Demystifying Delusions

Exploring the Truth using tools of Economics

Have you ever wondered as to how a technological advancement can actually make farmers worse off?

Cultivating the habit to save is good (remember the latest Bollywood flick “Tara Rum Pum” which prophesied the idea) but, what if all people start saving?

OR, if the government enforces stringent laws to check drug trafficking, would it be able to reduce drug-related crimes?

Well, the answer to all these questions might take you by surprise! After all, we live in a world of illusions and paradoxes, of which many are unaware! Let’s use some principles of economics to analyze and unravel the mystery behind some of these “inconvenient truths”.

Let’s first consider the case of savings. “Don’t wash money down the drain; a penny saved is a dollar earned”. Inspired by these quotes, say everybody in the economy begins to save. To save for a rainy day ahead is a wise decision but sometimes, what is true for an individual may not be true for the economy as a whole. The truth is that if everybody saves, then the total savings in the economy would actually fall. Surprised?!

Well, the logic behind it is that if savings increase, it implies that people start consuming less of goods and services and hence reduce their expenditures. Consequently, the demand for goods and services at the aggregate level, i.e., of all the people in the economy, would decline. Absence of market activity means lower economic growth. In a weak economy, incomes fall and ultimately savings also fall because what you save is actually a proportion of your earned income. This paradox is called the “Paradox of Thrift” and was discovered by John Maynard Keynes, one of the greatest Economists of all times. You are now acquainted with one of the very important topic in economics. Read on; there’s still more to come!

Let’s now shift our focus on the drug issue. Now and then many drug peddlers have been caught trafficking drugs, which calls for the enforcement of more stringent laws. But what if such laws work against the policymakers? Surprisingly, drug interdiction by the government may reduce drug-use but it surely increases drug-related crime! Let’s understand the economics behind it. If the government becomes stricter, the suppliers of drugs would have a tough time supplying drugs. Therefore, the cost of selling these drugs increases and supply would fall. Now the drug-users (their number is still the same) would have to shell out more money to buy their daily dose of drugs. So in the presence of scarcity and high prices, some of them (mainly amateurs) might discontinue taking drugs and move to rehabs. But what about the others who are big time addicts? Addicts who already had to steal to support their habits would have an even greater need for quick cash, leading to further increase in drug-related crime. A solution to this is drug education, rather than drug interdiction!

Another startling fact would be to understand the adverse effects of introducing an improved and better technology in agriculture. Suppose Indian agronomists develop a new hybrid of wheat which is high-yielding and much better than the existing varieties. When farmers resort to cultivating this new hybrid, the amount of wheat produced on each acre of land would be more, thereby increasing the amount of wheat that farmers are willing to supply at the prevailing price. However, the quantity demanded by the consumers would, more or less, remain the same (obviously you won’t start eating five chapatis instead of the earlier three just because of the increase in supply at the earlier price!). As a result, farmers have to lower the price of wheat so as to induce consumers to buy more wheat. But the fall in price is much more than the increase in demand and therefore, the total revenue of farmers decreases (total revenue is what the farmers get on selling their good; here it is price times the quantity of wheat sold). So we see that the farmers are actually worse off!

Just now you got a gist of the important economics tools of demand and supply and the concept of elasticity! However, these results may not be applicable cent per cent in all situations; there are a lot of other factors which may affect such outcomes.

Such revelations often take us by surprise. It’s interesting to come across such paradoxes. But still many notions and disbeliefs lay embedded in our minds. The study of economics can give us the right solutions. It’s a complex, yet interesting field of study. It helps us to understand and analyze various government strategies, and market outcomes and decisions.

What you think may not be right always!

Pratik Goel