follow this up with some more exploration of the GDP and possible alternatives.
35 comments:
Dilip,
I enjoyed reading this article. You are absolutely right that buying stabilizers, repairing the computer, or buying a new computer raises the GDP.
On a different note, if India considered the black market in the GDP equation, then the GDP would be MUCH bigger.
But what I find silly is this obsession with the GDP: "Our GDP is now 3 trillion dollars... we have arrived."
There are a lot of problems with using the GDP for international comparison. On a broad level, it is fine. In other ways, it is kind of meaningless, as it does not measure inequality (e.g. Latin American nations with big GDPs and lots of inequality), quality of goods produced (the stabilizer could be a dud), and cost of living (in India, for example, almost everything is cheap compared to the US).
I know wikipedia is problematic, but this is worth checking out.
There was a time, when we used to use voltage stabilizers and what were called step-up transformers to build up the voltage to the required ~220V. I remember we had around eight of them.
Once we hooked all of them together to watch something on TV, we got the desired voltage but the amperage was below the required ~5A.
Things were that bad with our DESU (now DVB) supply.
Plus these transformers burnt up regularly and nearly set our house on fire - TWICE!!
I wish they'd be able to do something about this power situation (especially in Delhi, which I believe is far worse off than Bombay, Chennai and the other metros).
A thriving stabilizer industry can only mean one thing, we still need to work on our basic infrastructure.
Thanks for the article Dilip. I am sure you must have already, but if you haven't read it then this Jug Suraiya piece is a related treasure:
http://timesofindia.indiatimes.com/articleshow/1146310.cms
Regards.
Well, the money that consumers (and businesses and companies) spend on voltage stabilizers could have been spent on other more important things which may increase their output or their productivity (and hence GDP) even more.
[a non economist with only one undergrad course in econ-- so don't take this opinion too seriously!]
Dilip, the argument that buying stabilizers helps the economy is not valid. It's the same argument that having a glass window broken causes employment to the glazier, who then spends it on something else, and thus contributes to the circulation of money. But had the glass window not been broken, the homeowner would have used it on something else of his choice, which he now has to spend on the window. The net loss to the society is the cost of one glass window. Likewise, the net loss to society due to voltage fluctuations is the cost of all the stabilizers purchased.
Here's a relevant link for the glass window story: Broken Window. -- (same anon as before).
Check writing on "broken window" fallacy by the French economist Frederic Bastiat
Put another way, inefficiencies boost the economy. Correct those inefficiencies, which we should, and we damage the economy.
I pray to God (all of them, if there are any, or any other manifestation of a Supreme Force, if any), that you are being sarcastic. No, I mean really. No I really, really mean it. I mean SERIOUSLY.
The ONLY thing that the thriving stabilizer industry shows, is the fact that the FREE MARKET provides for things, when the government fails. Not enough electricity? Well, then generators, UPS, invertors and stabilisers sell like hotcakes. No clean water? Buy Kinley/Aquafina/Bisleri. But if you seriously believe that a STABLE electricity supply will cause more devastation, sir I strongly suggest that you check yourself in to the nearest lunatic asylum (or the Lok Sabha, being equivalent).
F**k.
A stable electricity supply means water pumps work. Which means people get water.
A stable electricity supply means that industries don't have to spend extra billions on bribing electricity-walas, or wasting it on buying their own electricity supplies, or stealing it from their neighbours, causing power cuts and electrical fires. This means they have more money to spend on other avenues (yes it might just go into their pocket too).
A stable electricity supply means the Delhi Metro and 7 billion other trains won't break down on the middle of the tracks
A stable electricity supply means that street lighting will work, which means women may be less likely to get raped in the middle of night, which means they might feel safer about being out, which means they may be willing to work and spend money at later hours, which means they will contribute more to the economy. It also means there might be less traffic accidents which means that some GDP contributors might NOT die gruesome deaths and get to their places of work on time, or catch their flight on time, or get to the railway station on time.
A stable electricity supply might mean that it's possible to have computers in villages, and that such a statement might make sense, unlike in the current context. If you need me to expand on how computers can benefit illiterate villagers, I won't bother. Because clearly, a stable electricity supply to you seems to cause more damage than an inefficient electricity supply.
A stable electricity supply allows for the use of more machinery in farming, in manufacturing, at home, at work, which means people get things done faster, which means they produce more, which means they make more which means they spend more which means they produce more which means they make more which means they spend more.
