On free individual choice and collective inaction

PIC-blog post-collective inactionThe logic of contemporary economies is built on our belief in the virtues of ‘free’ individual choice. Adherents of this view, which include (most) governments, corporations and many individuals, believe that regulating individual choice is bad for the economy. However, among this syndicate, some do recognise the pitfalls of employing this principle in the development and growth of institutions relating to education and health. In economic parlance, the ‘failure’ of individual choice in yielding a socially beneficial outcome is termed a market failure – suggesting that markets, in general, do not fail. It is important to state the logic of individual choice explicitly owing to its enthralling grip over contemporary political and economic imagination. John Maynard Keynes in his 1926 critical essay ‘The End of Laissez-Faire’ makes explicit this logic: ‘by the working of natural laws individuals pursuing their own interests with enlightenment, in condition of freedom, always tend to promote the general interest at the same time!

How did private vice transform into private interest (and choice)? And how is it that private choice is at the core of today’s economics and politics? Albert Hirschman’s The Passions and Interests:Political Arguments for Capitalism Before its Triumph (1977) provides us with one compelling historical account. The idea that free individual choice results in socially beneficial outcomes is now commonplace. This was not always the case. In fact, Montesquieu, the French philosopher, wrote about the socially beneficial outcomes from pursuing honour which ‘brings life to all the parts of the body politic’ and ‘it turns out that everyone contributes to the general welfare while thinking that he works for his own interests.’ By the seventeenth century, it was recognised that the ‘disruptive passions of men’ could not be restrained by moral philosophers and their religious counterparts although attempts to convert the disruptive passions into ‘constructive’ passions were already underway. For instance, anticipating Adam Smith, Pascal, another French philosopher, writes that man ‘has managed to tease out of concupiscence an admirable arrangement’ and ‘so beautiful an order.’ Subsequently, the idea of ‘countervailing passions’ started gaining currency in political thought. However, as Hirschman also notes, what forces actually ensure that groups (of individuals) with conflicting passions/interests result in a gain for all? If the contemporary politics of climate change is taken as an example, the outcome runs contrary to such an expectation.

Today, the widespread belief especially among policy makers is that unregulated individual choices – whether as a consumer or a producer – will ensure that the fruits of economic growth trickle down to the poorest person. However as Keynes warned us very persuasively in The General Theory of Employment, Interest and Money (1936), this belief is flawed and we need government intervention so as to eliminate labour unemployment. Clearly, the pursuit of individual gains has not brought social gains. Mainstream economics accommodates this big flaw in marginalist economics under the label of externalities. Unintended consequences of economic actions may be positive or negative for the society. In the determination of output and employment, Keynes pointed out that the tendency towards full employment (a more modest claim than public interest or social welfare) is a fluke in liberal capitalism. To put it differently, unemployment of labour is the expected consequence in liberal capitalism.Both theoretically and empirically, all evidence points to one inescapable fact: liberal capitalism does not result in the full employment of labour. Another charge by Keynes against this view is that it commits the fallacy of composition: what is good for an individual may not be good for the society. For example, while saving is good for an individual, if all individuals in a society save, who will consume the output?

Amitav Ghosh in The Great Derangement: Climate Change and the Unthinkable (2016), his first work of non-fiction, forcefully argues that the paralysis of climate change politics lies in our idea of individual freedom; our ‘calculus of liberty’ has no place for nature and natural systems. How then can our idea of freedom – a product of Enlightenment thinking – and its close relative, democracy, ever effectively address our environmental issues? A solution to our environmental problems warrants collective and concerted action. This is consistently absent in current politics, which has been reduced to individual morals and choices. Indeed, the onus of resisting environmental degradation has been passed on to the individual by appealing to her morals. As Ghosh puts it in his The Great Derangement, ‘This then is the paradox and the price of conceiving of fiction and politics in terms of individual moral adventures: it negates possibility itself.’ Both fiction and politics, at their core, are, or rather, ought to be about possibilities –possibilities for the individual as well as the society as a whole.

