Category: Economic Growth

On Economic Growth and Development

There exist disagreements about the role economic growth plays in socio-economic development. Among economists, a divide exists between those who consider economic growth to be a necessary condition for economic development and those who do not. This blog post tackles this issue from the perspective of the ‘surplus approach’, an approach embedded in the works of economists such as Adam Smith, David Ricardo and Karl Marx, and revived and improved in the 20th century notably by Piero Sraffa and Pierangelo Garegnani. For our purposes, it is enough to focus on the concept of the social surplus.

Deducting necessary expenses (subsistence wages, raw material costs and depreciation) from the annual gross product of an economy leaves us with the surplus. In the work of classical economists, this surplus consisted of profits and rents. Wages could also contain a ‘surplus’ element when the economy is growing or when collective bargaining favours the working class. Most importantly, the surplus could be utilised freely (or for any purpose) without it affecting the ability of the economy to reproduce itself. Of course, for the economy to grow, some of that surplus will have to be reinvested. This reinvestment of a part of the surplus results in an expansion of productive capacity. When this expansion in productive capacity is matched by an equivalent aggregate demand, there will be economic growth.

In physical terms, the volume of the surplus depends on the methods of production in use and the magnitude of subsistence wages. The methods of production specify how much of output can be produced with a certain combination of inputs (given by the technical know-how and blue prints available with the firms). (To use marginalist terminology, the production function in classical economics is of fixed-coefficients; that is, labour and ‘capital’ cannot be substituted for each other such that the same commodity is produced.)

Leaving rent aside, the distribution of the surplus between capitalists and workers will depend on the strength of the labour unions and other labour market conditions. For instance, in India, it will also depend on the gender and caste determinants. Also, the distribution will vary depending on whether the firm is formal or informal. There exist sectors where productivity gains entirely accrue to the capitalists. Whereas, the distribution of the surplus between private individuals (both workers and capitalists) and the government depends on the prevailing income and corporate tax structure.

The surplus, as mentioned previously, can be used for reinvestment (to produce capital goods) or for luxury consumption (in the production of non-capital goods). Also, the surplus can accrue as taxes to the government. And we have seen that if the surplus is reinvested, there will be economic growth as long as there is adequate aggregate demand. How much of economic growth is good’ Are all kinds of economic growth desirable’ Are all kinds of economic growth sustainable’ By ‘kinds of economic growth’, we refer to several combinations ‘ driven by agriculture; service-led; consumption-driven; debt-induced; foreign trade-driven; or productivity-driven. These issues will not be addressed in this blog post. More precisely, we do not examine the difficulties associated with any of these drivers of growth.

So far, we have not discussed development. Let us define economic development to be the rise in the standard of living of the people in an economy/nation state. An overall increase in real incomes is necessary for an overall improvement in the standard of living. If all workers and capitalists have sufficient (real) incomes to access their as well as their dependents’ educational needs, health needs besides the basic needs of ‘decent’ food, shelter and clothing, we can safely say that the economy is ‘developed’. In an economy where workers do not have sufficient (real) incomes and/or there are socio-cultural impediments to access/consume any of their needs, development needs to take place.

What is the source of (economic) development’ There has to be monetary resources available to build the lacking infrastructure or to directly import them where possible. One of the means of generating such resources is through economic growth. But, generating a surplus is clearly not sufficient. The manner in which the surplus is distributed among workers and capitalists as well as redistributed by the government is extremely crucial. There is no predefined way of going about this. It is determined by wider social, cultural and political factors. For example, if trees are felled during the creation of infrastructure, some of the surplus can go towards planting new trees. Or, some of the surplus accruing to the capitalists can be reinvested for improving the working conditions. The important point to note is that there are no automatic mechanisms which ensure such allocations. The market has no such interests or objectives. In short, the decision of ‘development’ is primarily undertaken in the socio-political arena. And, as long as we aspire for better standards of living, economic growth is necessary so that it generates adequate monetary resources in order that our aspirations may be met. But, yes, economic growth by itself cannot guarantee or ensure development.

Rosa Luxemburg: An Introduction

Previous posts have commented on a diverse set of economists ‘ Krishna Bharadwaj, Pierangelo Garegnani, Alfred Marshall, V K R V Rao, Knut Wicksell among others. In a similar manner, this blog post discusses the main ideas of the economic theorist, Rosa Luxemburg (1870-1919). Born in Zamosc, she studied philosophy and natural sciences and then moved to economics. Her PhD thesis is an empirical analysis of Poland’s industrial sector which was seen to depend on backward eastern markets. This statistical finding would later develop into a theoretical one.

