Monday, March 06, 2006

Part 14 - Hyperwage Theory: Asymptotic Hyperinflation

Hyperwage Theory Part 14

Hyperwage Theory Part 14

Chapter 14: Asymptotic Hyperinflation

The Hyperwage Theory’s greatest weapon is that it is the only economic theory that requires only a single variable to be tweaked – the minimum wage – and all other factors of production and variables of the economy will adjust accordingly.

All the benefits, both economic and non-economic benefits will come down in an avalanche as a direct, logical, and natural consequence of protecting the poorest of the poor by giving them a wage that carries purchasing power.

The non-entities called domestic helpers will now become a huge source of revenue for sellers of goods and services, and of course, a huge source of taxation like value-added or amusement taxes.

Hyperwage can address such issues as petty corruption, laziness, inefficiency, tax evasion, and population explosion. Population control? Yes, Hyperwage is the only economic theory that successfully addresses population control as a natural consequence.

And don’t forget that with the proposed minimum wage, you can hire young and pretty Eastern Europeans as domestic helpers. You didn’t think of this specific non-economic benefit, did you? (Well, the manpower agencies of Hong Kong and Singapore don’t have the insight to hire Eastern Europeans instead of Thais, Indonesians, and Filipinos, but upon reading this, I’m sure there will be a shift in recruitment geopolitics.)

But the problem with Hyperwage is that it mandates a fundamental shift in paradigm. Hyperwage first has to break down the mindset of economic PhDs, and I don’t think they are willing to admit that a solution as direct as Hyperwage is better than their econometrics and macroeconomics.

It is not the logic of Hyperwage that is the stumbling block. Actually, the greater obstacle is the humbling experience of having to abandon your PhD education and admit that a non-economist has discovered the only practical way to elevate Third World countries who have the natural resources to the economic status of First World countries who are exploiters of natural resources.

Before you will be redeemed, you must first be humbled. Well, I was the first one to be humbled. I had to abandon whatever meager economics education I had before Hyperwage finally redeemed me. What am I talking, I invented Hyperwage, for Pete’s sake, so there was never really any humbling effect.

Anyway, I’m sure you have many questions of the implementation of Hyperwage. Don’t worry, I’ll get to that soon. Implementation is easy once everybody is convinced that this is the way to go because in this scenario we will view obstacles as directional rerouting not as stop signs.

Limits to hyperinflation
In the preceding parts, I have slowly unraveled that the hyperinflation scare is merely a scare. After all, almost all of our goods and services are currently at levels at par with First World countries.
In fact, in some products, we pay more than our First World counterparts. We pay more for electricity, we pay more for computers, we pay more for oil which is the world’s most common product.
If we increase our minimum wage from P2,000 to P20,000 the price of Apple iPods will still be the same, in fact, it will probably come down because of more volume.

The price of computers in our country is more expensive than the price of these same models in the USA or Singapore.

The price of oil is now almost the same price as in the US.

Don’t forget, that all goods and services will eventually trace its pricing back to oil. The fare for a horse carriage in Carbon will rise when oil prices rise.

There is a limit to hyperinflation, and that is the current world market price. We cannot go beyond that by a large difference. And remember, we are already paying a bit above the world market price, so what are you worried about? We are already under hyperinflation. We are already paying hyper prices but without the Hyperwage.

During a talk show, one caller was very angry: He said, “If the price of rice is P25 per kilo given that a helper’s wage is P2,000, then if we raise the wage to P20,000, the price of rice will be P1,000 per kilo!” Then he slammed down the phone.

My reply: “The first casualty of Hyperwage is our brains. The moment we hear of P20,000 as minimum wage, our brains stop working. You know, here’s my answer to that caller. When the minimum wage is increased to P20,000 the price of rice will be P10 per kilo instead of the current P25. It will be lower.”

“Why lower?” The host asked me.

“Well, we buy from Viet Nam or China. Their rice is cheaper that is why we have rice smugglers. If their comparative advantage is efficient rice production, then our comparative advantage is purchasing power. We buy from them, why let our poor consumers suffer? This may affect our own agriculture, but we’ll tackle that issue some other time. My point is that hyperinflation is not a necessary consequence of Hyperwage. Even if rice will double to P50 per kilo, hey, you receive P20,000 a month, what are you complaining about?”

I am now ready to discuss asymptotic hyperinflation.

What is an asymptote? Let me give you an example. You have a function y=1/x. This function is actually a hyperbola, a hyperbolic curve. Remember the word “hyperbole?”

Now, what happens if x=0? Then y=infinity. But look at it this way. Since x will never be zero (since division by zero is not allowed), then y will never be infinity.

