Economics Education/Teaching – Undergraduate Economist

English for Economists: Sowvendra’s ‘The Adivasi Will Not Dance’

Economists spend time studying mathematics because it enables them to formulate questions in a precise manner and provides solutions to economic problems expressed mathematically. This blog post, the first one in the series, finds socioeconomic issues articulated clearly in the short story ‘The Adivasi Will Not Dance’ by Hansda Sowvendra Sekhar in his 2015 book with the same title. Likewise, subsequent posts in this series – English for Economists – will examine socioeconomic issues in the Indian context as found in novels and short stories (within the genre of Indian Writing in English).

Sowvendra’s story questions the current model of economic development which displaces adivasis from their home-land. The ensuing commentary follows the news about the setting up of a thermal power plant in Godda by a businessman.

The businessman, in fact, needed electricity for the iron and steel plants he was planning to set up in Jharkhand. The plant was to be set up for his own selfish needs; but if he were to be believed, the whole of Jharkhand would receive electricity from his plant. Whole towns would be lit up non-stop, factories would never stop working for lack of power. There would be development and jobs and happiness all over. (pp. 183-4)

The rhetoric of economic development rests on its supposed ability to create well-paying jobs. Displacement is seen as unavoidable within this rhetoric and is therefore compensated for in varying proportions. Of course, hardly is the compensation ever economically just.

All very happy with the progress, the development. The Santhal Pargana would now fly to the moon. The Santhal Pargana would now turn into Dilli and Bombay. The businessman was grinning widely. Patriotic songs in Hindi were playing from the loudspeakers placed at all corners of the field. ‘Bharat mahaan,’ someone was shouting from the stage, trying to rouse the audience, his voice amplified by numerous loudspeakers. What mahaan’ I wondered. Which great nation displaces thousands of its people from their homes and livelihoods to produce electricity for cities and factories’ And jobs’ What jobs’ An Adivasi farmer’s job is to farm. Which other job should he be made to do’ Become a servant in some billionaire’s factory built on land that used to belong to that very Adivasi just a week earlier’ (p. 185)

The above excerpt questions the current notion of development/progress. Who are the ones progressing’ Who are the ones regressing’ Mainstream economic theory is still obsessed with the fruit of ‘free’ markets – the trickle-down of incomes.

Land displacement happens in the name of economic ‘reforms’ and those who protest are seen as enemies of ‘development’. What is the state of the farmland’

Only a few of us still have farmland; most of it has been acquired by a mining company. It is a rich company. (p. 171)

The struggle to eke a livelihood is visible in the following passage. It is also a passage describing, what may be called, a class struggle (a la Marx).

This coal company and these quarry owners, they earn so much money from our land. They have built big houses for themselves in town; they wear nice clothes; they send their children to good schools in faraway places; when sick, they get themselves treated by the best doctors in Ranchi, Patna, Bhagalpur, Malda, Bardhaman, Kolkata. What do we Santhals get in return’ Tatters to wear. Barely enough food. Such diseases that we can’t breathe properly, we cough blood and forever remain bare bones. (p. 172)

Socioeconomically, the current and previous owners of the land are highly unequal. The latter has lost a permanent means of livelihood and a physical asset, a provider of economic security. On the other hand, the former group – the current owners – live prosperously. Santhals are denied access to good education and health. Access to communication is difficult for the protagonist because the ‘big post office in Pakur [is] more than twenty kilometres away’ (p. 180).

We come across two interesting passages on markets and pricing in this story.

Our music, our dance, our songs are sacred to us Santhals. But hunger and poverty has driven us to sell what is sacred to us. (p. 179)

Santhals don’t understand business. We get the coal easy yet we don’t charge much for it; only enough for food, clothes and drink. (p. 175)

Firstly, forcible commodification needs to be resisted. Secondly, the notion of value and prices varies in capitalistic and non-capitalistic societies.