She studied Marx’s work closely and critically. The three volumes of Capital demonstrate the workings of a capitalist economy characterised by wage labour and profit maximization. According to Marx, a capitalist system is able to reproduce itself by maintaining a sizeable reserve army of labour and by appropriating the surplus value created by the workers. However, Marx sees the possibility of crisis in a capitalist economy where production decisions are unplanned and are coordinated by different markets. Luxemburg asks a related yet different question: how does capitalism survive in the real world’ Or, in her words, ‘what are the objective historical limits to capitalism” This question resulted in her main work, The Accumulation of Capital.

Luxemburg answers this question by extending Marx’s analysis after making certain modification. First, Marx conducts his analysis by examining the fundamental units of capitalism ‘ that of a commodity and the workings of individual capital. This working is succinctly encapsulated in the relation M-C-M^ where M^ is greater in value than M. Second, his theoretical investigation is restricted to that of a capitalist system. Luxemburg looks at the total capital, an aggregate magnitude. Some commentators consider this to be one of the early attempts at a macroeconomic analysis. Moreover, in her attempt to understand the workings of capitalism in the real world, she introduces a real-life facet ‘ that of the existence of both capitalist and non-capitalist systems. These modifications lead her to the conclusion that capitalist systems depend on and exploit non-capitalist systems for their survival. The exchange which takes place between these two systems stops the capitalist enterprise from crumbling.

In The Accumulation of Capital ‘ An Anti-Critique (1972), she clarifies the differences involved in studying individual units versus aggregate ones: ”the standpoint of total capital differs basically from that of the individual employer. For the individual, the luxury of’ high society’ is a desirable expansion of sales, i.e. a splendid opportunity for accumulation. For all capitalists as a class, the total consumption of the surplus value as luxury is sheer lunacy, economic suicide, for it is the destruction of accumulation at its roots’ (p. 56). This important methodological fact has been overlooked by neoclassical economics where the aggregate is seen to behave in a similar way as its individual parts. This is clearly untrue and their reasoning commits the fallacy of composition. Such discussions by Luxemburg were certainly a methodological improvement.

The major (historico-)theoretical insight she provided relates to the manner in which capitalist systems avoid permanent crises. Luxemburg argues that capitalism survives based on its coercive relations with non-capitalist systems. She poses the question thus:

‘After we have assumed that accumulation has started and that the increased production throws an even bigger amount of commodities on to the market the following year, the same question arises again: where do we then find the consumers for this even greater amount of commodities” (p. 57).

Her answer follows.

‘They must be producers, whose means of production are not to be seen as capital, and who belong to neither of the two classes – capitalists or workers – but who still have a need, one way or another, for capitalist commodities’ (p. 57).

She elaborates this further.

‘In reality, capitalist production is not the sole and completely dominant form of production, as everyone knows, and as Marx himself stresses in Capital. In reality, there are in all capitalist countries, even in those with the most developed large-scale industry, numerous artisan and peasant enterprises which are engaged in simple commodity production’ (p. 58).

To conclude, Luxemburg made positive contributions to economic methodology and theory. Her analysis of accumulation can prove useful in countries like India where non-capitalist production systems are very prevalent. In addition, it can enrich the analysis of economic relations between the developed and developing countries.

REFERENCES

(1951), The Accumulation of Capital, trans. Agnes Schwarzschild, intro. Joan Robinson, London: Routledge & Kegan Paul.

(1972), The Accumulation of Capital ‘ An Anti-Critique, ed. and intro. Kenneth Tarbuck, trans. Rudolf Wichmann, New York: Monthly Review Press.

Urbanization in India: What does it mean’

 

In the recent past, there have been a lot of discussions and commentaries on the merits of urbanization in India. In addition to this, we also hear about the poor, rather pathetic, living conditions of migrants who work in urban spaces, there are pressing environmental concerns especially regarding air and water pollution, public transport is in a disarray, etc. The latter concern has led to the rise of ‘new’ areas of learning and research such as urban studies, urban economics, urban ecology, urban sociology and urban planning. These are extremely important areas of learning considering the fact that urban centers attract both labour and capital. This blog post tries to understand some economic issues relating to the process of urbanization that is taking place in India. In particular, we seek to understand the limits of urbanization and in the process we try to know what it means to achieve economic growth.

According to the World Bank, ‘Urbanization is not a side effect of economic growth; it is an integral part of the process.’ ‘McKinsey states that ‘Urbanization is critical to India’s development.’ Further, Ministry of Urban Development, Government of India notes that ‘It is important to note that the contribution of urban sector to GDP is currently expected to be in the range of 50-60 percent. In this context, enhancing the productivity of urban areas is now central to the policy pronouncements of the Ministry of Urban Development. Cities hold tremendous potential as engines of economic and social development, creating jobs and generating wealth through economies of scale. They need to be sustained and augmented through the high urban productivity for country’s economic growth. National economic growth and poverty reduction efforts will be increasingly determined by the productivity of these cities and towns.’

