Category: Economic Growth

Employment: The Neglected Variable

Today, the issue of employment receives attention in public discussion mainly because of NREGA. It is economic growth or GDP growth which is given prominence in most policy documents. In economics, employment generation and related aspects form a part of macroeconomics alone. Financial economics, international trade, monetary economics, etc hardly comment on the issue of employment. Increasingly, the question of employment is getting less attention in most academic and policy oriented discussions. This post attempts to revive certain issues pertaining to employment. For this purpose, we revisit the 1943 paper of a neglected macroeconomist ‘ Michal Kalecki. His paper straddles the fields of industrial economics, financial economics, public economics and macroeconomics, and provides insights regarding employment generation.

The generation of more employment, rather full employment, according to Kalecki, is beneficial to both government and capitalists. In addition, it also benefits the class of workers. Employment can be generated by capitalists or by the government. However, the government is restricted from generating employment because apparently government investment crowds out private or capitalist investment. In Kalecki’s words:

‘The economic principles of Government intervention require that public investment should be confined to objects which do not compete with the equipment of private business, e.g. hospitals, schools, highways, etc. Otherwise the profitability of private investment might be impaired and the positive effect of public investment upon employment offset by the negative effect of the decline in private investment.”

It is for this purpose that we have Acts such as the FRBM Act to ensure sound finance. This Act regulates and limits the employment generation capacity of the government. As for the corporate sector, they never support public investment. Hence, the employment generating capacity gets solely determined by the corporate sector/capitalists.

Kalecki questions this stance of the capitalists. For, full employment, as noted above, clearly benefits the capitalists by providing them greater profits. He argues that it is the ‘political realities’ associated with the maintenance of full employment which prevents the government and big business or capitalists from doing so. Given that the Government has to adhere to sound finance, largely, the capitalists determine the volume of employment in an economy. The capitalists tend to increase employment and output if they expect a good economic and political environment to be forthcoming. This environment is a dynamic and complex function of government policies, international events, political outcomes, etc. In economics, we call it state of confidence. Today, one factor which reflects this state of confidence is the bullish trend seen the stock markets. It is for this reason that, in India, SENSEX occupies such an important place in everyday news. Hence, the state of confidence assumes such an important role only in an economy where the government is supposed to maintain sound finance. As Kalecki points out:

‘The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the ‘state of confidence’.’

Similarly, on the politics involved in capitalists pressing for sound finance, Kalecki powerfully notes that:

‘Under a laisser-faire system the level of employment depends to a great extent on the so-called level of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives to the capitalists a powerful indirect control over Government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.’

Thus, regardless of whether we agree with Kalecki or not, he provides an interesting way to examine the issue of employment creation; especially for the Indian economy where FRBM Act is taken seriously and because of the growing significance of SENSEX. Such an analysis also calls for greater interdependence between macroeconomics, public economics, industrial economics and financial economics on one hand and between economics, political science, sociology and culture studies on the other. The latter sort of interdisciplinary inquiry will provide descriptions of actual processes by which such ‘politics’ take place. This analysis by Kalecki also revives the classical notion of ‘political economy’ which understands that economics cannot be divorced from politics. For practical purposes, it is of utmost importance that we pay more attention to the variable ‘ employment, in our economics curricula and debates, especially in a country like India.

References

Kalecki, Michal (1971), ‘Political Aspects of Full Employment’, in Selected Essays on the Dynamics of the Capitalist Economy 1933-1970, Cambridge: Cambridge University Press. (full text available at Monthly Review)

Further reading

Bhaduri, Amit (2006), ‘The Politics of Sound Finance’, Economic and Political Weekly, 4 November.

 

Economic Growth in India: Some Considerations

It has been pointed out earlier in this blog that economic growth cannot be understood by merely looking at the rate of growth of GDP; and that an adequate explanation of economic growth needs to incorporate the ‘structure of economic growth’. This post builds on the idea that ‘structure of growth’ is of paramount importance by pointing out certain important aspects of growth, which have been put forward by Pulapre Balakrishnan in his new book (OUP, 2010), Economic Growth in India: History and Prospect.

Balakrishnan’s book questions several aspects of mainstream theorising on growth. Firstly, he emphasises that fact that, there can be no ‘universal model of growth and development’ (p. 29). Though, this point is very obvious to most people, economists still try to develop ‘scientific models’ which are general enough so that the varied growth experiences of different countries can be explained. In particular, the fact that there is no universal model has been shown by the growth experiences of countries like Japan and China. Maybe, unfettered competition and self-interest work in certain countries. In others, a one party system might work. Or, democracy coupled with active state intervention might be the solution for a few. The growth trajectory of a particular economy depends on its history, its people, its land, its politics, its institutions, its culture, its government, its media and so on. For example, it would be foolish to provide disproportionate sops and subsidies to the service sector, when majority of the population depend on agriculture. Whatever be the model of growth and development, it is of utmost importance that the inhabitants or the populace of that country has enough food to eat, proper clothes, access to safe drinking water, a proper house, a job, etc. In other words, the minimum requirements (which is historically, socially and culturally determined) of the inhabitants need to be met.