In others, words, as x approached zero, y approaches infinity. The value of x will never be zero, hence the value of y will never be infinity.

You can imagine a wall. A curved object approaches the wall but will never ever touch the wall. That wall is the asymptote of that curved object.

Back to our equation, the limit of y=1/x, as x approached zero is infinity. There’s actually a math expression for this relation but I’d rather not write it because last time my symbol for infinity came out as numeral 8 on these pages.

In other words, the line x=0 will never be touched by the curve 1/x. Mathematically speaking,, the line x=0 is the “asymptote” of the curve y=1/x.

Asymptotic hyperinflation
Why did I use mathematics to explain a simple thought such as an upper limit to hyperinflation?
My purpose is to demonstrate that the concept of asymptote is a common mathematical thought, therefore, not a surprising concept. Thus, when I apply this concept to economics, I hope to exemplify that asymptotes are normal for economics as well.

In short, I want elucidate this with utmost emphasis: The concept of a runaway hyperinflation is an abnormal concept while the concept of asymptotic hyperinflation is a normal concept.

What am I saying? When economists state that Hyperwage will lead to a runaway hyperinflation, they are not correct because the probability of a runaway hyperinflation is very low. Runaway hyperinflation is an abnormal concept whose probability of occurrence is practically zero.

On the other hand, Hyperwage will lead to asymptotic hyperinflation which means that no matter how prices will rise as a result of the Hyperwage, there exists a certain limit. This limit is the asymptote of hyperinflation.

And in the view of Hyperwage, that specific limit is the current world market price. It may not be strictly an asymptote under the rigors of math but the concept of the limit, the concept of the asymptote is there.

This concept eases my burden. When I explain Hyperwage to any scientist. mathematician, or engineer, and when they react about hyperinflation, I simply say: “There will be hyperinflation but it will be asymptotic with the world market price as the limit. In fact, right now, we have reached that level because our prices of computers, machineries, equipments, power plant generators are already asymptotic. It can go up but not by multiples.”

See what I mean? This is the reason why the scientists are the earliest converts to Hyperwage, not the economists.

Illogical reactions
Economist: “But Hyperwage will result in a runaway hyperinflation!”

This is an illogical reaction because a runaway hyperinflation has no probability of happening.

Street Strategist: “Hyperwage will result in an asymptotic hyperinflation but you need not worry because almost all of our important and major products are being sold at that level already. The other items such as rice and hair-cut services will then be affordable anyway because of the P20,000 minimum wage.”

Now, this is what I call a more logical statement.

Price control
I’m always amused whenever our government officials try to impose price controls in one way or another.

What is their way to reduce the price of medicine, the price of LPG, the price of diesel? Subsidies that are:
1.hard to implement
2.fraught with loopholes
3.affects only tiny percent of our consumers
4.ricochets negatively to other products or sectors
5.eventually wastes time energy
6.never has a lasting effect

Guys, remember I mentioned before that the PPP ranking of the Philippines is good because we have lower prices on the goods defined in the basket of goods, but our purchasing power is low.

Wage-price mismatch
There’s one thing I noticed. Because our economists (including the World Bank economists) are brainwashed by inflation-centric economics they tend to introduce price control schemes that are funny and amusing.

The problem is wage-price mismatch. Prices are at First World levels because we buy oil and computers from the First World, while our wages are Third World.

Solution? Come on guys, even a grade school knows the logical answer. Raise the wages to minimize the gap. That’s it. One single stroke.

Education as liability
But what is happening? The high education of the economists has become their liability. To avoid a runaway inflation, they address the wage-price mismatch issue with an indirect, beating-around-the-bush solution.

Discount for LPG, discount for Senior Citizens, discount for diesel jeepneys, discount this, discount that.

Why all these beating around the bush? Because they are afraid of a runaway inflation. An irrational fear, that one, as I have discussed earlier.

What kind of a strategy is that? Beating around the bush? Inflation-centric?

Now, right now, let me correct your high education with my street education. Inflation-centric economics applies only to countries who are already at hyperwage levels.

Since we are still at hypowage levels, then we use purchasing power-centric economics.

And don’t worry about runaway hyperinflation. It will not happen. Only asymptotic hyperinflation will happen, and we are already on that level anyway.

So what’s their solution?

The NFA sells rice at a lower price but there’s one big problem. That particular cheap rice not available. Cheap but out of stock. Or again, loopholes. Mixed with commercial rice and sold as commercial.

Medicine? The government imports from India. Come on guys, you’re making me laugh. The people don’t
need cheap paracetamol that is not available in Leyte. Besides the high cost of medicine in this country is caused by the corrupt practices of doctors demanding favors from the salesmen (from concert tickets to lechon to travels abroad).

