All those who have studied economics for the past 50 years or so have heard about Samuelson – Foundations of Economic Analysis, Samuelson-Stopler theorem, Factor-price equalisation theorem, revealed preference theory, Bergson-Samuelson social welfare functions, non-substitution theorem, linear programming in economics, etc. The first one is his 1947 book which dominates economics teaching even today, directly or indirectly. Samuelson transformed economics into some sort of science (pseudo-science, as some call it)-social physics. [For more on this, go here]

Robert Lucas on Samuelson:

“Samuelson was the Julia Child of economics, somehow teaching you the basics and giving you the feeling of becoming an insider in a complex culture all at the same time. I loved the Foundations. Like so many others in my cohort, I internalized its view that if I couldn’t formulate a problem in economic theory mathematically, I didn’t know what I was doing. I came to the position that mathematical analysis is not one of many ways of doing economic theory: It is the only way. Economic theory is mathematical analysis. Everything else is just pictures and talk.” [Marginal Revolution and here]

SCARY!

In his Foundations, he is supposed to have popularised the views of Keynes. In fact, what he popularised is the neo-classical synthesis (IS-LM curves, which were created by Hicks). Hence, what we learn in most macroeconomics texts is not what Keynes said. Post-Keynesian economics is more closer to what Keynes said.

Despite his ‘ideas of good economics’, one needs to appreciate the works he carried out in different areas in economics – macroeconomics, public finance, international trade, consumer theory, capital theory and general equilibrium, etc.

In his initial editions of the Foundations, one could find a few pages devoted to the 1960 capital theory debates. However, with passage of time, the debate was relegated to footnotes. Now, in mainstream textbooks, capital theory is entirely omitted. In fact, Samuelson admitted the problems neoclassical microeconomics and general equilibrium run into because of their notion of capital. [More here]

I end with two questions.
Is mathematics the only way of studying economics and analysing economies? [We mostly use calculus and game theory. Should we employ other kinds of mathematics?]

How reliable are textbooks? It makes learning easy, but probably, a bit too easy.

This post revisits ‘An Essay on the Principle of Population’ written by Thomas Malthus in 1798. In my last post I briefly touched upon his population theory. Unfortunately, mainstream economics textbooks mention Malthus only for his ‘bad’ population theory. His other significant contributions like Differential Theory of Rent, his theory of money, his questions about the validity of Say’s law, etc are conveniently suppressed.

First, I would like to discuss why his theory is ‘good’ and then I would like to show how Malthus is viewed, interpreted and treated by various economists and students of economics.

Economics as viewed earlier and as viewed now (by a few) was a discipline which tried to understand the society (now known an economy) and also to come up with solutions for the problems that persist. His Essay “was the first serious economic study of the welfare of the lower classes” during his times. He was also a clergyman who wanted to make the society perfect.

His two postulates were that “food is necessary to man” and that “the passion between the sexes is necessary and will remain nearly in its present state”. [Malthus 1798] Now we know that the first is a true premise and the second one is believed to be a law of nature. So, there are no issues with both his postulates. He also refers to these postulates as ‘laws of nature’.

Ceteris paribus, population growth will outstrip food growth. He also gives additional insights as to how population growth will necessarily be checked. His thought experiment based on the ‘true’ premises is therefore valid. At this juncture, one needs to understand the underlying assumption of diminishing returns to agriculture. Once this is understood, there is no reason to call his theory ‘bad’.

How can such a theory be useful to the society? It brings to the fore the need for improvements in agriculture through technological advances, so that food production can be increased. (Assuming increased food production implies lesser hunger, but Amartya Sen proved otherwise. But it is necessary to have sufficient ‘food’ to feed society) Family planning is undertaken so that no child goes hungry apart from other reasons. Such checks are welcomed by all. Also, they indirectly draw from Malthus- the need for all people to consume food. However, checks like the Chinese one child policy create social problems on a massive scale.

It is amazing that even when his theory is viewed in isolation (from his other works), it still holds good! With progress in education (school children get introduced to a lot of theories and facts at an early age) theories like Malthus’ seem obvious and hence pointless. This also reflects the way theories are taught in schools and colleges. Very often, the context of the theory is left out. Corn Laws, the then predominant Ricardian theories, etc are very often not mentioned or discussed.

Now, I shall put forth two different views on Malthus, the economist.

