150th Anniversary of Capital: Reading Wage-Labour and Capital (Part II)

This post is second in the two-part commemoration of Capital’s 150th anniversary (last year); part I was a commentary on Francis Wheen’s biography of Capital and Part II undertakes a critical engagement with Wage-Labour and Capital (available freely at Marxists.org), which were originally lectures, and later published as a set of articles in 1849 in the Neue Rheinische Zeitung (which roughly translates into the ‘New Rhenish Newspaper’). Marx had delivered the lectures at the German Working Men’s Club of Brussels in 1847, a year before the publication of the Communist Manifesto and twenty years before the publication of Das Kapital.

wage labour capitalWage-Labour and Capital is made up of 9 short chapters, with the largest chapter containing 5 pages, and a total of 48 pages. In the introduction, F. Engels provides his reasons for altering the original text of Marx, and writes “this pamphlet is not as Marx wrote it in 1849, but approximately as Marx would have written it in 1891” (p. 6). To assess the merits of Engel’s editorial intervention, one needs to compare it with Marx’s original. Marx intended his writings to be understood by the workers and therefore they do not “presuppose a knowledge of even the most elementary notions of political economy” (p. 16).

In capitalism, according to Marx, “it appears that the capitalist buys their labour with money, and that for money they sell him their labour. But this is merely an illusion. What they actually sell to the capitalist for money is their labour-power” (p. 17). Therefore, labour-power “is a commodity, no more, no less so than is the sugar. The first is measured by the clock, the other by the scales” (p. 17). And wages is the “special name for the price of labour-power”, a “peculiar commodity”. The wage-workers, who owns labour-power, does not really have a choice in deciding whether to sell it to the capitalist or not, but is forced to “in order to live” (p. 19). While it appears that the worker has a choice, in essence, she does not (this idea can help transform the dominant labour-leisure trade-off story). Then Marx points out that this feature – the idea of free labour – is particular to capitalism, and not found in slave or feudal societies. While the worker owns labour-power, the capitalist owns “raw materials, tools, and means of life” (p. 20). The following description of work (and life) deserves to be quoted in full.

“Life for him begins where this activity [work] ceases, at the table, at the tavern, in bed. The 12 hours’ work, on the other hand, has no meaning for him as weaving, spinning, boring, and so on, but only as earnings, which enable him to sit down at a table, to take his seat in the tavern, and to lie down in a bed.” (p. 19)

Subsequently, Marx discusses the determination of commodity prices, which contains an account of competition. The latter is studied in three parts: “among the sellers”, “among the buyers”, and “between the buyers and the sellers” (p. 21). It is this competition which seeks the highest “customary profits” among the different sectors, and this constant “immigration” (p. 23) tends to equalise the rate of profits across sectors. This force of competition also tends to bring the actual price of a commodity close to its “cost of production” (p. 24). The “fluctuations” occasioned by competition is not an “accident” or exception but the “law” contrary to the accounts of the “bourgeois economists” (p. 24). Thus, “In the totality of this disorderly movement is to be found its order” (p. 24).

Wages are regulated by the cost of production of labour-power, which “is the cost required for the maintenance of the labourer as a labourer, and for his education and training as a labourer” (p. 26). In other words, it is “the cost of the existence and propagation of the worker” (p. 27). Here, Marx is referring to the wages for the entire class of workers and not of an individual worker because “millions of workers, do not receive enough to be able to exist and to propagate themselves” (p. 27).

Most economists define capital as produced means of production, and this is the starting point of their analysis. But Marx pushes the starting point further and rightly labels capital as “accumulated labour”, as the raw materials, instruments, and machines were also created by labour. Capital is also a “social relation of production” (p. 29). As noted earlier, the existence of wage labour is a characteristic of capitalism where workers are forced to sell their labour power to the capitalist in order to live. And as Marx writes, “The existence of a class which possesses nothing but the ability to work is a necessary presupposition of capital” (p. 30). Furthermore, capital, or accumulated labour dominates living labour.