The protagonist of the story asks: ‘What do we Santhals get’ We Santhals can sing and dance, and we are good at our art. Yet, what has our art given us’ Displacement, tuberculosis. (p. 178)’ Indeed, one wonders what ‘development’ and ‘reforms’ really mean. Owing to poor economic conditions due to ‘development’ and ‘reforms’, many Santhals ‘have migrated, or migrate seasonally’ (p. 178) – a form of distress migration. Economic distress is not an isolated event but has adverse moral and political consequences: ‘We are losing our Sarna faith, our identities, and our roots. We are becoming people from nowhere’ (p. 173).

Sowvendra’s short story is a real story about real people who are economically, socially and politically disadvantaged. The disadvantages have exacerbated because of economic policies undertaken in the name of ‘development’ and ‘reforms’. I think that such ‘stories’ disseminate contemporary socioeconomic issues to a wide audience in a lucid yet poignant manner. Insofar as they do that, they add to the existing vault of socioeconomic data. Moreover, such short stories can be used in schools and universities while teaching economics.

Introductory Macroeconomics: On Crowding Out

Macroeconomics textbooks and journalists write in earnest about the crowding out effects of fiscal policy. Government expenditure is widely believed to displace private investment by raising interest rates which increases entrepreneurs’ borrowing costs. On this basis, governments have been ordered to cut down expenditure. Government deficits are identified as the cause of decreasing private investment as well as for creating inflationary pressures in the economy. This blog post argues that crowding out occurs under special circumstances ‘ (1) when the economy is at full employment and (2) money supply is exogenous. In fact, when the economy operates at less than full employment and money supply is endogenous (that is, the central bank conducts monetary policy by adjusting the interest rates and the quantity of money endogenously adjusts to the demand for money at that set interest rate) government expenditure results in crowding in.

The crowding out argument can be represented with the help of the IS-LM diagram. IS refers to equilibrium in the goods market (quantity demanded = quantity supplied). LM refers to equilibrium in the money market (money demand = money supply). The intersection of the IS and LM curves gives us the equilibrium output and interest.

When government expenditure increases, IS curve shifts outwards. Both output and interest rates increase in an exogenous money model (upward sloping LM curve). The automatic increase in interest rate because of government expenditure is then said to result in crowding out of private investment.

Next, we look at interest setting monetary policy (with endogenous money) using the framework of IS-LM. In this case, LM is horizontal because the interest rates are set by the monetary authorities keeping in mind their inflationary target. This scheme is more realistic given the role played by Central Banks today. Interest setting monetary policy can be represented in an IS-LM framework as follows.

The goods market is also referred to as the real sector and the money market as the financial sector. We additionally assume (as is the case with not only the Indian economy but many other economies) the economy to be in a less than full employment position. If the economy operates at full-employment, increase in government expenditure will undoubtedly lead to inflation. In fact, an increase in private expenditure will also create inflation in a full employment set-up. In this realistic model, let us see what happens when there is an increase in government expenditure.

The diagram above clearly shows that an increase in government expenditure, represented as a shift in the IS curve does not raise the interest rates. The entire increase of government expenditure translates into increase in equilibrium income. That is, there is zero crowding out in this case as the economy operates at less than full employment. The increase in demand for money is met by endogenous increase in the supply of money through credit creation. In short, fiscal policy has no systematic effect on interest rates in a setting wherein the interest rates are set by monetary policy.

Therefore, it is clear that the basis of crowding out argument rests on the unrealistic assumptions of (1) full-employment positions and/or (2) exogenous money. Ordering the Indian government or other governments to cut back their expenditure by the IMF or by the ‘top’ economists therefore lacks a sound basis. The role of the government in aiding an economy towards its full-employment levels therefore can never be reiterated enough. Moreover, it is an argument which is based on sound economic principles.

Reference

Smith, Matthew (2012), ‘ECOS 2002: Intermediate Macroeconomics’, Lecture Notes, University of Sydney.