The people need wages that they deserve.

Is the airfare from Manila to Saudi Arabia cheaper because we are a Third World country? Is it 1/10th lower? We will still pay international prices because even if we are Third World consumers.

Pricing strategy
And how do we address oil price increases? We want to keep prices of oil cheap so that prices of other commodities will not rise. How?

We will not increase wages because this will result in high prices of goods. That’s the line of the economists and the government.

My reaction: Do you mean to say that increasing wages will increase prices?

Let me ask you, will lowering wages result in lower prices?

I think the pricing strategy of Third World countries is inappropriate because we set prices to target low inflation. We target low inflation because we are afraid of high inflation. We are afraid of high inflation because … actually, I’m not sure why.

Ah, we are afraid of hyperinflation because our brains stop working just by the mere mention of the word hyperinflation in the twilight zone of economics. Is this logical?

Think of asymptotic hyperinflation. You’ll soon feel comfortable. The only thing to fear is fear itself.

There is a price for labor, and it is the world market price. If our workers are paid P25,000 abroad as helpers, then we should try to match that. This is not price control, ladies and gentlemen. This is world market pricing strategy. This will prevent brain drain.

But can we afford it? Of course we can. More than 52% of our wealth rests in the hands of 20% of the population. It’s high time we use Hyperwage to address the Gini ratio of the country and redistribute this wealth to create a middle class. But more on this later. Besides, more salaries income means more salaries tax, more transactions tax, more taxation base.

Low price or high volume?
Are you a businessman? Are you more afraid that your prices are high or that your volumes are low?
Suppose you are a retailer of MP3 USB players, which is a greater problem for you? High selling price or low volume of sales?

Any businessman will tell you that prices don’t matter as long as the people can afford to pay them. The MP3 Players will have to be sold at prices higher than in Taiwan because we have to import them. But you cannot sell them, even below cost if the consumers have no money.

Can you imagine the effect of raising minimum wages? Every helper will have one MP3 player, and if there are 5 million maids, you will have 5 million new customers. Even if you pay P50,000 salary to your sales clerks, you can still afford them if you sell 5 million units in a year.

Equation of
Hyperwage inflation
Will a dollar increase in wages result in a two-dollar increase in prices? No.
Here is the summary: 1,000% in wages – 100% in prices = 900% net increase in purchasing power

Remember that the wages of maids will be P20,000 but do you really think the cost of computers will double from P25,000 per set to P50,000? No way. The world market price is only P20,000.

Do you think the price of TVs will rise from P30,000 to P60,000? No way, the price of TV in US is only P25,000 for the same model.
Do you think the price of rice will go from P25 to P50 per kilo? Assuming it will, you can now afford it.

Besides how many kilos do you eat in a day? One kilo? You mean to say you are worried you’ll spend an additional P25 each day for rice when in fact you are now getting P20,000 per month instead on P2,000?

Will there be an increase in mobile-to-mobile call charges ten-fold? Will the price of Nokia rise by 10-fold?

Think, think, guys. Will there be a runaway inflation? No?

Will there be an asymptotic inflation? Yes.

Question: Will there be a possibility of a price reduction instead under a regime of Hyperwage? Yes, there’s a possibility. Why? As I have given in my Apple iPod example, the maids could now afford iPods which previously they can’t. The volume of all the iPod sales will probably rise 1,000 times. The total profit can now justify a reduced selling price.

And remember, all these transfers of wealth from the huge profits of companies and individuals to the lower class of society in a scheme called Hyperwage will result in more consumption power of the poor.

This consumption spending power will be spent by the poor, and all will go back to businesses anyway, eventually, because the poor will buy goods and services.

But before all the money finally goes back to the businessmen, such consumption money will have been subjected first to the Keynesian multiplier effect. And this makes Hyperwage even more logical as the solution to Third World poverty.

Nonlinear formula
Before I go, let me remind you that I have fully discussed that hyperinflation does not happen. The two other concerns regarding Hyperwage are loss of employment and affordability. Don’t worry I shall tackle them next.

According to the Street Strategist, the asymptotic hyperinflation will be non-linear, meaning, a 1000% increase in wages does not automatically result a linear increase of 1000% in prices.

For instance, a 1000% increase in the minimum wages of domestic helpers may only result in a 20% increase in prices in some commodities such as rice and vegetables, and probably zero or even negative increase in some durables like computers, appliances, and cars.

Isn’t it cool, we have finally struck down so many economic myths with our Hyperwage Theory?
(Thads Bentulan, August 4, 2005)
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