The idea that free pursuit of individual interest yields a socially beneficial outcome is a flawed piece of political and economic imagination. Unfortunately, this principle does not function in today’s capitalist societies and the belief that it does is a dangerous one to safeguard. The idea that free individual choices yield socially beneficial outcomes must therefore be challenged in all possible spaces committed to documenting and exploring socioeconomic possibilities, particularly in humanities, journalism, literature, and the social sciences.

 

Bernard Mandeville and his Unorthodox Economics

mandevilleI first came across Bernard Mandeville (1670-1733) while reading Keynes’s General Theory as a student at the University of Hyderabad. Mandeville’s Fable of the Bess: or, Private Vices, Publick Benefits was published in two parts in different times. This work has its origins in an earlier work of his: The Crumbling Hive: or Knaves Turn’s Honest (1705). I recently read the Fable of the Bees edition published by Oxford University Press in 1924 with a commentary by F. B Kaye; interestingly, this work is an expanded version of Kaye’s PhD dissertation submitted at Yale University in 1917. On looking up the Yale University Library Catalogue, I found out his complete name and the years he lived – Frederick Benjamin Kaye (1892-1930).

Mandeville was born into a family of city governors, physicians, scholars, and naval officers. He studied medicine and philosophy. The other notable ‘physician-economists’, as Peter Groenewegen, the emeritus historian of economic thought at University of Sydney, labels them, are William Petty and François Quesnay (for a short account of the ‘natural’ origins of economics, read this). Mandeville also published a book entitled A Treatise of the Hypochondriack and Hysterick Passions (1711). Kaye informs us that his books sold very well.

The Root of evil Avarice,

That damn’d ill-natur’d baneful Vice,

Was Slave to Prodigality,

That Noble Sin; whilst Luxury.

Employ’d a Million of the Poor,

And odious Pride a Million more

Envy it self, and Vanity

Were Ministers of Industry;

Their darling Folly, Fickleness

In Diet, Furniture, and Dress,

That strange, ridic’lous Vice, was made

The very Wheel, that turn’d the Trade.

(p. 25; or see the online source)

In the above passage, Mandeville is arguing that prodigality, considered a virtue, is actually a public vice and luxury, considered a vice, is a public virtue. The importance of consumption in the growth of the economy is also to be found in Sismondi, Malthus, Marx, and Keynes. As Kaye puts it, this is Mandeville’s thesis: “vice is the foundation of national prosperity and happiness” (p. xlvii). In other words, public benefits are a consequence of private vices – ‘pride’ and ‘luxury’.

According to Mandeville, all actions were influenced in part by selfishness. If all people behaved selflessly, Mandeville argued that trade and crafts would be abandoned.

As Pride and Luxury decrease,

So by degrees they leave the Seas.

Not Merchants now, but Companies

Remove whole Manufactories.

All Arts and Crafts neglected lie;

Content, the Bane of Industry.

(p. 34; or see the online source)

How can vice become a virtue? This is the paradox, much like Keynes’s paradox of thrift where increase in saving, while good for the individual, is bad for the economy as a whole.

THUS every Part was full of Vice,

Yet the whole Mass a Paradise;

(p. 24; or see the online source)

Mandeville thus argues that private vices have public benefits. What is ‘good’ or ‘virtuous’ for an individual need not be beneficial to the public or society. In the General Theory, Keynes approvingly cites Mandeville’s The Fable of the Bees before articulating his fundamental point: “capital is not a self-subsistent entity existing apart from consumption” (p. 106). And, again on p. 371, he places Mandeville among “the brave army of heretics” alongside Malthus, Gesell and Hobson (see Keynes’s short commentary on Mandeville on pp. 359-362 in ch. 23).

It must be noted that Mandeville favoured virtuous vice and not vicious vice (such as crime and theft). Moreover, his thesis is not that all private vices have public benefits. The Fable of The Bees, Kayes cautions us, ought not to be taken literally. As Kaye elaborates, “it is not ascetic virtues, such as hoarding frugality, which make a nation prosperous” (p. lxviii).