Short Introductions to Keynes: Skidelsky vs Clarke

The recent global financial crisis has led to a renewed interest in the works of John Maynard Keynes. In part, this is motivated by the intellectual failure of contemporary economics and the search for important insights into the working of the real and financial sectors. Another part owes to the dissatisfaction with conventional economics and restoring the research programme of Keynes seems to point at a better alternative. Together, revisiting the works of Keynes does assume great importance in the current economic and political climate. Two books stand out in this regard: Robert Skidelsky’s Keynes: The Return of the Master and Peter Clarke’s Keynes: The Rise, Fall, and Return of the 20^th Century’s Most Influential Economist. Both of them were published in 2009. This blog post is a critical examination of these two books.

Skidelsky

According to Skidelsky, ‘the root cause of the present crisis lies in the intellectual failure of economics’ (p. xiv). To avoid such crises in the future, Skidelsky encourages economists to think of economics ‘as a moral, not natural, science’ (p. xvi). We are quite aware of the affinities between Malthus and Keynes, on the role of consumption. Besides this, Malthus had a similar vision of economics (political economy as it was known then) as Keynes. That is, Malthus also views economics as a ‘science of moral and politics’; For Keynes, economics is a ‘moral science . . . it deals with introspection and with values . . . it deals with motives, expectations, psychological uncertainties’ (p. 81). Keynes’s economics and broader ideas, argues Skidelsky, aids in contemporary economic thinking and policy making. In particular, the role of uncertainty is emphasised.

The intellectual stature of Keynes is something that is well-established. Skidelsky provides the readers with a statement from the philosopher, Bertrand Russell: ‘Keynes’s intellect was the sharpest and clearest I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool’ (p. 57). In any case, Keynes was extremely active in academic and policy discussions.

Keynes argues that investment is determined by expectations and depending on the state of confidence, investment would increase or decrease. This renders investment unstable, as a policy variable. In addition, if savings are greater than investment, it diverts resources ‘from the wider economy into financial speculation and conspicuous consumption’ (p. 69). Consumption is seen as the stable component of demand. Keynes also clarified the very important distinction between decisions to save and actual saving. Firstly, ‘If everyone wants to save more, firms will sell less and therefore output will fall, unless the inducement to invest is increasing at the same time (p. 91). This is the paradox of thrift, a simple enough idea but very powerful which had not been presented clearly so far. Therefore, if increases in saving are not matched by increases in investment, it will cause a fall in output and employment. In short, ‘It is spending, not saving, which creates output and employment; and when spending falls short of earnings, unemployment results’ (p. 91). Skidelsky captures the most important conclusion of Keynes’s General Theory which is ‘that a decentralized market economy lacks any gravitational pull towards full employment’ (p. 97).

So far, so good. However, when it comes to Keynes’s views on classical economics, Skidelsky falls prey to the conventional view. The conventional view being that Keynes attempted to disprove the economic theories of classical economissts such as Smith, Ricardo and Malthus. This view is far from the reality. (For a concise account of this, see my short article in the DSE Journal.) In fact, Skidelsky, being very faithful to Keynes’s words calls Arthur Pigou a classical economist (see p. 104). Suffice it to say here that classical economists such as Smith, Ricardo and Malthus maintained that unemployment could be a permanent feature of capitalistic economies. By classical economists, Keynes actually meant the (neoclassical) economics of Marshall and Pigou. In the following paragraphs, we will see that Clarke deals with this issue in a more satisfying way.

Clarke

We need to read Keynes today, says Clarke, because of his ‘lifelong commitment to the strategy of institutional reform through reasoned argument’ (p. 23). This means that we need to understand the historic and political context in which he lived. Also, reading ‘Keynesian economics’ is no substitute for understanding Keynes. In fact, as Clarke informs us: ‘After dining with a group of American Keynesian economists in Washington, DC, in 1944, Keynes said at breakfast the next morning: ‘I was the only non-Keynesian there” (p. 168).