Mainstream (marginalist) economics is built on the marginal productivity theory of distribution which states that under conditions of perfect competition, in equilibrium, workers are paid the marginal product of capital and capitalists get the marginal product of capital – a harmonious explanation of income distribution. In contrast, Marx argues that wages are profit are inversely related pointing to the fundamental conflict characterising income distribution in a capitalist society (p. 37). In the same chapter (VII), Marx outlines two major routes through which profits increase: (1) increase in aggregate demand and (2) technological improvements (see an earlier post on the link between demand, profits, and employment). In the following chapter, Marx reiterates the distributional conflict: “the interests of capitals and the interests of wage-labour are diametrically opposed to each other” (p. 39). And “If capital grows rapidly, wages may rise, but the profit of capital rises disproportionately faster. The material position of the worker has improved, but at the cost of his social position. The social chasm that separates him from the capitalist has widened” (p. 40). This underscores the social nature of economic relations, an aspect which marginalist economics has eschewed with its assumption of the independence of individual preferences.

The following remark about economists by Marx is appropriate for our current times: “The economists tell us, to be sure, that those labourers who have been rendered superfluous by machinery find new venues of employment” (p. 45). I shall end this post by quoting Marx on capitalist accumulation, crises, and exploitation of markets, since it continues to remain relevant today.

“…capitalists are compelled … to exploit the already existing gigantic means of production on an ever-increasing scale, and for this purpose to set in motion all the mainsprings of credit, in the same measure do they increase the industrial earthquakes, in the midst of which the commercial world can preserve itself only by sacrificing a portion of its wealth, its products, and even its forces of production, to the gods of the lower world – in short, the crises increase. They become more frequent and more violent, if for no other reason, than for this alone, that in the same measure in which the mass of products grows, and therefore the needs for extensive markets, in the same measure does the world market shrink ever more, and ever fewer markets remain to be exploited, since every previous crisis has subjected to the commerce of the world a hitherto unconquered or but superficially exploited market” (pp. 47-8)

 

 

 

150th Anniversary of Capital: Reading Francis Wheen’s Biography of Capital (Part I)

wheen-capitalAlthough I had read the three volumes of Capital, three parts of Theories of Surplus-Value, and Grundrisse over the course of my PhD research, all of them merit rereading and I ought to read Marx’s other works. Hence, given that 2017 marks the 150th anniversary of Capital, Volume 1 (first published in 1867), I decided to commemorate it by reading a work of Marx I hadn’t read – Wage-Labour and Capital – and a short biography of Capital by Francis Wheen (2006). I shall present my commentary in two parts as it is too lengthy for one post. Part I is a commentary on Wheen 2006, and part II is on Wage-Labour and Capital.

Despite writing about Steuart, Smith, Ricardo, Sismondi, Malthus, Keynes, Sraffa, Krishna Bharadwaj and many others in several posts, I have dealt with Marx’s ideas exclusively only in one: ‘Is Marx (Ir)relevant?’. In the next year, I hope to write more on Marx’s economics. 

Wheen’s biography of Capital is just about 125 pages. Marx’s Das Capital: A Biography is a three chaptered book dealing with the gestation, birth, and afterlife of Das Capital.

Marx, the studious worker 

According to Wheen, ‘Marx’s character was a curious hybrid of ferocious self-confidence and anguished self-doubt’ (p. 3).  It was ‘only after many years of spadework in philosophy and literature’ that Marx turned to the study of political economy (p. 7). At the age of seventeen, Marx precociously wrote in a schoolboy essay: “Our relations in society have to some extent already begun to be established before we are in a position to determine them” (p. 8). [Wheen’s excerpts from Marx which I quote are in “double quotes” and those by Wheen are in ‘single quotes’.]

