Part I-Core of Economics
Lest you should mistake that all the great economists are “firangees” from the West or the ones that stylishly yap on the Bloomberg TV in the US and the like TVs elsewhere, let me introduce to you, here, an Indian economist par excellence, one who has more than amply demonstrated intellectual honesty, and sensitivity about the Indian realities apart from being an unconventional economic theorist. You can check out a brief profile of Prof. Bhaduri at https://intereconomics.org/research/experts/AmitBhaduri. He has been with the subject of economics or political economy, especially macroeconomics, for about half a century in different places, and in different universities around the world in different teaching capacities and research institutes. In 2016 he was awarded the Leontief Prize for Advancing the Frontiers of Economic Thought—a prize in memory of Wassily Leontief, designed to recognize economists with outstanding contributions to economic theory that address contemporary realities and support fairer and sustainable societies. With regard to economic theorizing, note what he says as an antidote to the hubris of the conventional economists: “Awareness of history must enter economic theory by showing that concepts such as cost, profit, wage, rent and even commercial rationality have anthropological dimensions specific to social systems. The humility to accept that economic propositions cannot be universal would save us from self-defeating arrogance.” (Bhaduri, 2017).
In this post, I draw your attention to the lecture he had delivered to the Indian school economics teachers (Bhaduri, 2010), which is a public good that you can obtain through me or freely download fromhttps://www.eklavya.in/pdfs/Books/what%20is%20the%20cor.pdf I am summarising the core points of the lecture, which otherwise tends to ramble with incompleteness.
At the outset, it is important to know some general remarks made by the professor. First, “Economics is a very important subject not for what it teaches you, but not to be fooled by other economists.” He is referring to the famous lady economist Joan Robinson who had put it much better thus: “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” It follows that “it is our duty at various levels to demystify economics”. The second thing is to know where economics meets with ideology: “What distinguishes all the social sciences is that you can have your ideology: from BJP, to CPM to even more left, more right. You cannot have something that is completely neutral, but you must be honest to know where you are introducing your ideology.” Thirdly, “much of the use of mathematics is to show that you can put things in a much sharper way, but it is not something which gives you anything new. It never gives you anything new. There is not a single social science where mathematics tells you something which you could not tell in words but what it does is to say the same thing far more sharply. It also tells you in some cases, how to bluff.”
College freshers and even sophomores ought to know core of economics by way of micro, macro and Indian economics with some idea of how to analyse quantitative information, as follows.
Take microeconomics. “The income and substitution effect is one thing and choice using soft information and hard information or exact information and inexact information is the second thing that is all I think which is really valuable in microeconomics.” Consider first the difference between the income effect and the substitution effect: “…whenever the price rises particularly of an essential commodity, let us say, food prices rise, what does it do? It does two things: it reduces your real income and it obviously raises the prices of food…to some extent you will try to not buy those vegetables whose prices have increased more and if there are some whose prices have increased less, you will substitute in their favour (substitution effect). There is direct substitution in favour of the cheaper versions. Second effect is your real income is less so you will consume less of everything (income effect). This actually allows you look at inflation in a very different way. Because for those who are at the bottom, the poor, and have nothing to substitute for. They are probably consuming the cheapest variety of everything. Hence, what do they do? As their real income is going down, they will simply cut down on something else, which is called Engel’s Law. They will buy food, because they have to buy everyday food and they will cut down on health and they will cut down education of their children and so on. This is a good introduction to say how poverty affects as the prices rise.”
Now come to how prices are determined: “…firms set prices. If you know the director of any firm from soap to an automobile manufacturing firm, how do they put prices? They look at the cost. You say this is my unit cost, the cost of producing one bar of soap and I put a 20 per cent margin and set the price. This is what is called cost-based pricing. What I am using here? I am using the cost which is the hard (exact) knowledge completely, saying that I want to use this to set my price and then the 20 percent is soft (inexact) knowledge. If with that I can sell I will then make it 30 per cent. Tata will sell their Nano at Rs. 1 lakh. If they can sell sufficiently in two years, prices will be raised. They will see how much they can sell. This is true of everyone; you probe the market. If you see that the 20 per cent is too high, you will reduce. This is actually the logic of cost-based pricing. You break up your price into a hard information and soft information…This is how they do it everywhere in the world. They don’t set by demand and supply, and market equilibrium and marginal revenue and marginal cost and all that stuff that we teach and profit maximization. Who knows what the demand curve is? What is the marginal cost? What is the marginal revenue of an extra bar of soap? Can you tell?”