Similar in spirit to Brtrand Russells’ comment, Clarke shares with us that ‘Friedrich von Hayek, Keynes’s most formidable academic opponent, wrote that ‘he was the one really great man I ever knew, and for whom I felt admiration” (p. 10). Clarke sheds light on the not often discussed aspect of Keynes’s life ‘ his training in economics. Alfred Marshall, Keynes’s family friend, taught economics to Keynes. ‘It was the usual Cambridge system of individual supervision, one hour a week for the eight weeks of the teaching term ‘ the only formal instruction in economics that Keynes ever received’ (pp. 24-25). In any case, this doesn’t matter and clearly, it didn’t matter. For him, economic theory was not an end in itself (like the classical economists). ‘The whole point lies in applying them to the interpretation of current economic life’ (p. 49). In this quest, there are no roles for dogmas. Hence, he expressed his dissatisfaction with both anti-capitalist as well as free trade dogmas. However, the latter emerged as his primary target (p. 68). On the free trade system, Keynes writes the following: ‘It is not intelligent, it is not beautiful, it is not just, it is not virtuous ‘ and it doesn’t deliver the goods’ (p. 72). To this end, by writing the General Theory, Keynes wanted to change the thinking of economists first and foremost. This is why the General Theory is ‘a concentrated assault on inside opinion as the necessary prelude to converting outside opinion’ (p. 77). Given those difficult times, the theoretical and policy oriented intervention of Keynes was essential. For, ‘Many people [were] trying to solve the problem of unemployment with a theory which is based on the assumption that there is no unemployment’ (p. 148).

We have already pointed the crucial distinction between saving and investment. Clarke puts forth the importance more clearly. ‘At the time, saving remained prized and honoured as the key to economic recovery. Keynes’s serious point is to distinguish saving (or thrift), which is essentially negative, from the real motor of economic growth, investment (or enterprise)’ (p. 106). Furthermore, Keynes is correct when he states: ‘I think it makes a revolution in the mind when you think clearly of the distinction between saving and investment’ (p. 107). Too much saving diminishes income. ‘It is a paradox because it seems natural to suppose that if individual saving enriches the individual concerned, it must also enrich the community’ (p. 152). Despite these crucial differences between saving and investment, much of the modern theories of economic growth seems to take the equality for granted; thanks to the single-good models and continuous production functions.

The commentary by Clarke on Keynes’s view of classical economics is historically accurate and therefore more satisfying than that of Skidelsky. The following extracts bear testimony to this. ‘Keynes later took him [Pigou] as representative of the ‘classical school’, devoting seven pages of the General Theory to a demolition of Pigou’s The Theory of Unemployment (1933)’ (p. 108). ‘Orthodox economics assumed that the system reached its own equilibrium through the effect of interest rates in reconciling the level of investment to the amount of saving available ‘ through flexible prices, of course’ (p. 131). ”Classical’ economics ‘ really Marshallian orthodoxy ‘ said an infinitely adjustable price mechanism will deliver equilibrium via interest rates’ (p. 134). Finally, Keynes’ friend and a reviver of classical economics, Piero Sraffa, is said to have brought the terms ‘effective demand’ to the attention of Keynes. ‘Keynes decided to salute Malthus as yet another brave Cambridge pioneer by purloining his term ‘effective demand’ to describe his own theory of output as a whole’ (pp. 143-4).

Concluding thoughts

The two introductory books on Keynes by Clarke and Skidelsky attest to the intellectual and practical relevance of his work. A few points are in order. First, a perfectly competitive economy does not have intrinsic forces that result in full employment. Secondly, saving and investment are conceptually distinct variables. Finally, economic theory is a means to understanding contemporary society and not an end in itself. I let Clarke have the last word: ‘Keynes’s name is thus rightly invoked to license fresh approaches to the novel economic difficulties of our own era ‘ to tackle them actively rather than take refuge in inert doctrinal purity‘ (p. 180).

