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Economic Trilemmas

I was discussing with a church-mate on Friday regarding the Monetary Policy Trilemma (one of the basics of economics). His amazement made me realise that not many of us really understand economics or its impact upon policies dictated by countries.

The Monetary Policy Trilemma states that policy makers can only choose two of the three policies for trade and currency – fixed exchange rates, freedom in monetary policy (interest rates, etc) and freedom of movement of capital. If one chooses fixed exchange rates and freedom in monetary policies, one cannot have freedom in movement of capital (a position China has taken). If one chooses freedom in monetary policies and movement of capital, one must give up the ability to regulate exchange rates (a position America has taken). Interestingly, as China begins to loosen its capital restrictions, but still wanting to fix exchange rates, it finds itself unable to regulate monetary policy (inflation becomes difficult to control).

Other economic trilemmas exist as well in all societies. Steven Pinker, in his book “The Blank Slate”, noted that a society cannot be simultaneously fair, free and equal. A society that is fair and free will not be equal. One that is fair and equal will not be free. And one that is free and equal will never be fair. There is a reason why the libertarian form of capitalism and the true communist systems of resource allocation have their own sets of problems.

Finally, Arthur C Clarke also pointed out a production phenomenon that I have personally experienced so many times – that production speed, quality and price cannot be simultaneously available. A restaurant the few customers and good food will be expensive. One with good food and is cheap will have tons of customers. I hesitate to think of the third case, where the restaurant chooses to give up quality of food in its trilemma decision.

I love economics!


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