1)

In this famous work, Malthus posited his hypothesis that (unchecked) population growth always exceeds the growth of means of subsistence. Actual (checked) population growth is kept in line with food supply growth by “positive checks” (starvation, disease and the like, elevating the death rate) and “preventive checks” (i.e. postponement of marriage, etc. that keep down the birth rate), both of which are characterized by “misery and vice”. [Source] (Note the mention of (unchecked))

2)

Malthus believed that population would increase at a geometric rate and the food supply at an arithmetic rate.

Malthusian population theory was eventually dismissed for its pessimism and failure to take into account technological advances in agriculture and food production. [Source]

Conclusion

How should theories be taught? By this post, I only intend to question the current teaching and understanding of Malthus’ theories. Also, I wish to stress the importance of understanding and studying the ‘context’ (historical, political, social, cultural,etc) of a theory.

Now, economists (positive economics) are busy using scientific methods so as to universalise theories rather than provide solutions to hunger, poverty, unemployment and other socio-economic problems.

To sum up, Malthus stressed on the need to keep population and food production in such a way that everyone would be fed. I believe that this still holds true across the globe as one of the main concerns of economics.

Further Reading

1) 1) 1) Darwin and Malthus

2) 2) 2) Is India falling into the Malthusian trap?, C. J. Punnathara, The Hindu Business Line, April 9, 2008.

3) 3) 3) Malthus, the false prophet, May 15th 2008, The Economist.

4) 4) 4) The International Society of Malthus (further links from the society)

5) On GM Food and GM Mosquitoes

Prices- how are they formed? Economics fundamentally is concerned with the theory of value; wherein prices play a crucial role. Does the mainstream or marginalist (neoclassical theory) explain the formation of prices? In equilibrium, the forces of demand and supply interact to give the equilibrium prices and quantity purchased and sold. But, in reality, is it so? Does this theory explain the actual working of any economy?

In school textbooks, I remember being taught the law of demand, factors affecting demand and the exceptions to demand. The law of demand conveniently takes into account only one factor, which is its own price. And economists like Veblen and Giffen who tried to discuss demand were sidelined as exceptions.

Thorstein Veblen talked of ‘social factors’ like status symbol, conspicuous consumption etc which affected demand. His book The Theory of the Leisure Class explains how interdependent individuals in an economy are, and how the individual is very much a part of the society unlike the ‘rationalist atomistic individual’ as assumed by the mainstream theory.

In Marshall’s Principles of Economics, he mentions Giffen effect- a rise in the price of bread results in a large drain of resources which force them to curtail the consumption of relatively expensive items like meat; and they consume more of bread as it is still the cheapest food they can get. In India, with more than 60% percent of the populace being poor [Guruswamy and Abraham], Giffen effect is the norm rather than the exception!

This post discusses some of the microeconomic concepts taught across schools and colleges.

Scarcity

I was taught that the central problems in economics were that of scarcity, of unlimited wants and how one chooses the best option. And here optimization (a mathematical apparatus) comes to the aid of economics- in finding the optimum. But are resources really scarce? If resources were really scarce, how could an economy grow? Land, of course is scarce; but the availability of land can be increased through reclamation, deforestation etc. Economics ought to be concerned about wants that are backed by purchasing power; otherwise the theory will be trying to reconcile dreams and scarce resources.

Equilibrium

Equilibrium is reached when the demand and supply curves intersect in the graph having quantity demanded and supplied on the x axis and price on the y axis. Joan Robinson (1973) wonders why one uses a metaphor based on space to explain a process which takes place in time.

This approach has for quite some time disturbed me. Why is it that we take ‘equilibrium’ to be favorable? Equilibrium is a thing very commonly found in Physics. One of the meanings is that ‘it is a state of rest’ and this is precisely the meaning economists provide. For, in equilibrium, the quantity demanded will be equal to quantity supplied and all is well. Coming to think of it more, why would a stagnant economy be favorable? What is more frightening is that, we are taught that it is what economic policies should aim at!

Prices

Prices, according to the mainstream neoclassical theory are determined based on the intersection of demand and supply; that too in a static set up. Prices, in today’s world is certainly not fixed in the before said manner. The producers decide the price based on the cost of raw materials and other items needed for production, wages and salaries of employees, advertising costs, existing taxes, etc. So this means, prices in an economy has more correspondence to the supply side than the demand side.

