Category Archives: Economics Education/Teaching

Alfred Marshall (1842 – 1924)

Alfred Marshall made lasting contributions to economics. No economist will question that. However, his precise contributions to economics are often forgotten. In a way, the microeconomics that we learn and apply today has strong Marshallian foundations. This post draws on Peter Groenewegen’s excellent (concise) biography of Alfred Marshall (2007) which has been published as part of the Great Thinkers in Economics Series published by Palgrave Macmillan.

Marshall is most famous for his Principles of Economics first published in 1890; the definitive eighth edition was published in 1920. In addition, he wrote Industry and Trade (1919), Money, Credit and Commerce (1923) and Economics of Industry (1879) which he wrote along with his wife, Mary Paley Marshall. Besides these, he also printed and privately circulated his work entitled The Pure Theory of Foreign Trade. The Pure Theory of Domestic Values (1879). Overall, he taught for more than forty years in Bristol, Oxford and Cambridge. The most notable among his students are John Maynard Keynes and Arthur Cecil Pigou.

He took German lessons in order to read Kant in the original. Hegel’s Philosophy of History had a strong influence on his thought. Marshall commenced his study about economics with a close reading of John Stuart Mill’s Principles of Political Economy. He also read the methodological works of Mill on logic and particularly criticised Mill’s conception of the individual as a ‘self-seeking, wealth-maximising homo economicus’. His other economics readings included Smith’s Wealth of Nations, Ricardo’s Principles and Marx’s Capital. Other important influences were Cournot’s Mathematical Investigations in the Theory of Wealth and von Thunen’s The Isolated State; they motivated Marshall’s use of diagrams.

For Marshall, ‘the proper work of economic science…was solving economic problems’. ‘The necessity of economic theory, the importance of facts and continual striving to keep economic analysis relevant and practical were all crucial parts of Marshall’s promise to devote his professional life to the improvement of economic science’ (p. 74). It is also quite well known now that, for Marshall, the ‘mecca of the Economist lies in Economic Biology rather than in Economic Dynamics’ (p. 106).

Groenewegen informs us that Marshall had a personal dislike of the use of textbooks in university teaching (p. 77). Not surprisingly, ‘[t]he Principles of Economics remained a leading textbook on the foundations of economics not only during the life of its author, that is, from 1890 to 1924, but for the next quarter century as well, that is, until the early 1950s’ (p. 111).

The use of mathematics in the Principles has garnered lot of attention since he ‘banished’ all equations to the appendix. In any case, Marshall considered economics as ‘form of reasoning’. Perhaps, given the use of mathematics during his time, his relegation of equations to the appendix might have been appropriate. I quote an interesting letter Marshall wrote to his student Bowley: ‘(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples which are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often’ (p. 114).

Marshall identified time to play an important role in the theory of value. He developed the concepts of the short and long period. He paid particular attention to ‘elasticity’. Besides these, he laid the foundations for the theory of the firm, use of offer curves or reciprocal demand curves in international trade and distinguished internal and external economies.

This post has only very briefly touched upon the way Marshall viewed economics, especially his use of mathematics and his evolutionary notion. We have not detailed his precise contributions to economics. This post serves the purpose of being a very short introduction to Marshall. As students of (micro)economics, it will be fascinating to read Marshall’s works, especially his Principles.

Undergraduate Economist: The 100th Blog Post

To celebrate the 100th post on this blog, I am sharing my 15 best posts over the past years. Thank you all for the support, in the form of comments, likes, tweets, etc. Thanks once again.

(1) The ‘Micro-Foundations’ of Economic Survey 2009-10

(2) On Financial Markets: The Problematic Assumptions

(3) On Disguised Unemployment: Some Issues

(4) On the Unorganised Sector in India

(5) James Steuart, Strange(r) Economists and the Indian Economy

(6) The Politics of Microeconomics

(7) What Can Indian Economists Learn From Sismondi?

(8) Urbanization in India: What does it mean?

(9) For ‘Social’ Economists

(10) (Mis)understanding Inflation

(11) Employment: The Neglected Variable

(12) Economics: The Study of Commodities

(13) Economic Growth in India: Some Considerations

(14) Krishna Bharadwaj: The Ideal Economist

(15) Sraffa: Production as a Circular Process

The Politics of Microeconomics

Recently, some students walked-out from the lecture of the exceedingly famous economist, Greg Mankiw, who teaches EC10, Introduction to (neoclassical!) Economics at Harvard University. He is, perhaps, more known for his best-selling textbooks. This post was drafted for a different purpose almost a year ago. However, given the relevance of the essay/post, I decided to publish it here.