I really. really. REALLY-f**king-REALLY hope you're being sarcastic, and that I've just missed the joke.
And pareshaan, you are wrong. It is not DVB now, it is BSES or Tata Power. As off 2 years ago, distribution of electricty was privatised in Delhi(with all sort of stupid constraints)
TTG:
I cannot believe it, have been hearing of this privatisation business, since 1994, in fact it was Madan Lal Khurana's idea if I am correct, and people were really pissed off when it did not happen.
That is good news indeed, I am surprised I didn't know, and also that nobody from Delhi ever mentioned this to me, Thanks.
Funny that you haven't heard about Paresh(aan), as there was some stuff in the news recently about how All of Delhi was up in arms, refusing to pay the 10% hike that was proposed. "People Power" worked, and they had to roll back the hike. The Privatisation, while considered a failure by the media and closet and non-closet communists, had a mixed result.
The billing system has greatly improved. The bill is clear, and you can make payments easily and conveniently.
In our area, there are no voltage fluctuations.
However, the new electronic meters apparently "run fast". I honestly believe that it was the old meters that were running slow, or were tampered with, and that there was rampant abuse of that, which is why regular electronic meters now seem to be "running fast". Relativity.
While in my area we had daily power cuts in the summer, they were never more than an hour, and you can actually call a call centre where a polite voice informs you how long the power cut is expected to last (if it was planned for).
But, power cuts still occur, and why they do is unclear - because although distribution. is private, generation/transmission is still public, meaning they are still dependent on the government for power. But at the same time, they should be able to dole out what power they get efficiently, which, if the media is correct, they are not doing. So the bastardized privatisation, is, naturally, a failure. Not entirely off-topic, but apologies all the same.
Man TTG, there's a rant if I ever saw one. You do that often?
OK, what did my article say? A whole industry, for a wholly unnecessary product, has grown out of inefficiency. What's more, if our electricity supply ever did become stable -- a goal worth striving for, certainly -- that whole industry will become redundant.
Put another way, inefficiencies boost the economy. Correct those inefficiencies, which we should, and we damage the economy.
That is, if we correct the inefficiencies, we destroy the stabilizer industry and (to that extent) damage the economy.
Do I say stable electricity will devastate us? No, I even say it would be a "goal worth striving for".
I guess I need to be clearer in what I write. Lesson for the future.
As for In our area, there are no voltage fluctuations... In South Ex II ten days ago, the electricity tripped a couple times. But yes, it was in general stable, and much more so than I remember Delhi being.
Dilip,
yes, I do rant often. It's the only motivation that gets me to type. When I'm happy, I disappear from the Blog World...
I take issue with the statement "damage the economy". Companies going out of business do not automatically mean the economy is damaged. Further, simply because we have stable electricity does not necessarily mean that there is no more use for voltage stabilizers.
The (theoretical) principles of the Free-Market state that in that case it's adapt or perish. Since these people would like to stay in business, they will find new uses for their products (or perish). This is how you end up with baking soda in your toothpaste, and orange-flavoured cranberry juice. And innovation (I did not say it would be earth-shattering innovation), is in all likelihood, good for the economy. It's the age-old debate. Manufacturing things the old-fashioned way with lots of labour, and no robots or machinery is "keeping people employed". And that's why everybody feels that we cannot have more modern manufacturing processes in India. It's a complete fallacy. If you can implement those modern, automated processes here, you produce more. And when you produce more.. e.t.c, e.t.c. e.t.c. It is a dangerous, and incorrect statement to make - that even inefficiencies help prop up an economy. Companies going out of business can also be _very_ good for an economy. When the government keeps a loss-making PSU going, it spending my money paying lalas to sit at their desks to do nothing. It is spending money on keeping lots of land inefficiently tied down. It is spending money on trying to run a concern, when clearly that concern should not be run because it is not making any money. So it is in effect pouring money down a black hole. Letting that PSU go out of business will definitely cause a loss of jobs - in the short run . But it will be good for the economy as well. Or selling that PSU to a private company, whose sole goal will be to make a profit (NOTE: IT will then be the government's job to ensure that company stays within the law in its pursuit of profit. This the government will be free to do because it is no longer running that PSU)
BTW, I have been laid off before. I know what that feels like. I was unemployed for a while.
TTG, It is a dangerous, and incorrect statement to make - that even inefficiencies help prop up an economy.