The recent past has witnessed a lot of debates on the juncture at which the Indian economy structurally transformed. Several years have been identified as break-points depending on the base year adopted, the kind of statistical test chosen, the nature of data, etc. There has been no consensus. Some identify 1991 as the point of change. Others argue that the growth process had begun as early as the late 1970s. Not surprisingly, these results also depend on what the economists think the role of the government is (or the role of the markets). However, Balakrishnan argues that the time period 1900 to 2005 ‘may be seen as setting the minimum agenda for an investigation of growth in the country’ (p. xxvi). This assertion is a noteworthy one, for it can aid in understanding the role of the government as well as the role of the market (understood as the competitive mechanism) in the economic growth process for over 100 years.

An examination of the process of growth from 1900 onwards is certainly a very difficult task. However, the merits of the hard work outweigh the costs. Systematic data collection in India begins from only around 1950s. However, by making use of the scattered accounts written by various travelers, historians, fiction writers, etc and from English archives, port records, and others, one could construct a narrative of the growth process. Unfortunately, most of the growth narratives of the Indian growth stress only on ‘numbers’. An analytical growth narrative, according to Balakrishnan, offers a better mode of capturing growth. It ‘may be seen as a theoretically informed empirical analysis of growth in a country over a specified period.’ (p. 36) However, this mode of analysis can become narrow if the ‘theory’ is only taken from economics. If the theory can be expanded to take in insights from related disciplines like history, political science, sociology and anthropology, the analytical growth narrative can provide a rich and comprehensive account of growth.

Such a growth narrative would also mean a shifting of research from the growth accounting based on production function to a more holistic one, which takes into account the structure of the Indian economy ‘ the divide between rural and urban, between men and women, between agriculture and services, between organised and unorganised, between English-educated and illiterate, between those who have access to computers and those who do not, etc. For, growth accounting based on production function suffers from numerous logical and conceptual issues. This method assumes that the contributions made by labour and capital (means of production) are independent, which in reality and accounting wise, is difficult to accept. This method also gets into trouble when it tries to incorporate rapid technological advancements.

From the preceding discussion, it is clear that there can be no universal model of economic growth and development. And, until a more comprehensive understanding of economic growth is presented by economic theorists, the urgency to find out a break point is of no use. Also, economic growth is a process which takes place over time; hence, a long term perspective is necessary to understand growth and to put forth the determinants of growth. Also, it is time to give up growth accounting based on the aggregate production function. To conclude, it is time that growth narratives are also put forth by other social scientists. And, why is it that discussions on economic growth remain the prerogative of the economists alone’

To Economists: please pay attention to the ‘real’ problems

A talk by Arundhati Roy and watching Peepli Live has motivated the contents of this post largely. I have been forced to rethink what ‘economics’ as a discipline should do in a country like India. How can it contribute to economic growth and human development. It is often forgotten that, economics studies the big black box that transforms the labour of the labourers into commodities for consumption by the labourers. People or rather, people who work, appear at both the ends of the tunnel. The black box or the tunnel consists of varied actors, markets, institutions, laws, power groups, social classes, etc.

Some economists try to make sense of this complex interaction using tools such as game theory, which throws light of certain aspects of the interaction. This in turn is supposed to aid in the design of better institutions. A few study labour, the main actor in the whole economic process. Some look at institutions and how various legal arrangements affect the economic outcomes. It remains to be asked: outcomes for whom’ In this manner, the entire profession of economics has been divided into various sub-disciplines, each specialising in a particular aspect of the economy. And it is evident that communication between the above mentioned sets of economists happen rarely. Very often, the larger picture is forgotten. Each group presents their results with a tremendous sense of certainty, which is entirely misplaced. And, the joke that economists love their ceteris paribus clause comes true here. Except that, the clause in this case, assumes as constant the remaining processes or aspects of the economy!

Who are the real producers in an economy’ What role do farmers (small, marginal and large) play in our society’ Do they live in dignity’ When inflation occurs, do these farmers get more incomes’ Or do the intermediaries pocket the increase’ Are proper institutions in place to provide them with adequate credit’ Can these formal institutions compete with the informal ones, such as money lenders and chitti funds’

It is accepted that farming is not a profitable enterprise any more. Policy makers are calling for industrialisation. They want the farmers to come away from their lands and work in industries. And so arises the slums in and around major cities, where their living conditions are perhaps worse than in the villages. Or, most of them are forced to become construction workers. Urbanisation implies buildings, which creates construction jobs in plenty. Once the space in big cities are exhausted, the urbanisation will take place in small cities. Workers will be in demand. In short, labour migration and increasing labour distress, owing to improper housing conditions will become even more intense. It is time, serious attention is paid to farmers and the role of farming in the development of India.