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“Students, economics is divided into microeconomics and macroeconomics,” says the professor. This classification dominates economics teaching at all levels – from schools to post graduate studies. What is not mentioned is that, this classification is a characteristic of a particular kind of economics – neoclassical economics. The introductory chapters of microeconomics textbooks teach us that there are two kinds of economics, namely, positive economics and normative economics. With this distinction students are led to believe that microeconomics is objective, scientific and apolitical. Such arbitrary and artificial characterization, I argue, is an important way in which neoclassical economics perpetuates its dominance both in academia and in the arena of policy making. However, the “politics” of microeconomics comes to the fore when one closely examines its history. This essay will closely examine the concepts of factors of production and marginal product.

The so-called objective and scientific microeconomics treats all factors of production (land, labour and capital) on an equal footing. In particular, the roles of labour and capital are depicted as symmetrical. No mention is made of their particular social and historical characteristics. Land, as we know, cannot be treated on par with labour in any unique way. At this juncture, let us recall the objective of economic theory and policy – to improve the conditions of human life. However, such a human-centric objective must not be taken to imply complete disregard for animals or for the environment. Given this, what is the rationale for employing the concept of factors of production in economic analysis? One wonders whether it is to depoliticize economic theory. The earlier economists (classical economists and Marx) had employed the concept of social classes to understand the working of the economy. In their analysis, society was divided into landowners, workers and entrepreneurs. This division was necessary to develop a theory of income distribution. That is, it is the division of the society into ‘social classes’ or ‘factors’ which provides the foundation on which the theory of income distribution is erected. In the former structure, landowners received rents, workers earned wages which were often at subsistence level and entrepreneurs received profits. Whereas, according to microeconomic theory, the rewards accruing to the factors of production are as follows: land earns rents; labour earns wages; capital earns interest and entrepreneur/organization earns profits.  In the latter case, one notices that a distinction has been made between the “agent” and the “factor” of production. Notwithstanding this, the apparent objectivity of microeconomic theory crumbles and arbitrariness enters once we ask: what are the units for measuring capital? Land, as we know, can be measured in hectares, acres, square feet, etc. Similarly, labour can be measured in head count, man hours, man days, etc. But, how is capital measured? In fact, even before posing this question, we need to ask: what is capital? Why is capital, which is produced by labour acting on raw materials, considered a a factor of production? There appears to be no clear reason or rationale behind this. It seems that such an arbitrary concept was introduced to remove “politics” and “conflicts” from economic theory. Even the nomenclature “factors of production” appear significantly distanced from society vis-a-vis that of social classes, which was conceptualised taking into account the conflicts, especially over the means of production, prevalent in the society. Employment of “factors of production” in economic analysis presented a harmonious view of the society as opposed to the conflicts in income distribution which was pointed out by the classical economists.

Next, we briefly discuss the role of the concept of marginal product in microeconomics. In simple language, marginal product measures the contribution of one unit of the factor of production to the production process. Marginal productivity theory is a widely taught concept in graduate programs in economics and business. It is this concept which links factors of production to a theory of income distribution in neoclassical economics. Clearly distinguished “factors” of production is a prerequisite for the theory of marginal productivity. As pointed out in the previous paragraph, the owners of means of production do not find any explicit mention. Microeconomics teaches us that, in conditions of perfect competition, labour and capital get (monetary) rewards in proportion to their contribution to the production process. In other words, wages paid to labour equals marginal product of labour and interest paid to capital equals marginal product of capital. But, note that marginal product can only be computed by considering ‘potential change’, which is computed with the aid of differential calculus. What we do not pay adequate attention to, is that the origins of marginal analysis are to be found in the differential rent theory of Ricardo. Land, owing to technological constraints generated output at a diminishing rate as more and more labour and machinery were applied. This was because of the characteristics particular to land. Neoclassical economists extended this notion of diminishing marginal returns in land to other “factors of production” such as labour and capital. Such a generalisation has been shown to be inadequate on logical and historical grounds. Today, microeconomics textbooks and microeconomics professors hardly mention the historical origins of marginal productivity theory.

Neoclassical economics, as we have seen, misguides economic policy making by projecting a harmonious view of the society, comprising financiers, rentiers, entrepreneurs, wage labourers, salaried workers, etc. This is mainly done through the conceptual apparatus of “factors of production”. The idea of symmetry is introduced through this manoeuvre. Neoclassical economics also teaches students that a state of perfect competition is desirable because each “factor of production” will get what they deserve (their marginal product) as incomes. This, as indicated above, is a misinformed generalization of the rent theory of Ricardo. In fact, through the theoretical apparatuses of factors of production and marginal productivity theory, neoclassical economics tries to be objective, scientific and apolitical. However, as this essay has shown, most concepts of neoclassical economics have been devised in order to mask the conflicts and politics involved in economic phenomena.