The reader gets to appreciate Marx’s style of studying from Wheen’s scattered references across the book. Marx had the habit of noting down extracts from all the books he read while at the university. And he read widely. As Wheen writes, ‘This is the same eclectic, omnivorous and often tangential style of research which gave Das Capital its extraordinary breadth of reference’ (pp. 10-11). His use of dialectic is influenced by his early study of Hegel’s (1770–1831) ‘pursuit of contradictions’. He had taken the idea that ‘people create the constitution’ from Ludwig Feuerbach (1804–1872), the German philosopher; Feuerbach had argued that ‘thought arises from being, and not being from thought’ (p. 13). Therefore, humans have to assert themselves as subjects and not as mere objects of capitalism. And to thoroughly engage with the land question, Marx thought it ‘essential to study Russian land-owning relationships from primary sources’ (p. 37). Marx’s data sources included ‘newspapers, parliamentary commissions, factory inspectors and copies of Hansard’ (p. 51); Hansard contains ‘edited verbatim report of proceedings of both the House of Commons and the House of Lords’. Marx’s data on child labourers were taken from English match factory records. [On the importance of using a wider set of data, see English for Economists: Sowvendra’s ‘The Adivasi Will Not Dance’.]

Already well versed in German Philosophy and French politics, Marx set out to educate himself in British economics. As he went along, he kept taking copious notes. These notes, which formed the early rough draft of Das Capital, are commonly known as the Paris manuscripts, published as Economic and Philosophic Manuscripts of 1844 (available for under Rs. 200 from Aakar Books and freely available at Marxists.org).

Marx worked extremely hard. He spent most of 1850-1 in the British Museum reading past issues of The Economist and books on economics. He sat in the Museum’s reading room from 9 AM to 7 PM. In the winter of 1857-8, he used to sit in his study until about 4 AM. When he realised that his ‘rudimentary arithmetic’ would prove inadequate in his economic studies, he undertook a ‘quick revision course in algebra’ (p. 27). Marx felt that his study of algebra was necessary “for the benefit of the public”. His ‘nocturnal scribblings’, as Wheen describes them, running to more than 800 pages were published in German in 1953 entitled Grundrisse der Kritik der Politischen Oekonomie (popularly known today as simply Grundrisse). And the notes he took in 1862 and 1863 filled more than 1500 pages (p. 32); this was posthumously published as Theories of Surplus-value.

Marx’s intellectual corpus in political economy 

Here is a succinct timeline of Marx’s key works in political economy. At the same time, this is also a timeline of how Marx’s thinking evolved to culminate in Capital.

1844: Paris Manuscripts/Economic and Philosophic Manuscripts of 1844 {notes; posthumously published}

1847: Wage-Labour and Capital {lectures; published as a set of articles in 1849}

1848: Communist Manifesto (political pamphlet; with Engels)

1857-8: Grundrisse {notes; posthumously published}

1859: A Contribution to the Critique of Political Economy {Marx’s first book}

1862-3: Theories of Surplus-Value {notes; posthumously published}

1865: Value, Price and Profit {speech; posthumously published}

1867: Capital, vol. 1 {Marx’s second book} (second edition in 1873)

The first manuscript in Economic and Philosophic Manuscripts of 1844 begins with the following sentences: “Wages are determined by the fierce struggle between capitalist and worker. The capitalist inevitable wins. The capitalist can live longer without the worker than the worker can without him” (p. 14). This struggle is also found in Adam Smith’s Wealth of Nations. In capitalism, Marx writes that, productivity rises by transforming the worker’s “lifetime into working time, and … [by dragging] his wife and child beneath the juggernaut of capital” (p. 15).

Marx’s ‘first small book’ is A Contribution to the Critique of Political Economy. It was first published in 1859 (in German). [I took the phrase “the first small book” from Maurice Dobb’s introduction to the 1979 English translation brought out by Progress Publishers.] Marx had earlier intended to call Das Capital ‘A Contribution to the Critique of Political Economy, Volume II’ (p. 33). It was Engels who compiled, edited, and published volumes II and III of Capital in 1885 and 1905 respectively; see Regina Roth’s work which argues that these interventions were often significant. The Theories of Surplus-Value, sometimes called volume IV of Capital, was published by Karl Kautsky in 1905.