Take next macroeconomics. The fallacy of composition that the whole is not equal to the summation of its parts or what is true for the individual is not true for the society, is really the sense of macroeconomics. This can best be illustrated with some examples. If everyone saves all their income, obviously there will be no demand. So, is savings good? This is the paradox of thrift. Another example is the wage cut controversy. “Suppose there is one firm, which cuts its wage and cuts its cost. It helps because it is more competitive with lower costs. If most of the firms cut their cost, does it help? No, because relative positions don’t change. Now go a little bit further…We want to globalize. We cut our costs, let’s say in producing tea. And what do we hope to get? We hope to get bigger exports and to be more internationally competitive is the government’s intention. Suppose all your neighbours do it, as they really do. Isn’t this the same thing as the wage cut?” Another real life example is you giving incentives to attract industry which is done by others too. “Everybody involved is in a competitive game and who is gaining in the process? Industrialists.”One last example which is now common in the entire corporate sector. Suppose everybody manages to downsize, i.e. cut down the labour force for the sake of efficiency (less people producing more), who will purchase the goods? The effect will be same as that of thrift mentioned above. There is thus “for a macroeconomy a demand, and this problem of demand you do not understand by looking at the individual….But when you think of economy as a whole, demand actually is generated by expenditure. If I say that expenditure is what gives income, how do I explain it? This is the notion of Keynesian multiplier, probably the most beautiful notion in macroeconomics. The notion basically says that the government decides to spend one more or one million more on national highway. So I get the money, usually not as a labourer but as a contractor. Now I spend it on her. She keeps some of the money as savings and spends it on the next person, and so on and it goes around. If you assume that everybody saves a little, I spend 1 and she spends 0.8, he spends even less, he spends even less, she spends even less…it goes round the room and by the time it comes to the nth person, she spends a very small amount of this one. This is the idea of a convergence series…But what it says is that one will have a magnified effect. The government spends one, I get one. That is only the initial impact. You would have never understood it from common sense. Somebody like a banker would not understand it. A typical politician will not understand it…So when a government cuts down its budget, it is not only cutting down so many million dollars, it will have an impact of this sort, which you must know.”
“There is a second thing in macroeconomics which makes it different from Micro”. This is the notion of money as legal tender, i.e. money is the medium of exchange which everybody has to accept legally. More importantly, money is also a store of value: “ I have Rs.200 today and I may decide to spend Rs. 100 or Rs.150 and the rest I decide, not to spend but save. What does this mean? I typically either hold it in currency or I buy some paper which will give me some interest. If I decide to do that what am I doing? I will spend the money sometime in the future. It is a store for me, it is store of value for me.” This is why the quantity theory of money that if you double the quantity of money, prices will be doubled, is wrong for two reasons: “One is that money which is now coming to the hands of the people, they will hold some of it normally. The entire amount will not be spent. Two hundred rupees will not enter the purchasing power, only a part of it will. And second, if someone spends it, there will be a multiplier effect. Keynes said that there is a multiplier effect, and if there is an effect in terms of spending and demand increases with unemployment, what will happen? People will produce more. Earlier you were not producing because there was not enough demand. Now there is more demand, they will produce more. Money has led to increase in production. This will be true in some cases and not true in some cases…If you are really honest, this is where your politics comes in. The same policies do not hold good all the time…economics unlike physics unlike chemistry does not produce the same result…So if something was true at one time, it is not true at another time. And ‘when’ it is true is much more important—the conditions. Keynes was certainly right and he is again right today, for example in the United States there is now a lot of unemployment, a lot of excess capacity, and so on. In India, as soon as you have lot of foodgrains, other sectors can always produce usually much more. If that is true, that you have excess capacity and unemployed labour, Keynesian economics will work quite well. It is false to say that it will not work. But in some cases it will not work. And this you must remember India always has a lot of unemployment.”
