When there is too much money in circulation relative to the volume of goods and services available for purchase, you have inflation. In the US, the historical annual inflation rate (measured as the rate of change in the consumer price index) has ranged from 3 to 4%. In the Philippines, it has ranged from 6 to 10%. At this rate, a basket of grocery items bought in a Filipino supermarket will double in price every 7 to 10 years.
This sounds bad enough, but imagine what will happen during hyperinflation, which has been defined as an inflation rate of more than 50% per month. It doesn't take a math genius to see that money will become worthless real fast. This has happened many times in the 20th century: Germany in the 1920s under the Weimar Republic (when prices doubled every 49 hours); Greece during the German occupation of World War 2 (prices doubled every 28 hours); Hungary at the end of World War 2 (prices doubled ever 15 hours); Yugoslavia from 1993-1994 (prices doubled every 16 hours); and the list is not exhaustive.
Hyperwage leads to hyperinflation. The Street Strategist correctly identifies hyperinflation as the greatest nemesis of hyperwage theory. When domestic helpers expect to be paid P20,000 a month, the Central Bank will be forced to print more money to meet the demand for it. The excessive growth in money supply (quantity theory of money), coupled with excessive growth in demand for goods and services (demand-pull inflation), and rapidly rising labor costs (cost-push inflation) will all combine to produce escalating prices. The immediate effect will be the suppression of business activity. What entrepreneur would want to do business in this environment where profit margins are being shaved off by the rising costs? A masochistic entrepreneur, perhaps.
Bentulan counters this argument by saying that the increased purchasing power of domestic helpers will actually stimulate business activity and increase profit margins. The producers of goods and services will supposedly make more money due to the increased demand. Well, this is only correct if the cost of production stays the same while the purchasing power of the consumers goes up. But if the cost of production rises in tandem with or faster than the increase in consumer purchasing power, then what have you really achieved except add a few more zeroes to your currency?
Bentulan also does not take into consideration the fact that there may be a long lag time before production capacity adjusts to the surge in demand. As I said before, goods and services will first have to exist before money can buy them. Just because a domestic helper's wage has been boosted to P20,000 a month does not mean that there has been a corresponding increase in the amount of goods and services she can purhcase. Capital will first have to be invested to build the factories, hire the workers, and deploy the technology needed to manufacture the cell phones and breast implants that the domestic helpers crave.
But since production costs have already escalated due to the prior legislated hyperwage boost, then capital investments have just been made unattractive. This situation will benefit producers who are well positioned to meet the demand. Who are these producers? Likely the deep-pocketed multinational corporations not affected by the hyperwage law who have the means to adjust quickly to the demand surge - since they already have existing factories and the technology in neighboring countries like China where the labor costs are low. This means Filipinos will end up importing these goods and services. Obviously, less capitalized domestic Filipino producers will bear the brunt of hyperwage. They will be decimated.
Hence, the great unintended consequence of hyperwage theory is that it may cause the Philippines' to become a net importer of merchandise. This state of affairs will reduce the country's Gross Domestic Product, given that GDP = consumption + investment + (government spending-taxes) + (exports − imports). Hyperwage may indeed result in a rise in consumption, but if it also reduces investment and causes the net export (gross export minus gross import) to become negative, then it doesn't help overall economic growth.
In summary, Thaddeus Bentulan's Hyperwage Theory was a very entertaining series of articles which forced me to brush up on my economic knowledge. It's a great read even though I have my reservations about it. The biggest objection to it is the threat of hyperinflation that hyperwage will engender, and its detrimental effects on domestic industries which will bear the brunt of high production costs. The much touted economic benefits of increased consumption may only be negated by hyperwage's suppressive effects on investments and its promotion of import dependency.
Bentulan promotes hyperwage as the cure to Philippine poverty. Alas, it is a drug that will kill the patient before its beneficial effects will have a chance to kick in.
Thaddeus Bentulan aka the Street Strategist shocked his readers when he proposed that the minimum wage of Filipino domestic helpers be turbocharged to P20,000 a month. He laid out this proposal (which he calls Hyperwage Theory) in his 33 week series of articles which appeared on Businessworld in 2005. Bentulan believes that it is the most effective solution to Philippine (and Third World) poverty. The merit of his idea is still being hotly debated in the econ-oriented blogosphere.