 Capital: key ideas

In capitalism, commodity carries a specific meaning. Even today, a commodity, at the first sight, appears to be a ‘trivial thing’ (p. 42). Fetishism is the ‘belief that commodities have some mystical intrinsic value’ (p. 43). Instead, the value of commodities, for Marx, owes to the value labour provides. The wages of the workers are determined by subsistence wages, a social and cultural variable unlike in neoclassical (more accurately, marginalist) economics where it is determined by the marginal product of labour (and is a labour clearing wage, that is, there is full employment of labour). Subsistence wages includes ‘education and training’ (p. 49). As Wheen writes, ‘Marx has no illusions about the supposedly sacred symmetry of the law of supply and demand’ (p. 55) which is central to marginalist economics. Indeed, as Wheen notes, ‘The only difference from previous epochs is the guile with which the robbery is concealed from the victims’ (p. 50).

The relation between technological progress and better living standards or higher wages is not as straightforward as in the marginalist growth models of Solow and Romer. In contrast to these models, Marx concludes that greater the productivity, greater is the labour unemployment (p. 56). Thus, Marx writes, “It follows therefore that in proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse” (p. 57). For Marx, poverty “is about the crushing of the human spirit” (p. 58). In an article published in the New York Review of Books, Jeff Madrick observes: “people of all racial and ethnic groups are losing confidence in the core American principle that hard work is a means to upward mobility.” And as Wheen notes, ‘The average British employee now puts in 80,224 hours over his or her working life, as against 69,000 hours in 1981. … many people have no time for anything beyond labour and sleep’ (p. 59). The effects of technological progress or rising productivity has been very uneven.

What causes crises in capitalism? According to Marx, “The last cause of all real crises always remains the poverty and restricted consumption of the masses” relative to private investment (p. 61). This key idea resurfaced with vigour in the twentieth century in the seminal works of Michal Kalecki and John Maynard Keynes.

Capital’s afterlife 

In the Preface to Capital, Marx writes, “I assume, of course, a reader who is willing to learn something new and therefore to think for himself” (pp. 82-3). Undoubtedly, since its first publication, Capital has enabled many individuals to know the capitalist order better. George Bernard Shaw articulates this view clearly: ‘Das Kapital achieved the greatest feat of which a book is capable – that of changing the minds of the people who read it’ (p. 90). However, the initial reception to its publication was ‘muted’. Wheen thinks that it was ‘sheer incomprehension’ and not ‘political enmity’ which explains the ‘muted reaction’ to the publication of Capital.

As Sir John MacDonnell wrote in the Fortnightly Review (March 1875): ‘People may do him the honour of abusing him; read him they do not! (p. 87). Resorting to an ‘authority’ for support without proper reasoning is always troubling. Wheen notes how during the 1917 Russian revolution, the ‘architects … all cited Marx, and Das Kapital in particular, as the divine authority for the correctness of their views’ (p. 98).

Unfortunately, mainstream economics still views income distribution as a harmonious process. That income distribution is a process characterised by conflict and power relations has been ignored, and perhaps even intentionally supressed. These ideas continue to be studied and researched by ‘heterodox’ economists working in the Classical, Marxian, and Keynesian traditions. And one must not confuse ‘new political economy’ with the political economy found in the works of Smith, Ricardo, and Marx. It is interesting to note that before the 2007 Global Financial Crisis, economists looked down upon ‘political economy’ but after the crisis, the number of mainstream economists who started doing ‘political economy’ rapidly increased.

Conclusion

Marx’s Capital remains one of the most insightful studies on capitalism. With all the strides in technological progress with respect to global value chains, transnational corporations, industry automation, etc., reading Marx’s Capital enables the reader to see the cells of the capitalist order – impoverished workers.

Let me end this post with Marx’s favourite motto (p. 101): ‘de omnibus dubitandum’ (‘everything should be doubted’).