James Steuart, Strange(r) Economists and the Indian Economy

 

Inflation has been portrayed as the biggest challenge faced by Indian policy makers and its Central Bank, Reserve Bank of India, in recent times. The Chief Economic Advisor to the Government of India and Professor of Economics at Cornell University, Kaushik Basu, recently presented his professional views on inflation – understanding and management, at the First Gautam Mathur Lecture on 18 May 2011. This is currently available for download as a working paper at the Ministry of Finance website. Various excerpts from this paper have made its way in some English newspapers and TV media. I will comment on this paper at length on a later date. Reading Basu’s paper makes me wonder whether monetary economists or other policy makers know what India is, who Indians are and what Indians actually do. In more abstract terms, do economists know the structure of the Indian economy? Do they know what motivates Indians? Is it primarily region, class, caste, religion, gender, education, self-interest, compassion, sympathy, fame, status? Although, to be fair to Kaushik Basu, he asks the RBI not to experiment and not to put up a façade of knowledge (which he frequently does). Without having a clear understanding of, what the 18th century economist James Steuart calls, “the spirit of a people”, it is impossible to formulate effective policies. Moreover, the focus on employment generation has completely given way to inflation stabilisation, using sophisticated econometric techniques. Therefore, this blog post revisits James Steuart’s views on how “the spirit of a people” influences economic engineering. In the Indian context, the consequences of monetary intervention might not be those which are depicted in conventional models of inflation.

Sir James Steuart (1713-1780) published An Inquiry into the Principles of Political Oeconomy in 1767 which was and has been overshadowed by Adam Smith’s Wealth of Nations published in 1776. Steuart acknowledged the importance of devising context-specific economic policies. However, we must realise that context-specific economic policy is not antithetical to general economic theories. In other words, proposing economic theories and models of a general nature is not inherently a problem; but, when applied blindly, they cause havoc, which is often supressed in very clever ways. Steuart writes:

“Every operation of government should be calculated for the good of the people. . .that in order to make a people happy, they must be governed according to the spirit which prevails among them” (p. 21).

An ignorance or lack of understanding of this “spirit” can have disastrous consequences. We see some of them in the worsening urban-rural inequality, falling of inflation-adjusted per capita incomes in interior villages [EPW, 2011], agricultural distress and forced migration [P Sainath, The Hindu, 2011]. One of reasons why such skewed policies are implemented is because of the rationale provided by “pure economic theory”, which Basu seems to praise for its scientific rigor and [semblance of] truth. To be clear, “pure economic theory” is something which Steuart was against because it assumed a certain “spirit” and claimed to be universal thereby neglecting important specificities and characteristics pertaining to individual economies.

For Steuart, “the spirit of a people is formed upon a set of received opinions relative to three objects; morals, government and manners: these once generally adopted by any society, confirmed by long and constant habit, and never called in question, form the basis of all laws, regulate the form of every government, and determine what is commonly called the customs of a country” (p. 22). That is, education, religion, region, caste, gender, etc would significantly affect the “spirit” of India. Also, important characteristics such as the percentage of Indians employed in agriculture, in unorganised manufacture, in self-employment, in rural areas, using informal sources of finance, who are socially poor (less than 100 rupees a day), who actually invest in stock markets, who read English newspapers and so on affect the outcomes of economic engineering. Not paying heed to these significant characteristics is the same as formulating an inappropriate policy. Let me highlight once instance. The RBI conducts Inflation Expectations Survey to estimate how the expectations of the Indian populace change over time and this result forms an input into monetary policy making. Despite this, the RBI did not survey any Indian living in rural areas; they seem to neglect and forget the fact that the main producers live in rural areas and their chief occupation is agriculture! This certainly deserves to be questioned. Policies should not be formulated “at any point which regards the political oeconomy of a nation, without accompanying the example with some supposition relative to the spirit of the people” (p. 23). If the “spirit of the people” is not taken into account, as the example above indicated, such policies could prove to be harmful. This also calls for greater dialogue between economists and other social analysts (sociologists, cultural theorists, political scientists, anthropologists, social workers, etc) when engineering nation-wide socio-economic policies. Hence, Steuart writes that “in every step the spirit of the people should be first examined” (p. 25).

Often, the attitudes of policy makers indicate how much their academic knowledge is irrelevant for practical economic and social problems. The reliance on “pure economic theory” is nothing but an intellectual looking, mathematically replete and made-difficult-to-understand version of free markets, because efficiency and rationality are our new gods! As Keynes writes in his preface to The General Theory, “the difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.” Today, these “old ideas” are not only fashionable and ‘scientific’ (and often unsuited to India), but they are also communicated relentlessly to the new generations through schools and universities. In conclusion, it is scary to realise that India’s policy making is done by those who are “strangers” to the Indian realities. Steuart warns us that “when strangers are employed as statesmen, the disorder is still greater, unless there be extraordinary penetration, temper, and, above all, flexibility and discretion” (p. 27).