“Economics is the art of getting the best out of life.”
Nobel Laureate in Economics, 1992.
“…On the issue, there is no debating the presence of politics in the establishment of policies in
Papino. NVS villager.
September 21, 2007.
Philipikita. NVS villager.
Comment on article “
“…The private sector allocate resources where they will earn the highest return. The government in contrast, allocate resources to projects that meet their political interests. However the lesser the economy depends on politics, the better for the country and the people. Thus, influential politicians must not decide who should be given a bank credit and who must not. Nevertheless, this is what happens in countries with authoritarian regimes where politicians build ‘crony capitalism.’ Projects with high profitability potential get little or no funding while dubious and unprofitable projects are lavished with government funds simply because the brother-in-law of the president is in charge. In such situations, the consumers loss in two ways. First, tax money are squandered when unviable projects which should never have been funded in the first place go bust (or when the whole banking system needs to be bailed out because it is full of rotten loans which were issued to implement unviable, dubious and politically motivated projects) Secondly, the economy does not develop quickly and effectively as it should because credit ( a limited resource) is channeled away from worth-while projects. It looks like this in real life: new automobile factories are not built, students don’t get loans to finance their education, entrepreneurs are deprived of capital needed to develop their businesses. Resources are squandered and as a result, the economy does not perform anywhere near its potential. Countries without functioning government are not oases of free market prosperity. They are places in which it is expensive and difficult to conduct even the most simple business.
d life expectancy is a shocking forty-two years! These are not countries in which the market economy has failed; they are countries in which the government has failed to develop and sustain the institutions necessary to support a market economy. A recent report by the United Nations Development Program placed much of the blame for world poverty on bad government. Without good governance, reliance on trick-down economic development and a host of other strategies will not work, the
-Charles Wheelan. Author of “Naked Economies: Undressing the Dismal Science.”
excerpt from chapter 4 “The Government and the Economy: The Army was lucky to get that screwdriver for $500”
FINANCE 101: INVESTMENT ANALYSIS.
In order to assess “objectively” the tragic decision of the Northern led federal government to build a new capital in
In corporate finance, or to be more precise, in investment analysis, investors are taught to embark on an investment project only if the Net Present Value (NPV) of the project is positive. If we are to use the language of a layman, who does not have a background in finance, what this relatively means is that an investor should take on a project only if the financial benefits from the project outweigh the cost. Before proceeding, it is also of utmost importance in our discussion and analysis to define or understand what an investment project is. So, what is an investment project? An investment project is an undertaking that requires time and resources – financial, human, technical, technological and raw-materials to implement, and are carried out, in most cases, with the sole purpose of making profit.
Having defined what an investment project is, now let us complicate the task of the investor a little bit. In a situation whereby the investor is considering a number of potentially profitable projects with positive NPV,
which one should he choose? The fact that capital is a limited resource makes many projects mutually exclusive. In other words, by choosing one, two, three or more projects, that his limited capital is capable of
financing, an investor is compelled to forgo other projects, despite the fact they are all profitable. The one billion dollar question now is: What criteria should the investor use in deciding which of the potentially
profitable projects are worth embarking on? The rule of thumb in investment analysis says that “all things being equal,” the “rational” investor should invest in the project(s) with the highest net present value(s) in
order to maximise the return on his investment (R.O.I.) By this, I mean that investment decisions taken by a rational investor are not based on emotion, philanthropy, charity, politics, external pressure or influence, e.t.c. but are taken “independently” and based “solely” on maximizing profit or financial reward from his investment. In other words, a rational investor invests in project(s) that maximizes his profit.
But what about the government? How should they spend the money in their custody? Just like private investors, every government has limited resources, as a result, it is faced with the same problem of choosing which projects to embark on behalf of the citizens. Before we proceed
with our analysis, it is very important to emphasize here the concept of “opportunity cost.”
According to Garry Becker, the 1992 Nobel Laureate in Economics, “Economics is the art of getting the best out of life.” Suffice to say that there is more than meets the eye in this simple statement. It is possible to write not only a treatise in order to explain this statement made by Becker, but volumes of books could be written as well. However, the reader will be spared the ordeal of reading a treatise in order to expain the meaning of Becker’s very important statement. We will try to explain the meaning of this sentence as simple as possible in a lay man’s language.
Simply put, this sentence means that individuals, investors, companies and governments should always strive to get the “maximum value” for their inputs or resources. But the question we need to answer is “What should be the
criteria for measuring maximum value for investors, individuals and the government?” As earlier stated, for rational private companies or investors, the only acceptable measure of value or criteria are the profits from their investments. Similarly, all things being equal, a rational individual should offer or sell his service or labour to the highest bidder or the company that is ready to pay the highest salary.
Thus, for an individual, the amount of salary is the criteria used in measuring his value for his inputs or labour. By receiving the highest possible salary that his labour or service could fetch in the free labour market. Subsequently, an individual gets the maximum from life within the limit or range his salary could afford him – by spending them on the things that give him the maximum satisfaction. What gives people maximum satisfaction varies from person to person and strictly depends on individual preferences and criteria.
However, since the government is our main focus in this article, therefore, it is appropriate to ask “How does the government ensure that the populace get the maximum value from life?” In other words, how does the government ensure that its citizens derive the “maximum benefit” or value from the money put in its custody to manage?
In large corporations or publicly listed companies, owners or shareholders elect the board of directors to represent them or act as an intermediary between them and the management of their company. The board of directors, in turn, appoints the management of the company that will run the day to day activities of the company. So, what do the shareholders expect from the management? The shareholders expect management to maximize the value of their company or stocks. And how can management maximize the value of shareholders’ company? By investing in projects that give the highest Net Present Values (NPV). It’s only by investing in projects that give the maximum NPV that management can maximize the market value of each stockholder’s stake in the company.
There are lots of similarities between a public company and the government. Like in a corporation, each citizen is like a stock or stakeholder in his country. His country is like a big corporation. Citizens, in the capacity of stakeholders vote for the President, who in turn, appoints the ministers that form his cabinet. The President of a country is like the Chief Executive Officer, CEO, while his ministers are like top managers or directors of the departments of a big corporation. The President and his ministers are entrusted with the responsibility of not just taking political, economic and social decisions but the right decisions that are in the “best interest” of its citizens.