Of course it is. So where did I make it?
Once again: I said, the inefficiencies in our electric supply give rise to the need for stabilizers. To the extent that stabilizers are a flourishing product for which there is a flourishing demand, they add to our GDP. If we ever manage to tackle those inefficiencies in the supply, we won't need the stabilizers any more. The little bit they contribute to the GDP will vanish, and in that sense and to that extent, the GDP will be affected. (Analogy: suppose the steel industry shut down tomorrow. Would we not say the GDP takes a hit?)
Of course other aspects of the economy will work better with a better electricity supply, there's no argument there. This is just an example. I'm sure you can think of others if this one doesn't go down well.
I also realize that I should be more careful about where I use "GDP" and where I use "economy". The whole point of this article, and of the one or two followups I hope to post when I get the chance, is to question whether the GDP accurately measures the health of the economy. So I apologize if I've confused anyone by carelessly using the two terms equivalently here.
And hey, if we're totting things up, I'm up on you. I've been laid off twice, voluntarily quit jobs twice, company folded once. Been unemployed correspondingly often, arguably am unemployed right now; even once collected unemployment benefits for some time.
So there!
true.good point.
*brings out dead horse. Proceeds to flog*
TTG, It is a dangerous, and incorrect statement to make - that even inefficiencies help prop up an economy.
Of course it is. So where did I make it?
Here- In fact, it's safe to say that the stabilizer business makes a steady contribution to the economy.
Here- Since we tolerate inefficiency in one part of our economy -- the generation of electricity -- we need devices whose production and purchase shore up another part of our economy.
Here- To the extent that stabilizers are a flourishing product for which there is a flourishing demand, they add to our GDP
Here- Put another way, inefficiencies boost the economy. Correct those inefficiencies, which we should, and we damage the economy.
While at the same time, the added cost of both purchasing stabilizers and suffering the effects of voltage fluctuations causes the rest of the whole economy to divert income which could have been spent on greater production. Meaning that most likely, the GDP has not gone up, but gone down. Note, the voltage stabilisers only help people who can afford them, whereas a stable electricity supply is most definitely affordable by a greater number of people.
The same capitalists who thrive due your lack stable electricity have enough savvy to exploit some other market once electricity no longer fluctuates.
Is GDP an accurate measure of an economy?
N.O. NO. But it's the best one out there.
And I only mentioned the point about being laid to bolster the "getting fired in the short run" statement, lest ye think I'm being callous about being losing jobs...
That should be "laid off", not just "laid". LOL.
"Once again: I said, the inefficiencies in our electric supply give rise to the need for stabilizers. To the extent that stabilizers are a flourishing product for which there is a flourishing demand, they add to our GDP. If we ever manage to tackle those inefficiencies in the supply, we won't need the stabilizers any more. The little bit they contribute to the GDP will vanish, and in that sense and to that extent, the GDP will be affected."
I think Manish and Anon already made the point countering this in their comments. The assumption in your argument is that people who have no more need for a voltage stabilizer, thanks to more efficient power delivery, will simply hoard the money. That's not true.
And, how's the steel industry shutting down an analogy for anything you have said, unless the existence of the steel industry is an outcome of some inefficiency?
Hey Dilip,
Well I had a similar thought.
http://toiletseatideas.blogspot.com/2005/10/inefficiency-boost.html
I tend to believe that our lousy infrastructure is actually growth engine.
Waiting for you follow up post
Santhosh
TTG, you said it. Flog away. But wait a sec, is the dead horse laid or laid off...?
But what's it, you and Ashok don't feel like arguing the central point this piece makes, that GDP is a flawed measure of the health of the economy?
Ashok, the steel industry analogy was to underline the point that shutting down the stabilizer industry will have an effect on the GDP, almost by definition. I thought mentioning something as large and visible as the steel industry makes the point better, is all.