 

I acknowledge Prasanth Radhakrishnan for his helpful comments. 

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.”

 

 

 

60 Years after the 2nd Five-Year Plan: On Economic Theory, Planning & Policy

Picking up Ajit Dasgupta’s A History of Indian Economic Thought (1993) motivated me to revisit India’s 2nd Five Year plan (1956-61) and the Mahalanobis model in light of the structural changes in India’s economy and developments in economic theory, particularly of demand-led growth theory. Although 60 years have passed since the inception of the 2nd Five Year plan, the ‘Approach to the Second Five Year Plan’ contains ideas which are particularly important today, especially after the closure of the Planning Commission. In its place, we now have the NITI (National Institution for Transforming India) Aayog which assumes that Indian manufacturing and service sectors are currently operating ‘on a global scale’ and what is now needed is ‘an administration paradigm in which the government is an “enabler” rather than a “provider of first and last resort”’ (see Cabinet Secretariat resolution, 1 January 2015).

Why economics?

Economics is the study of commodities – its production, distribution and consumption. Economics provides us with the determinants of aggregate production (GDP), employment, and income distribution. This allows us to understand our economic surroundings better and consequently enables us to improve existing economic conditions. This may be carried out through general economic policies (for example, progressive taxation to reduce income and wealth inequalities and monetary policy to combat inflation) or through targeted economic policies (for example, fertilizer subsidies to improve agricultural productivity and tax concessions to foreign investors). Ultimately, economic interventions are made based on an assumption and several aims. The assumption is that economic theory tells us how economies function. The interventions are carried out to satisfy certain normative aims (for example, equity and freedom). This distinction is made in textbooks by distinguishing between positive and normative economics. For instance, if a particular society is not uncomfortable with unemployment its economic policies would not be aimed at reducing unemployment.

Objectives of the 2nd Five Year Plan

In this section, the economic objectives of the 2nd Five Year Plan are presented. All excerpts from the 2nd Five Year Plan are taken from here.

“The current levels of living in India are very low. Production is insufficient even for satisfying the minimum essential needs of the population….” Therefore, it was imperative to increase aggregate production. But, the economic architects of the plan did not visualize money as an end in itself.

“A rising standard of life, or material welfare as it is sometimes called, is of course not an end in itself. Essentially, it is a means to a better intellectual and cultural life. A society which has to devote the bulk of its working force or its working hours to the production of the bare wherewithals of life is to that extent limited in its pursuit of higher ends.”

Moreover, economic policy was aimed at an increase in activity levels and “also in greater equality in incomes and wealth.”

The Plan Document clearly favours social gain over private gain. In other words, private enterprise was regulated such that the economic yields benefitted all. To put it differently, a recognition of negative externalities was present.

“The private sector has to play its part within the framework of the comprehensive plan accepted by the community. … Private enterprise, free pricing, private management are all devices to further what are truly social ends; they can only be justified in terms of social results.”

More clearly,

“Economic objectives cannot be divorced from social objectives and means and objectives go together. It is only in the context of a plan which satisfies the legitimate urges of the people that a democratic society can put forward its best effort.”

The Plan Document also recognized the dual nature of urbanization – that economies of scale have both positive economic externalities and negative environmental externalities.

The 2nd Five Year Plan on economic inequality

The 2nd Five Year Plan clearly recognized that the gains from economic development are skewed and trickle down is not automatic. For the gains from economic development to be inclusive, two institutions have to be strong: trade unions and the democratic state.

“The gains of development accrue in the early stages to a small class of businessmen and manufacturers, whereas the immediate impact of the application of new techniques in agriculture and in traditional industry has often meant growing unemployment or under-employment among large numbers of people. In course of time this trend gets corrected partly through the development of countervailing power of trade unions and partly through state action undertaken in response to the growth of democratic ideas.”

There is a passage similar to Thomas Piketty’s view on wealth inequalities and the role of progressive taxation in reducing such inequalities in the document.