Let me now summarise Mandeville’s position on luxury spending. First, he disagreed with the extant view that frugality is a virtue. Second, he disagreed with the dominant view that luxury is bad for the economy. We must also remember the context in which he is writing – luxury was condemned by Christianity. Indeed, Mandeville was challenging the extant religious and economic orthodoxy with his arguments favouring luxury.

Mandeville argued for freer trade both domestically and internationally (pp. xcviii ff.). His argument was anticipated by mercantilists such as Charles D’Avenant, Dudley North, and Josiah Child. According to Kaye, it is in Mandeville’s work that “individualism became an economic philosophy” (p. ciii). In fact, F. A. Hayek labels Mandeville “an advocate of laissez-faire as Adam Smith” (p. 135) in his 1966 lecture at the British Academy (published in 1967; this lecture is publicly available). And, as is to be expected, he thinks that Keynes’s enthusiastic approval of Mandeville is unfounded (p. 133). Moreover, Hayek finds Mandeville’s “understanding of human nature” noteworthy but not his economics – of division of labour and luxury consumption (pp. 125-6). Karl Marx notes that Smith’s ideas on division of labour were strongly influenced by Mandeville’s work but that there is no mention of Mandeville in the Wealth of Nations. However, Smith discusses Mandeville’s views on vice and virtue in his Theory of Moral Sentiments.

Perhaps, it is befitting to conclude this essay by summarising Marx’s views regarding Mandeville. After all, Marx is one of the greatest unorthodox economist whose political economy is of enduring value.

Originally, Political Economy was studied by philosophers like Hobbes, Locke, Hume; by businessmen and statesmen, like Thomas More, Temple, Sully, De Witt, North, Law, Vanderlint, Cantillon, Franklin; and especially, and with the greatest success, by medical men like Petty, Barbon, Mandeville, Quesnay.

(Capital, vol. 1, Ch. 25: The General Law of Capitalist Accumulation)

Marx describes Mandeville as “an honest, clear-headed man” in volume 1 of Capital and writes in part 1 of Theories of Surplus-Value that “Only Mandeville was of course infinitely bolder and more honest than the philistine apologists of bourgeois society.”

 

 

 

A Review of Jean Drèze’s Jholawala Economics

sensesolidarityJean Drèze is a familiar name among social science students and researchers. His contributions unarguably have helped improve the state of social programmes in India and have motivated several students to take up social research. In 2013, he co-authored An Uncertain Glory with Amartya Sen on the importance of public programmes in achieving social development.

Sense and Solidarity: Jholawala Economics for Everyone (2017, Permanent Black) is his second sole-authored book after No.1 Clapham Road, the Diary of a Squat (1990, Peaceprint, published under a pseudonym) on homelessness in London. The 2017 book is divided into 10 sections: draught and hunger; poverty; school meals; healthcare; child development; employment guarantee; food security; corporate power; war and peace; and a set of miscellaneous essays (of which only one was unpublished, but this has now been published in The Wire). His 2017 book is a collection of his previously published essays, mostly in The Hindu, with a fresh general introduction and a section-wise commentary, which sets out the context. This review post engages only with this fresh material.

Vision

Drèze’s vision, like most of the current and future readers of the book, is to “create a good society” (p.3). As he writes, this warrants the abolition of caste and patriarchy. Such a vision requires a progress in “ethics and social norms” (p.3). He titles his approach “research for action” (p.4). This reminds me of Marx, who wrote in the Theses on Feuerbach that: “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.”

It is indeed commendable that Drèze along with Reetika Khera and others have been able to conduct field surveys with student volunteers. Moreover, he has participated in several village meetings, public hearings, and social audits (p.9).

Drèze’s underscoring of “ethics and social norms” is extremely important today. Many public policy measures try to create policies with appropriate incentives as if they are gods. What we truly lack, to use Adam Smith’s phrase, is good “moral sentiments”—sympathy, compassion, friendship, care, etc. These cannot and shouldn’t be quantified or reduced to monetary terms. Nor can they be incentivised. It is here that ‘experience’ plays a significant role. Looking at theory and quantitative secondary data is insufficient to capture most of social reality. It is precisely this reason that has led to the critique on men writing about patriarchy and Brahmins writing about Dalits. Not only is the lived experience missing in these instances but also can it never be obtained.