Is Marx (Ir)relevant’

Karl Marx (1818-1883) is an important figure in most social sciences. His works have been translated into several languages. One might not agree with his views, but he cannot be ignored. Some love him. A lot more hate him. Note that the like and dislike are not targeted at his works, which are seldom read, like most ‘classics’. Having recently read the first part of Theories of Surplus-Value, 3 volumes of Capital and a discussion with a friend who works closely with Indian realities has resulted in the following blog post.

Classical political economy, according to Marx, begins with William Petty in Britain and Boisguilbert in France and ends with Ricardo in Britain and Sismondi in France. In the Theories of Surplus-Value, Marx mainly scrutinises the works of these classical political economists. However, Marx does not provide an overall summary of their entire work but focusses on his central question: how did these authors conceptualise and comprehend value’ Particularly, he discusses the why and how of classical political economists theorising of ‘appearances’ while forgetting the ‘essence’. In any case, Marx does not have the last word on the theoretical framework on the classical political economists. Hence, reading Marx motivates one to go forward and read the works of the classical political economists.

But, why read Marx or the classical political economists’ They did not write in the 20^th century. The world is different today. Facts have changed. Are their works relevant anymore’ Firstly, ‘progress’ or growth of scientific theories does not follow a linear path; the path could be non-linear. The implication is that what was considered unscientific in the past can resurface (with adjustments) with a greater explanatory strength and challenge the contemporary ‘scientific’ theories, at least in principle. For institutional reasons, this might never happen; mainstream journals, scientific associations, university teaching and textbooks are, what I label, institutions in this context. Thus, a priori, there exists no scientific basis for not reading the works of classical political economists, Marx and other economists. Secondly, a distinction needs to be made between theory and fact. A theory is not (necessarily) a fact. A fact is never a theory. A theory is general while a fact is specific. Theory tells us a way of thinking about facts ‘ in identifying them, classifying them and ascribing relations to them. The classical political economists as well as Marx theorised a capitalistic economy; in this regard, the rate of profit was taken to be uniform across industries through the process of competition. It is obvious and very clear that in a country like India, which cannot be classified as capitalist or non-capitalist (perhaps, 10% capitalist), using Marx’s theoretical apparatus blindly is going to result in perverse outcomes. The reason for choosing 10% and not 20% is because the share of the organised sector in the GDP is 10%. Maybe, Marx’s theory has certain insights to offer to the 10% of India. The remaining has been visualised as pre-capitalist. (Remember the mode of production debates.) But, one wonders whether this is the desirable (or even scientific) way of characterising the remaining 90%. When reading an author’s work, it is not solely for the theory. Often, it is for the method too. There has been and will be many books and articles on Marx’s method. But, whatever the agreements and disagreements are, there are always fresh possibilities. Given this, not reading Marx seems unscientific!

Often, the works of classical political economists and Marx are confined to the class rooms of history of economic thought (HET). Teaching their works in HET classes is not considered irrelevant. One reason for this thought arises from the linear view of scientific progress. The other, perhaps, has to do with the pride every generation possesses over their ancestors in terms of knowledge. Although, this ‘pride’ is not solely our own creation but it has been passed on to us. It is perhaps our responsibility to check whether we have been taught the ‘correct’ theories and facts about our world. This is all the more reason to assess the foundations of our current beliefs and theories. HET is one way to do this, in economics.

Marx has interesting insights to offer contemporary economics on property rights, labour conditions, economic crises, concentration of markets (inter-linked markets’) and so on. To conclude, reading Marx is important to an economist. Secondly, his observations regarding the ‘evil’ nature of capitalism can be addressed so as to improve the existing laws, institutions, markets, morals and values. After all, the objective and aspirations of scientific knowledge is to better the lives of all.