In his blog , Thaddeus explains his Theory as follows:
"The minimum wage shall be set to a level that shall give purchasing power to the minimum wage earners, including domestic helpers, unlike current levels wherein the domestic helpers have almost zero purchasing power. A hyperwage resulting in real purchasing power will stimulate domestic demand which in turn will stimulate production which in turn will stimulate employment. This domestic demand, under the power of the economic multiplier will result in increased production of goods or services which in turn will result in more employment in a positive upward spiral. "
Reading this paragraph brought back memories of my econ classes in college. Economics was not my major, but I found it to be interesting....interesting because my college years were bad economic times for the Philippines, and I wanted to understand why that was the case. I thought my Econ 1 course would help me answer my multitude of questions. I believed (naively as it turns out) that poverty can be eradicated simply by giving the poor more money. Why not just print more of the stuff and give them out? After all, when I applied this strategy on myself, it seemed to work. When I ran out of cash, I simply asked my parents for more of it, and that solved my cashlessness. Why can't the government do the same for poor people? Of course I was only 17 years old at that time, and the deeper logic of economic theory eluded my understanding as my powers of concentration were easily overwhelmed by many other distractions, not least of which was this thing called "the opposite sex".
But there is one concept that I did retain from my econ classes which I find very relevant to the discussion of hyperwage theory: inflation. Lay people hear this word often enough through the media that we have formed an opinion about its adverse effects on economic health. Inflation is bad. It is the monster that we must slay if we are to achieve a measure of prosperity. But what is inflation anyway? I can refer you to technical definitions of it, such as this. But I also would just like to define it in my own non-economist's language. Somebody said that if you can't explain a concept in your own words, you don't really understand it.
I understand inflation by imagining myself living in an island in the south Pacific Ocean. The island's chief food source is coconuts. He who has lots of it is considered rich because he can sustain his life for as long as the coconut supply doesn't run out. He who has few or none of it is considered poor. Unfortunately, the supply of coconuts is finite. There is a natural limit to how many coconut trees can grow on this small island. I happen to be one of the poor inhabitants. I own only 2 coconut trees while my neighbor Pablo owns hundreds of them in his plantation.
Despite our islands' backwardness, we do have a market system here where we can buy and sell coconuts using a medium of exchange - the peso. As my bad luck would have it, not only do I have few coconuts to trade, but I also only have five 1-peso bills in my possession. By all measures I am poor. I'd like to buy some of Pablo's coconuts but I can't afford them - I don't have enough pesos.
One day I concoct a plan to obtain more pesos: I decide to manufacture more of them. I own a small printing machine. Heck, I'll just print as many pesos as I want, and then buy out Pablo's coconut trees. That should do it! So I go to Pablo's house, deliver a trunkful of 1 peso bills that I printed, and offer to buy out his trees. There's just one hitch. Pablo won't sell them to me. He says that the actual coconuts are more important to him than the peso bills. Even if I gave him a million pesos he will still not part with his coconuts because he knows that the number of coconut trees the island can grow is finite. He can eat the coconuts but not the peso bills.
The point I am making here is this: money is just a piece of paper. It is worthless unless it can be converted into usable goods. If the amount of goods (and services) available for purchase is limited, then no matter how much money you have in your pocket, you will not necessarily be able to buy these goods and services. You will have to bid higher and higher prices in order to persuade the seller to sell to you. This is what inflation is: too much money chasing too few goods and services. Prices will rise as a result.
This brings me to the relationship betwen money and wealth. Money is not equivalent to wealth. Wealth is everything money can buy (and more). Wealth is the stuff that people use (food, clothing, cars, medicines, land, houses etc) to sustain their lives. These goods and services constitute true wealth. Money is simply a mechanism by which these goods and services are exchanged between those who produce them and those who consume them. Printing more money does not increase the total amount of wealth in a society. It does not increase the number of cars, clothes, or homes that are available for purchase. A country becomes truly wealthy if the aggregate amount of goods and services that it produces goes up, not if the total amount of money in circulation goes up.
This isn't to say that money is unimportant. Money is very important because it makes the trading of goods and services more efficient. But the key point is, these goods and services have to exist in the first place before they can be traded using money as the conduit.
Now that I've given my non-economist's definition of inflation, I will talk about the hyperinflationary effects of hyperwage theory. That's right, hyperwages lead to hyperinflation. The professional economists who criticize Thaddeus' theory understand this. Thaddeus himself acknowledges it. Paying domestic helpers P20,000 a month will cause them to purchase more goods and services. However, if these goods and services are in short supply, their prices will have to go up. Everything from the prices of breast implants, cars, cellphones, clothes, food, TV sets, etc will spiral out of control. That's because the production capacity of the economy is never infinite. We live in a range-bound world. There are just so much raw materials, land, factories, and people available to churn out these goodies.
Next installment: More on Hyperinflation
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The Street Strategist is a popular column in Businessworld that appears weekly on Thursdays. It has gained a following among business executives, economists, investors, journalists, politicians, activists, and riff raff like myself. People like Senator Serge Osmena and Labor Secretary Art Brion ask for copies of its latest issues. CEOs of Philippine corporations tell their secretaries to compile the articles. Former NEDA secretaries-general Felipe Medalla and Dante Canlas are forced to respond to its points. What's the Street Strategist all about?