Well I'm not arguing about GDP, because I know just how bad a measure it is. All sorts of funny things can distort it. But is there any other better measure of a country's performance/wealth/income? (Atanu Dey over at Deeshaa is busy trashing Bhutan's measure - Gross National Happiness) Sure you can add a few indicators (number of hospitals per 1000 people, number of TVs, e.t.c.) but really GDP is the main figure. Of course, the more accurate figure is GDP per capita, adjusted for PPP. That's about as close number you can get (and it's still inaccurate and an average).
hi dilip,
'..the GDP is a flawed measure of measuring the health of the economy.' you may be right (at least to an extent) - at the end of the day this is a metric we use to inform our opinions of how we compare against other groups, or how today compares against yesterday. like many others, it is not a perfect measure, but it is useful. to vikrum's point about 'problems with using the GDP', there are relatively simple ways to getting around those, such as PPP, gini coefficient, etc. thankfully we are not talking Gross National Happiness index here - now that would be problematic! am curious to hear about other metrics that (am sure) you have up your sleeve.
however, your stabilizer example doesn't convince me that the GDP is a flawed measure. would you rather have a few crores worth of incremental "voltage stabilizer" GDP and lose several multiples of that coming from productivity, lower prices and higher demand, more investment, and so on? (i.e., from having a dependable supply of power). i am convinced that a more stable power supply will result in higher GDP, stabilizers notwithstanding. tell me, how much of the USA's $35k GDP per cap comes from stabilizers?
so, give me stable power any day - i'd be happy to see the stabilizer company go out of business, because it really has no business being in business. might as well use the same investment to run other machines on stable power and produce something less funky/clunky but more meaningful, and increase GDP.
T
Tanuj/TTG/others, I'm seriously amazed by now. Have I really implied to you guys in this piece that I'd prefer to have unstable power? I seem to have, and if so I need to go back and learn to write more clearly than this. (Purvi, are you watching?)
Hey, I would love to see the stabilizer business go bust too. My point is exactly that it has no business being in business. It is a thriving business purely because we have great inefficiencies in our power supplies. That conundrum is just what this piece was trying to get at. (Unsuccessfully, I see).
Yes, I do have more on this score. (Maybe even up my sleeve). But it will have to wait for a while -- I'm off travelling in a few hours (TTG, you never sent me a number). Don't know when I'll next have time to get to this. But watch this space. I think there is a better measure of a country's economy.
Thanks for the back and forth, guys, it's been enlightening.
Really liked the post Dilip. GDP is certainly a flawed measure of an economy. GDP is a measure of cash flows rather than a measure of assets and liabilities - which is how companies are financially related.
I am not sure there can be a good measure of the economy - in real practical terms.
Rahul
Hi Dilip!
Hhave been reading your blog regularly and find it a great place! Your idea about GDP being a wrong measure for judging the true economic progress of a country is very correct. Good governance must be emphasised upon and not mere increase in GDP of the nation.
Hey, by the way I had emailed a poem of mine on the tsunami disaster to you. It is called "The Giant Wave". Since you have done written a lot on the tsunami disaster, I thought it would be a nice thing to share the poem with you. Did you see it? Pls do let me know.I have actually put up that poem in poemhunter.com also.
Hope to hear frm ur end soon.
ciao.
Dilip,
There's a logical inconsistency in your argument, especially the para below.
Look at it like this. You buy a computer. Doing so, you add to the GDP. Days later, the unstable electricity supply in Sheikh Sarai fries your sleek machine (which once happened to me here in Bombay). You either repair it or buy a new one. Whichever you do, you add to the GDP. This time, you are wiser: you buy yourself a stabilizer as well. With that purchase, you add to the GDP again.
Note what I've marked in bold. There's a third choice you've missed out -- "do nothing." I may not have the money. Or I may want to use the money for something else -- buying a sofa. Now what's the difference between spending Rs. 5,000 to repair a computer and spending Rs. 5,000 to buy a sofa? Why should an economist calculating GDP care what you purchase with your money?
Yes, I agree there are inefficiencies and GDP may not be a good calculator of “national income.” I currently don’t know of anything better. So I’m waiting to hear from you on a better measure of a country's economy. And of course GDP per se does not matter as much as per capita income (GDP / population)
Yazad, here in Jaipur your comment shows deleted in one screen and up there on the next. Some blogger hassles no doubt?
Anyway. I don't see the logical inconsistency. Of course the economist calculating GDP doesn't care what you're buying, and nor should he.
But if you follow this pattern of purchases -- which a lot of people do, and as I said I have -- you have contributed three times over to the GDP as a direct consequence of an unstable power supply. The GDP will reflect three purchases where there need only have been one. That's the point.
It's a governance issue? Well, that's one aspect of people's objections to the GDP -- that it doesn't take into effect such things as the effect of poor governance, which have a bearing on the satisfaction people have with their lives and the economy.
Dilip,
Seriously, I suggest GDP 101.