Methods

Drèze rightly criticizes the quantitative fetishism found in the community of economists and development studies researchers. And, as if they weren’t enough, the public policy specialists have joined this quantitative bandwagon, or rather the bullet train, as it were. This is not to suggest that we abandon quantitative analysis altogether but rather to use it with great care.

I completely endorse Drèze’s recommendation to study literature as a way to understand a society better. He lists the following authors in his book as people who ought to be studied: Bibhutibhushan Bandyopadhyay, Daya Pawar, Laxman Gaikwad, Om Prakash Valmiki, and Shantabai Kamble (p.17). In fact, I strongly think that the economics students would benefit with a compulsory course on ‘Literature for Economists’ alongside ‘Mathematics for Economists’ in the curriculum.

There is not much that Drèze writes on economic theory except his approval of game theory, which is not really a theory but a mathematical method of studying conflict and cooperation. I would go further and argue that there is much to be learnt from the theories of economists such as Smith, Marx, Keynes, Kalecki, and Sraffa. A deep understanding of methods—complexity theory, experiments, field work, game theory, instrumental variables estimation, lived experience, ratio and proportion, regression analysis, textual analysis, etc.—in all their plurality is much needed along with a similar understanding of various theories.

Another important learning from Drèze’s book is the need to engage with publicly available data, reports, and legislations. For instance, some of the legislations/programmes mentioned in this book are the Integrated Child Development Services (ICDS), National Rural Employment Guarantee Act (NREGA), National Rural Health Mission (NRHM), National Food Security Act (NFSA), and Right to Information Act (RTI). As voters, we too should be reasonably aware of their key provisions.

Action

Many students pursue social sciences with the intention of making a change in the society. And currently, there is a palpable sense of disappointment and disillusionment among these students. Perhaps, Drèze’s approach of “research for action” is one solution. At the very least, such research should be recognized and encouraged by academics and the society at large (particularly, parents). Of course, not everyone might have the means or the luck to pursue this course of action. However, this shouldn’t deter anyone from pursuing good research, which can be in the realms of theory, history, methods, action, or some combination of the four.

To me, the central takeaways from Drèze’s book are that as members and analysts of the ‘Indian’ society, we must be sensible in our approach to theory and methods by bringing in pluralism in these two areas. And, more importantly, solidarity warrants collective discussion, engagement, and action, which also aids in the progress of our “ethics and social norms”.

Finally, I felt that the book is expensively priced at Rs. 795 (hardback). One hopes for a paperback edition priced around Rs. 250. Although all but one are previously published essays, Drèze’s introductory chapter and section-wise commentary provides the readers a peek into his valuable philosophy. I end by wishing for the book to be translated into the many regional languages of India.

I acknowledge Abhigna A. S. for her editorial inputs and Aashish Gupta for alerting me to Drèze’s 1990 book.  

The Political Economy of GST

India welcomed the Goods and Services Tax (GST) on 1st July 2017, sixty-three years after France first adopted it. In his parliament speech, Prime Minister Narendra Modi said that “GST marks the economic integration of India.” It is expected to unify India through the creation of a single market for goods and services as the GST slogan aptly captures: ‘one nation, one market, one tax’. Moreover, it is expected to increase the tax base in India where less than 1 per cent of people pay income tax and close to 90 per cent of the workers are in the informal sector. Both these perceived benefits, according to the government, are expected to accelerate India’s economic growth by making it easier to do business and increasing public investment (financed through increased tax revenue).