Consider now Indian economics and quantitative methods. As regards the latter in terms of maths and stats, it is good enough if the school leaving econ students know a little bit of algebra, geometry and calculus, and the central tendencies, standard deviation, and normal distribution, and how they help in putting forward ideas sharply. As regards the former, the students ought to know a few things which are not easily known. Take growth and poverty: “India has a very high growth; it is also quite true that India has reduced poverty much less than the rest of the world. Both are almost quantitatively incontrovertible facts, facts which cannot be contested…India grew at around 8 percent for the last 20 years. The rest of the world grew at something around 3 percent in the last 20 years. So India grew at a reasonable rate. Now, you look at the data on poverty. Extreme poverty, i.e. people who are below nutrition norm. 20-25 percent of the poorest people in the world were in India in 1980. Since then, India had grown at twice the world average. What has happened to poverty? India’s share today is close to 40 percent of world’s poor! That is, the rest of the world including sub-Saharan Africa reduced poverty faster than India. Who says it? Nobody says this.” Moreover, the biggest way how poverty grows or does not grow is how the employment situation is changing. In this regard, our record has been disastrous exactly in the period of high growth: “India grew at 8 percent and employment grew at 1 percent. In the earlier period when India grew at 4 percent employment growth was 2 percent. So employment growth has gone down” and this is a biggest contributor to the poverty problem, middle class, lower middle class and more and more people joining the informal sector. This the students must know. Also, the students must know how we are producing billionaires along with the extreme poor: “India is a very rich country, only after the United States. India has the largest number of multibillionaires now only after United States. Now it has crossed 50. Only the United States has so much…do you know Bellary and the Reddy brothers in Karnataka? Do you know Bellary has the maximum number of private aircrafts? Can you imagine, it has the maximum number of aircrafts in such an area anywhere in the world today? Anywhere in the world!” The students must also know the problem of our politics, the problem of our political parties: “…more than 300 people in our parliament are literally multi-crorepathis by official declaration of their assets. If you take the unofficial assets, I don’t know who will be left. You cannot fight elections today without spending several crores. So any one of us is out of politics and I can tell you and you can tell me and so on. But our next generation, if they know, there is little bit of hope.”
To the above Indian economics, I add a grave trend that the professor has been highlighting in the last five years by drawing on one another lecture he had delivered (Bhaduri, 2015)—transfer of land and natural resources to private corporations on highly favourable terms is aggressively going on and this not only promotes inequality and unemployment but also crony capitalistic democracy: “It is becoming increasingly apparent that land and natural resource transfer justified by the government as the most potent way of improving the private investment climate for development leads to land grab by the corporations assisted by the government. This brings incomparably larger wealth to them within a much shorter span of time than profit from production and manufacturing could ever do. Ironically this also perverts the very private investment climate which the policy was meant to nurture; instead corporations compete among themselves for special favours for allocation of natural resources and land rather than manufacturing as the most profitable ‘business’. The result is massive transfer of wealth in the form of land and natural resources to politically favoured corporations–a particular version of ‘crony capitalism’ fostered by land and natural resource deals. Scam and corruption in governance on a scale unknown before is the surface phenomenon of this process. The mutualism that develops between and the government and these corporations is not just a matter of personal corruptions and gains. It begins to transform the nature of politics by raising corruption to the systemic level through re-orienting public policies. Like the polluted air one breathes, the atmosphere for economic policies is polluted by an over-whelming concern of the government for nurturing corporate wealth. The corporations return the favour to the political class with handsome donations to political parties. The donations are large because the gain from grabbing land is larger. Its crippling effect on popular representation spreads. In the competitive electoral game of multi-party democracy, no party wants to be left handicapped in collecting funds for fighting elections and strengthening the financial base of the party influencing the land and natural resource policies of every government in power. While in opposition all political parties tend to be highly critical, in power they fall in line quickly under similar compulsions. It results in a curious spectacle. On the one hand governments in power (in the states or provinces) ‘race to the bottom’ in giving special incentives to corporations; out of governmental power, the same political parties ‘race to the top’ in virulent rhetoric against pro-corporate policies. The result is a growing disconnect and distrust between the elected representatives in government, and the vast majority of people threatened with unemployment, dispossession, destruction of livelihood.” In light of this, what is the sense and sensibilities of the rhetoric of “Make in India” and “SakbaSaath, SabkaVikas”? College students must critically think about these social concerns and thereby about what is and what can be in store for the Indian people at large.
Bhaduri, Amit. 2010. What is the Core of Economics? Keynote Address delivered at the National Conference on Economics Education in Schools. NCERT. New Delhi. March 4-6.
Bhaduri, Amit. 2015. A Model of Development by Dispossession. Fourth Foundation Lecture. Centre for Development Studies. Thiruvananthapuram. December 7.
By Annavajhula J.C. Bose
Department of Economics, SRCC