“The most important single factor responsible for inequalities of income and wealth is the ownership of property. Incomes from work are by no means equal, but in part at any rate, they have some justification in terms of productivity or relative scarcity. Some types of work are, however, remunerated more liberally than others for reasons which are not directly connected with productivity. Differential monetary rewards are often a matter of tradition an existing psychological or social rigidities. It has also to be borne in mind that capacity to work effectively at higher levels depends on a person’s education and training, and these are a matter of the accident of birth or circumstances. A large expansion of general and technical education for all classes of people irrespective of their paying capacity is over a period a potent equaliser. The point is that while inequalities in incomes from work have to be corrected, the case for taxation based specifically on wealth or property needs to be carefully examined.”

India needs to seriously consider a tax on wealth given the wide disparities of income and wealth. The connection between ‘productivity’ and ‘social rigidities’ is noteworthy and requires to be addressed through labour laws, education policy, food policy, employment policy and so on.

The core of the 2nd Five Year Plan: the Mahalanobis model

From the previous paragraphs, we can state the following as the normative economic aims of the 2nd Five Year Plan: (1) expansion of output and employment opportunities, (2) reduction of income inequalities, and (3) inclusive economic growth and development. The economic core of the 2nd Five Year Plan is constituted by the Mahalanobis model. As Ajit Dasgupta writes in A History of Indian Economic Thought, “The purpose of the model was to determine the optimal allocation of investment between different productive sectors so as to maximise long-run economic growth in India” (p. 164). In other words, the aim of this model is to increase the pace of aggregate economic activity in India.

The Mahalanobis model is a two-sector model with a capital goods and a consumption goods sector. The model tells us how the resources are to be distributed between these two sectors such that maximum economic growth is achieved. Note that the then production was insufficient to meet the basic needs of the Indian populace. There are inter-sectoral relations due to which one sector cannot exist (or grow) without the other. To produce consumption goods, capital goods are required. For the workers and capitalists in both sectors, consumption goods are needed. Employing the Mahalanobis model is to some extent vindicated because the model assumes “capital to be the effective constraint on output” and India lacked good physical infrastructure.

Note also that this model assumes that there are no demand constraints. As Dasgupta writes, “The higher the proportion of investment (i.e. of the current output of capital goods) that is allocated to the further production of capital goods, the higher the long-run growth rate of output” (p. 165). The dual character of investment is not clearly understood for investment creates productive capacity and is a component of aggregate demand. Logically, a solution can be found such that the addition to capacity is validated by the demand generated but it is a knife-edge equilibrium as in Harrod.

Dasgupta points out that the Mahalanobis model has been criticized “for being concerned exclusively with investment and for identifying investment with the production of capital goods” (p. 165). Yes, demand constraints and human capital investment are ignored. Another criticism of the model has been its neglect of foreign trade (p. 166). However, the model could be modified easily to account for foreign investment and consumption whereas the incorporation of demand constrains and human capital would not be easy.

Conclusion: the relevance of economic planning

Since the 2nd Five Year Plan, much time has passed and the Indian economy has undergone several changes. Developments have taken place in economic theory too, particularly in the areas of economic growth and development. While the Mahalanobis model has its limitations, the normative aims of the 2nd Five Year Plan are still valuable today. The expansion of employment opportunities needs to be at the forefront of any macroeconomic or growth strategy. As written in the 2nd Five Year Plan, “From the economic as well as from the larger social view point, expansion of employment opportunities is an objective which claims high priority”. However, NITI Aayog, the successor to the Planning Commission works within ‘an administration paradigm in which the government is an “enabler” rather than a “provider of first and last resort”’. The market cannot be expected to provide accessible and good quality education, health, housing and living environments to all. With existing economic and social inequalities, the need for economic planning is even more. Social costs require to be assessed and not ignored in the name of economic efficiency and economic growth.

An economic planner ought to know the implicit assumptions and scope of economic theories and be knowledgeable about legal and institutional constraints of policy implementation. The economic planner must therefore be an excellent economist and an experienced bureaucrat.