Well, the Street Strategist is unlike any other column. It is not a preachy screed like what that leftist bore Conrado de Quiros is fond of writing. It is rib-ticklingly, can't-catch-my-breath, there-are-tears-in-my-eyes, I'm-wetting-my-pants funny. (Ok, I didn't quite wet-my-pants, but you get the drift). It is written by Thaddeus Bentulan. I know Thaddeus. He's a friend of mine from college. He was always a funny guy, and very very smart. His fund of knowledge is encyclopedic. I used to compete with him in quiz bowls and he was always a formidable opponent. He's the kind of guy who wins TV game shows like Who Wants to be a Millionaire. He is a genius.
Fast forward X years later and here I am critiquing his Businessworld column.
The curious thing about Thaddeus' column is that its topics are not the typical material used for comedy. You won't read about the foibles of Kris Aquino here. It is not an entertainment column. Its subjects are in fact quite dull: accounting, bank runs, bonds, contracts, debit and credit, minimum wage, and - for the life of me - ice cubes. This kind of material typically elicits yawns from most normal people. You have to be so into bookkeeping or refrigeration for this stuff to appeal to you. Average newspaper readers like myself usually head for the sports, entertainment, comics, or classified ads section first. Only when there's nothing else to read there do we stray into the business section.
But the Street Strategist is different, and this is testament to Thaddeus' brilliance. He has managed to turn boring topics into eye candy. He has successfully sexed up such things as "debit and credit", "contracts", and "ice cubes" to the point of winning fawning accolades from female admirers from around the world. At least that's what the Street Strategist himself says, and I have no reason to doubt it since he has published these fan mail on Businessworld. Surely, the man gets hate mail too (NEDA economist Felipe Medalla wrote that he should get psychiatric treatment), but this kind of reaction only underscores the fact that the Street Strategist has gained enough of a following among influential circles to be viewed as a growing threat that needs to be swatted.
I'm writing about this since I was recently drawn into an online discussion concerning one of Thaddeus' columns. You see, I am a lurker in his online discussion group. He had invited me to join this group about a year ago but I never participated in it because I was then too busy reviewing for my recertification exam in medicine that we internists are required to take every 10 years. Anyway, I've since passed the exam and that freed up my schedule. So I went back to his group and checked the discussions they've had over the past year.
I learned that the Street Strategist wrote a stunning 33 week series of articles in Businessworld in 2005 on Hyperwage Theory where he laid out his proposal to cure poverty in the Philippines and the rest of the Third World in one stroke. It was a very ambitious piece. It claimed to supplant the entrenched theories of neo-classical economics and Keynesianism on which modern capitalism is anchored. It was a scathing condemnation of the economic policies promoted by the World Bank. But it was written in a tongue-in-cheek sort of way that it made me wonder whether Thaddeus was merely pulling everbody's legs. Imagine this non-economist (Thaddeus has a degree in engineering, not economics) purporting to overturn the received wisdom of John Maynard Keynes, Milton Friedman, and the like - and demanding a Nobel Prize for it! Yet he had the econometric data and airtight logic to back him up.
Naturally, the series generated a lot of flak from professional economists whose thinking is mostly in line with World Bank prescriptions. This is the same piece which earned that snarky "go see a psychiatrist" remark from Felipe Medalla.
It turns out that the Street Strategist had sent me a PDF copy of Hyperwage Theory (which is now a book, by the way) last year which I never read because of my tight schedule. Last weekend, I sat down and plowed through the entire 300 or so page opus. It was very entertaining, to say the least. It was sexed-up economics - a far cry from what I remember my college Econ 1 used to be! Reading it was like reading an econ textbook where every other page contained photos of sexy nude women. A real page turner.
Thaddeus reviewed basic econ concepts like gross domestic product (GDP) and how it is calculated. He explained that the major driver of GDP is consumption. He demonstrated how the effect of consumption is magnified throughout the economy by way of the Keynesian multiplier, citing Gaussian geometric progression as the underlying principle of this. The idea is that P1 of consumption adds P5 to the GDP. His point is that if the Philippine economy is to grow, Filipinos must consume more goods and services. There are graphs and formulas to support his presentation.
Sounds good so far. The only problem is, Filipinos don't have the money to buy these goods and services. The Street Strategist's solution: give them the money. Hence hyperwage. Hyper as in "jet boosters". Thaddeus recommends boosting the minimum wage to P20,000 a month. That's the wage that he wants domestic helpers to get paid. He uses domestic helpers as his threshold occupation since he thinks they represent the poorest of the poor. Thus, by giving them P20,000 a month, he automatically boosts everyone else's wages. Why P20,000? He bases this on the "global market price of labor" which is equivalent to the US federal minimum wage of $7.50 per hour.