From the above excerpts, some important assumptions (or rationales) for promoting urbanization can be understood.

(1)”’ Economic growth is synonymous with urbanization.

(2)”’ India has to urbanize in order to attain economic growth and development.

(3)”’ Urban spaces need to be promoted because they generate about 50% of the Indian GDP.

(4)”’ Cities are potential engines of economic and social development.

‘Economic growth

In a macro sense, economic growth refers to the sustained growth in national output ‘ GDP. However, for policy purposes it is important to look at per capita GDP. This is a proxy for looking at how much on income an average person possesses. The objective of economic growth (and economics) is to ensure that all individuals are employed (who seek work), have adequate food, have access to drinking water, transport, etc. In no way should we consider the objective of increasing GDP to be our aim. It is a necessary means to an end- better life.

Urbanization is understood as an increase in the population of urban spaces. This also means that there is a growth in employment, capital inflow, infrastructure, etc. In turn, such large increases in population will result in an increased pressure on resources ‘ water, space, housing, transportation, office space, air, etc. Communication seems to be the only one which has relatively negligible supply problems.

Given this, how can the Central Government or Planning Commission argue that urbanization is the way to go forward’ This means ‘ fatten urban spaces and neglect rural areas! Both, as we know, are not desirable. Fattened urban spaces will present a whole new set of issues to tackle with; neglecting rural areas will mean that agriculture and those dependent on agriculture (around 60% of India) will not be encouraged. Clearly, this does not increase the well being of majority of Indians. More importantly, it is illogical and unwise to argue that urbanization is (or leads to) economic growth. Yes, it leads to economic growth, but only in a very superficial manner and not in any substantive way.

India: Rural and Urban

As per Census 2011, 69 % of Indians live in rural areas and only 31 % in urban spaces. It seems to be the case that the policy makers are interested in improving the ‘urban spaces’. This does not necessarily include improving the living conditions of the majority of Indians. It is strange how language plays a dividing role too: urban habitats versus rural areas! It is true that the urban sector contributes roughly around 50% of India’s Net Domestic’ Product (NDP). The remaining comes from rural India which comprises majority of the populace. As for agriculture, rural areas contribute 94% (for the year 2004-05) of total agricultural output. So, if urban areas are targeted at the cost of rural areas, those employed in agriculture, which is a very difficult occupation, are going bear the brunt.

It is strange that the Government and policy makers (including private think tanks) argue that cities are potential engines of economic growth, when 60% of Indians depend on agriculture for their livelihood which is mainly located in rural areas. This tendency of policy making to favour any method which just boosts the numerical value of GDP without any qualitative change must be stalled. By qualitative change, I refer to improvements in quality of life ‘ food, shelter, education, water, health and so on.

According to a recent paper (July-August 2011) by Gilles Pison in Population & Societies, India is expected to become the most populous country by 2050 and will overtake China. Yes, we have heard that India has been blessed with the demographic dividend; but we must remember that it is no dividend unless there are employment opportunities, and they should not just be in urban spaces. This paper also notes that India records the highest number of deaths under age one ‘ 13,96,000.

Hence, the Planning Commission has considered it imperative that the next 5 Year plan will include urbanization as a key challenge. This, however, is a myopic strategy and especially because of the neglect of agriculture. In addition, employment generation should be the key challenge. Jayati Ghosh also argues in a similar fashion in a recent article of hers. She points out that ‘The number of urban settlements has increased from 5161 in 2001 to 7935 in 2011, an increase of 54% that dwarfs the 32% growth in urban population.’ This means that urban statistics have swelled up because of a reclassification and not mainly because of rural-urban migration. This key information poses further problems for policy makers; actually, it poses problems only for the ‘concerned’ policy makers!

Conclusion

To sum up, it would be disastrous to formulate policies which targeted the urban spaces at the cost of rural areas. The objective of economic policies must be to improve the well-being of the people and not to increase the percentage of GDP by a few points! In fact, even in France and Europe, when the process of urbanization began in the early 18th century, agriculture was neglected. However, a group of economists known as Physiocrats argued that agriculture cannot and should not be neglected as it will lead to a downfall of the economy (see more). It is time that we realized the interdependence present in the economy between rural and urban areas and also high time we acknowledged the significance of creating employment opportunities to the majority of the population.