To conclude, it is time we paid more attention to the condition of India and not blindly follow academic fashions. It is the duty of the civil society and especially, the academicians to study the problems and issues thrown up by the society. When the problems of the majority of the population in India –those who live in the rural areas, those who work in the informal sector and those who are farmers– are forgotten and relegated as ‘deviations from the normal’ or ‘problems of the Indian economy’ and not as characteristics of the society we live in, it is indeed a pitiable situation.

The Indian Constitution and Human Dignity: for Economists

The field of law and economics is a glamorous one with economists such as Ronald Coase, Gary Becker and Richard Posner. It was Coase who provided the inspiration to law and economics through his introduction of ‘transaction cost economics.’ And Becker was the one who extended the domain of economics to virtually any social phenomena. Issues such as law, crime, marriage, family, etc came to be studied by economists. Although, the tools used never varied. It was the same old microeconomic baggage of neoclassical economics. Suddenly, neoclassical economics started feeling successful all over again. Their theory of value and pricing started explaining various social and cultural processes in the economy. However, this post is not a commentary on law and economics that is practised. For an excellent commentary on its origins and methodology, see the article by William Davies ‘Economics and the ‘nonsense’ of law: the case of the Chicago antitrust revolution’ in Economy and Society published in 2010.

The content of this post certainly falls under the label of law and economics. However, this post discusses certain aspects of the Constitution of India in the the light of economic policies undertaken-that of liberalization. The quotations in this post are from Dr. Durga Das Basu’s Introduction to the Constitution of India, reprinted in December 2009.

Economic Justice

The banishment of poverty, not by expropriation of those who have, but by the multiplication of the national wealth and resources and an equitable distribution thereof amongst all who contribute towards its production, is the aim of the State envisaged by the Directive Principles. Economic democracy will be installed in our sub-continent to the extent that this goal is reached. In short, economic justice aims at establishing economic democracy and a ‘Welfare State’.

The idea of economic justice is to make equality of status meaningful and life worth living at its best removing inequality of opportunity and of status-social, economic and political.

That is, an increase in growth rate is seen as the way to banish poverty. This principle is certainly based on the idea that growth trickles down. As has been witnessed in India, all that liberalization has achieved is ‘jobless growth’. Hence, the need for policy documents to shout for ‘inclusive growth’.

Now, all those who contribute to wealth by being producers are supposed to be compensated. It is on this class, that the burden of development falls. For, they do not have the adequate social and economic voice to demand for ‘just distribution’.

Can India claim social justice just by making opportunities equal’ Equal opportunities perform their function only in an already just and equitable society, and not in countries where inequality of income and wealth is so skewed. Thus, an active intervention is necessary at the level of production as well as distribution of GDP.

Nehru’s idea of Socialism is that ‘every individual in the State should have equal opportunity for progress.’ However, this idea cannot hold any water until the institutions in the State are examined- judiciary, executive, military, private enterprise, unorganised sector, etc. For instance, some groups of people are exploited as producers, where they are paid less than minimum wages. Therefore, as a consumer, they get exploited as well. This then passes on to their access to health, schooling, sanitation, housing, and so on.

Individual Liberty

The Preamble, therefore, says that the State, in India, will assure the dignity of the Individual. ‘All citizens men and women equally, have the right to an dequate means of livelihood, just and humane conditions of work, and a decent standard of life and full enjoyment of leisure and social and cultural opportunities.’

When economists and policy makers talk of ‘inclusive growth’, it is the dignity of the individual which is at stake. Often, India’s characteristics such as high reliance on agriculture, a large percentage of unorganised sector, immobility of labour and the like are labelled as detrimental to India’s growth and development. One cannot help but ask: Whose growth’ Such perceptions by the academia are largely a result of the manner in which human beings figure in micro and macro economics. If you take a moment to think about it, you will realise that poor people-who are a heterogeneous group- is absent from our theoretical edifice. Why’ Who are we analysing’ And to discuss poverty, we have created a sub-discipline called ‘development economics’.

In any case, human dignity appears to be of lesser importance than the computation of growth rates using yearly and quarterly data. We are satisfied to decipher whether stock market exhibits volatility or not’ Or whether market A is co-integrated with market Z. Does this satisfaction come from the fact that stock market data is easily available’ What about the farmers, the child labourers, the migrant labourers who are forced to leave their place and family, of street vendors, and all the others who actually engage in production’

Until dignity of human life features implicitly or explicitly in economics, it will continue to be a lifeless endeavour. Sadly enough, we are taught economics is the study of choice’ Whose choices’ Those who have the ability to choose’ It is time we discarded such economics and re-visited economists such as Adam Smith, Joan Robinson, Amit Bhaduri, and others whose works show a concern for humans.