Filipino domestic helpers will now be earning close to American wages. They will be able to afford 5 cellphones instead of one. This will start a chain reaction that stimulates economic growth. The increased purchasing power will then reverse many societal problems. For instance, the brain drain will be stopped. Filipino plastic surgeons who've migrated to the US will now make a U turn back to the Philippines where many domestic helpers - now flush with cash - will be waiting to get their nose lifts and breast implants. Ok, the author didn't really say that, I made it up. But his general implication is clear.
Domestic helpers with brand new boobs. This will stimulate the limp Philippine economy. Who's going to object to that? It turns out, the professional economists do. They are worried that the excessive stimulation will lead to hyperinflation. Of the economy, that is.
In the next installment, I will discuss how the Street Strategist addresses the problem of hyperinflation.
If there's one trait that is consistently found across human cultures, it is our religiosity. Religiosity is such a universal trait of our species that we might as well call ourselves Homo religiousum. A naturalist like myself is compelled to search for a natural explanation of this.
What is it about human brains that facilitates belief in entities that are beyond our powers of observation? One is tempted to say, "maybe God really does exist, and he may have wired our brains in such a way as to make us receptive to religion." But this "explanation" is not very helpful. Invoking the existence of God to explain why millions of people believe in the existence of God is fallacious circular reasoning. It also begs the question of why we have so many mutually contradictory versions of God. Surely, they can't all be correct.
But this puzzle is not insoluble after all. Just as scientists have found natural causes for mental illnesses like schizophrenia (previously thought to be due to demon possession), they have also chipped away at the citadel of human religiosity and discovered that it too has purely natural origins at its core. Stewart Guthrie's "Faces in the Clouds: A New Theory of Religion", published by the Oxford University Press, is one such scholarly attempt to explain this phenomenon.
Guthrie is an anthropologist at Fordham University. His thesis is that religious belief is a form of "systematic anthropomorphism". What this means is that human beings are prone to attributing human or life-like characteristics to objects and events around them. For example, we've seen how children play with dolls, put them in hammocks, and sing lullabies to them to put them sleep. These children really do believe that the dolls are animate. In fact, Mickey Mouse and the whole Disneyland empire owe their commercial success to our kids' propensity to anthropomorphize. Adults are not immune to this either. We "baby" our cars, curse the bad weather, throw our cellphones in frustration - as if these objects give a damn about our little existential issues.
Well, this is anthropomorphism in action, and Guthrie contends that it is a smart Darwinian strategy which is pervasive in humans because it has enabled our ancestors to survive the hostile environments they were exposed to. Think about it: the objects that our ancestors found most consequential in their environments were their fellow humans and other living things. Our ancestors' ability to correctly judge whether these other beings were threats to be overcome meant the difference between life and death.
Imagine yourself alive 150,000 years ago. You are crouched in the middle of an African savanna, hunting for food. You, in turn, are being hunted down by predators (eg other humans, or animals larger than yourself, like tigers). You move quietly to avoid being noticed. Suddenly, you see a shadow behind a tree. What can it be? Your mind races for an answer. Your pulse quickens, your breathing gets harder. You have a decision to make: either dismiss the shadow as coming from a fallen log, relax your guard, and proceed to go about your business....or assume it's another human being laying in wait to ambush you. What should you do?
If the shadow is just from a fallen log, nothing will happen to you. But if it is coming from a hostile human being, then you run the risk of being killed if you relaxed your guard. The smart bet is to assume the worst: that there is in fact a threat lurking in your environment. It's a smart bet because the cost of being wrong when you presume no threat exists when there is a real one far outweighs the cost of being wrong when you presume a threat exists when there is none. You will surely die if you are careless, but you will live another day if you are cautious.
Our ancestors must have faced scenarios like this countless of times eons ago. Those who were careless and ignored the warning signs were killed, and their genes were eliminated from the gene pool. The more cautious (or paranoid) ones survived. They erred on the side of overestimating threats, and lived. By definition, we are the offspring of the latter group. We inherited their characteristics, including their propensity to anthropomorphize.
We create God in our image, projecting all our habits onto him. He gets mad, becomes jealous if we entertain his rival, bears a son. We believe that he controls the weather, so we pray to him to give us rains for a bountiful harvest. Now, we're not really sure if there's a God behind the clouds, but our brains tell us it is better to assume the worst because the penalty for disbelieving a God who exists (eternal damnation) far outweighs the penalty for believing a non-existent one (no penalty). It is better to err on the side of overestimating threats than to err on the side of underestimating them. This line of reasoning is basically Pascal's wager . It's anthropomorphism at work. It is (or was?) a valuable survival strategy. That's just the way our brains have been wired by evolution.