The second volume of Economic Survey 2016-17 released earlier last month – another first for India – argues that the introduction of GST partly contributed to “optimism about the medium term”. One hopes that the optimism is well founded and not ‘irrational exuberance’, to borrow Robert Shiller’s phrase. Was the introduction of GST aimed at raising tax compliance by simplifying the indirect tax structure with the aid of information technology? Or, did it aim to structurally reform the Indian economy with a view of increasing employment and reducing inequalities? There is also another important question to pose: is a uniform tax a good policy move in an economy like India where the intra-state and inter-state differences are significant?

Amidst his discussion on inequality, Thomas Piketty rightly writes in Capital that “Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues.” Hence, it is important that the political economy of GST is rendered transparent. After the introduction of GST, several Indian states have lost their autonomy in public policy owing to a reduction in their tax revenue because the GST subsumes state taxes such as the value added tax (VAT), sales tax, and luxury tax. [The service tax belonged to the centre.] In fact, as GST is a destination tax, Tamil Nadu, a manufacturing state, had opposed it because of a potential revenue loss of around Rs. 9,270 crore. Additional reforms are necessary to ensure that the state’s economic policies are not throttled.

If simplification of the tax structure was a central goal, the four tax slabs of 5%, 12%, 18%, and 28% do not make sense. However, if the government has an additional goal of influencing consumer choices, different tax slabs make sense. Yet, our current GST tax structure eludes easy interpretation. For instance, why should pens be taxed at 18% and now cost more? And why should sanitary napkins be taxed at 18% and now cost more? There appears to be no obvious economic or social logic behind this classification.

On looking closer, the GST classification for goods and services appears to be based on the ‘ability to pay’ principle and therefore progressive in spirit. Hence, non-AC train travel is GST exempt while AC train travel is taxed at 5%. Similarly, while non-AC hotel services are taxed at 12%, the services in AC hotels attract a tax of 18%. From the perspective of the consumer, it is indeed the case that those who consume ‘luxuries’ (e.g., services in Five-star hotels and restaurants) have to pay a higher GST than those who consume ‘necessaries’ such as education and health services. But how are the producers affected?

During the VAT regime, handmade products were tax exempt but they are now taxed at different rates in the GST regime. If one adopts the sole principle of ‘ability to pay’ in the matter of taxation, taxing handmade products might not seem to economically unjust. As a government official put it, “a machine-made shawl is priced at Rs 500 and a handmade one at Rs 5,000. If a person can shell out so much for a handmade item, they might as well pay a higher tax on it.” This is a good example of myopic thinking because we need to ask what happens to the handloom sector (employment and wages) once the market price rises.

As I write this, a meeting has been organised to protest the taxing of handmade products. The problem is aptly captured in this statement by one of its organisers: “Handmade products such as khadi saris are already expensive as compared to machine-made products. With imposition of GST, a khadi sari has become costlier.” It is elementary economics that this can lower demand for handmade goods and negatively affect employment in this sector. India’s recycling sector has also been adversely affected due to GST implementation.

Economic policies or reforms cannot afford to be short-sighted either intentionally or out of ignorance. The second volume of the Economic Survey proudly states that the GST regime has formalised the informal textile and clothing sector. But at what cost?

It is true that the big firms will benefit from lowered transaction costs and will be able to enjoy an increased volume of inter-state business. Small firms mostly buy their inputs and sell their output within their own state. In short, the lower transaction costs benefit big firms.

While around 160 countries have implemented GST, its effects have been varied. In Malaysia, household consumption reduced after the implementation of GST; in Australia, the burden of GST was more on the poor than the rich; whereas the weaker sections of the populace benefited from GST in Ethiopia, Pakistan, and Vietnam.

To conclude, while ‘one nation, one market, one tax’ sounds alluring, it presupposes an economically homogenous nation and a uniform market for commodities and labour. Is one tax justified in India, which has several many different labour markets, each with its own ‘equilibrium’ price? Or do our policy makers think that imposing ‘one tax’ can transform India into a single market? Just like demonetisation, the GST is yet another bad economic ‘reform’ with detrimental impacts on India’s poor and vulnerable.

Acknowledgement

This is a condensed version of a talk I gave at National Public School, Indira Nagar, Bengaluru on August 11th. I thank the students for posing interesting questions.