Econ 101, Logic 101, how many courses you missed in college, eh, Dilip?
To clarify something (and to come to Dilips rescue) here is a post.
http://free-blog-site.com/navin/archive/2005/10/25/84954.aspx
Awaiting your responses.
TTG, sorry, Please excuse.
Inefficiency does boost the economy. If we had pure drinking water another whole industry would be wiped out but this is a somewhat cynical approach.
I love the empty drums whose only contribution to a debate is "Hey, go read GDP/Econ/CS/BasketWeaving 101!" They say to me that they themselves know nothing about GDP/Econ/CS/BasketWeaving. Never fails.
Hiren, good point. Of course that's true. Yeah, what about striving for drinking water from our taps: I feel about the packaged water industry much as I feel about the voltage stabilizer industry -- both are best consigned to oblivion. Cynicism? Where's the cynicism?
Dilip,
How is it that you somehow delude yourself into thinking this is some sacred forum for debate and you are worthy of one? Has it ever occurred that some stop with quips because they think that is "enough".
I think you have missed the point on how "purchasing power" goes down because of the added cost to a basic consumer product. But I also think I am better off not "debating" you. I honestly believe that it really is futile - but that is immaterial here.
Long story short - some times, you either laugh a retort off or ignore it (depending on the status you accord it). Else the joke is on you.
Dilip, I agree that the GDP is a flawed metric, but the examples you come up with are not convincing.
You say: "inefficiencies boost the economy. Correct those inefficiencies, which we should, and we damage the economy."
Both sentences are flawed.
First, what boost the economy are not the inefficiencies themselves (unstable electricity), but products and services that reduce these inefficiencies (the stabilizer). This is a crucial difference, one that you fail to make in your entire post.
When I buy a stabilizer, I add to the GDP of the country and this is how it should be. Because, contrary to what you say, the stabilizer is not a "wholly unnecessary" product. It is unnecessary only in a hypothetical India of excellent electricity distribution. In the real India, it is very much a necessary product, one that provides me value (otherwise I wouldn't buy it). Most importantly, my life has improved because of the stabilizer -- my computer will not get fried, I won't waste my time repairing it, and I won't waste money replacing it (more on this in time).
[Aside: It will be easier to imagine the increased quality of life if you replace the stabilizer with another product that has resulted from our inefficient electricity sytem: the inverter. I cannot count the number of slog overs I would have missed if it had not been for this device.]
So, quality of life with stabilizers is better than life without them. The increase in GDP caused by stabilizer purchases reflects this. Nothing perverse about it.
Second, you say that when we correct these inefficiences, the economy is damaged to the extent that the stabilizer industry is destroyed. Once again, this is how it should be. The stabilizer is simply one alternative to reduce the inefficiencies in our electricity system. A second alternative is to clean up the system itself, correct the inefficiency. When we replace one alternative with a superior one, our net gain is the gain from the new alternative minus the gain from the old one. This last minus part simply shows up as a reduction in GDP, as it should, because the gains from cleaning up the system are tempered by the losses from the destruction of the stabilizer industry. The old giving way to the new and all that.
In all these scenarios, the GDP behaves exactly like it should, and I don't see how you can use these examples to prove that poor jeed is a flawed metric.
There is one scenario you describe where it can be argued that the jeed doesn't work very well. This is when my computer is fried and I replace it. The second purchase has no additional utility to me as an individual, but its contribution to the GDP is the same as my first purchase. A couple of things to note here.
One, this has nothing to do with inefficiencies. The situation remains the same if there were a wilful child in my household who destroys every single computer I buy. The key here is destruction of existing property and its consequent restoration. This is something that is well-known as a limitation of the GDP (commonly cited examples are earthquakes and hurricanes). But...
Two, the second computer purchase does add value to the person who is selling the computer. He is certainly better off, so raising the GDP is after all okay from his viewpoint.
Does it make sense to have an increase in GDP if you take the entire economy's viewpoint? I'm not an economist and I'm not competent to comment on this, but what from what I've read, this is a matter of continuing debate between the two groups of people who claim to intellectually descend from a dead white Brit and a dead white Austrian.
[ Broken window fallacy, as someone pointed out.]
Sure, the GDP doesn't take into account "human development" factors, but it's interesting to note that the increasingly used UN human development index takes GDP into account. You must give the guys at the UN some credit -- they opposed the war in Iraq after all ;)
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