What is the significance of the demand side? One of the reasons could be to point out the importance consumers have in deciding the prices in a ‘perfectly competitive’ economy. It would signify consumer sovereignty in such an economy. Again, this belief of ‘consumer sovereignty’ is something one would like to have, but is absent totally.

Perfect Competition

No student of economics graduates without studying ‘perfect competition’. It is very much entrenched in economic theory as taught today. Why? The answer given is that it is the ideal state for an economy. Or rather, as the name suggests, it is ‘perfect’. Then we are taught about imperfect competitions keeping in mind what is good or ideal-perfect competition.

One of thoughts one could have is ‘why is it considered perfect’. The price is assumed to be given or it is said that the firm is the price taker. Another query would be- is perfect competition possible? The main driving force behind corporations and businesses is money or precisely speaking, profits. Would firms like an atmosphere where they are unable to fix prices and hence unable to earn more profits? It reeks of Orwell’s Animal Farm. Why would there be any competition at all? Aren’t differences that lead to competition? Would there be any incentive to produce or to diversify?

Conclusion

This post ends on a skeptical note. Is the current mainstream economics helping the economy by tailoring productive and progressive economic policies? Is they are not, why are they still being taught as compulsory topics? Is there an alternative approach?

I would like to put forth a question regarding the notion of prices.

50 years ago, one could buy a book for a rupee; but now, a book’s average cost would be about 100. This follows for all other goods and services too. What is that which accounts for this sustained rise in prices? Is it inflation alone?

The essence of Economics or Political Economy as it was called earlier (According to Adam Smith) was to provide a good livelihood for the people and also to bring in money for the state. Nowadays, economics has got lot many divisions and specialities, that I feel the essence is getting compromised.

These are some of the subjects which are closely related with economics.

Anthropology is the science that deals with the origins, physical and cultural development, biological characteristics, and social customs and beliefs of humankind.

Economic anthropology analyses decisions and behaviour of economic agents who are embedded in the networks of social relationships and cultural influences. Economic Anthropology is directly concerned with the most central anthropological issues of human nature, choice, values, and morality. [Thomas 2006]

Geography is defined as the science dealing with the areal differentiation of the earth’s surface, as shown in the character, arrangement, and interrelations over the world of such elements as climate, elevation, soil, vegetation, population, land use, industries, or states, and of the unit areas formed by the complex of these individual elements. [Dictionary.com]

Geography forms an integral part of Environmental Economics, which studies the externalities, both positive and negative, arising out of human activities.

Moreover, natural endowments have a significant correlation to the natural progress of an economy. Studies have shown that nations with abundant natural resources have grown faster.

Geographical factors can lead to poverty also. Jeffrey Sachs, in his book “The End of Poverty” has given an account of this.

Demography, the study of Population draws extensively from the science of geography.

History is the branch of knowledge dealing with past occurrences. Tirthankar Roy, an Economic historian says that Economists engage with history from a desire to make the theory of economic growth more complete and intelligible. Without comprehending the history of Britain during the 1700’s one could never understand what Adam Smith tried to say. Students find Classical theories to be otiose, due to their lack of understanding of history.

Political science or politics seem to have attracted a lot of ire, but with out a proper political institution, there will be no freedom. It is a branch of social science dealing with political institutions and with the principles and conduct of government. It is therefore essential that economic policies can be framed keeping the objectives of the political institution prevailing. “The disjuncture between economics and politics in India’s democratic system has also been growing” says Bimal Jalan in his book ‘The Future of India’.

Psychology is the science that deals with mental processes and behaviour. Theories like consumer preferences, irrational exuberance and specializations like behavioural economics and game theory draws heavily from psychology. Behavioural Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. [Mullainathan and Thaler]

Sociology is the study of human social behaviour, especially the study of the origins, organization, institutions, and development of human society. Economic sociology has emerged as a separate branch in Economics; Robert Gibbons of MIT defines it as the sociology of economic actors and institutions.

Philosophy is the rational investigation of the truths and principles of being, knowledge, or conduct. J D Sethi, who specializes in Gandhian Economics, said that “Science of Economics is in crisis. Indeed, the main reason for the crisis is that modern economics has no philosophy whatsoever”. To understand an Economist’s theories, we ought to know the prevailing philosophy at that time. Moreover, debates were carried out to decide whether Economics was a normative science (based on values) or a positive science (based on empiric).

Thus, it becomes pertinent that the teaching of economics also touches subjects like history, psychology etc so that the student gets a more realistic picture of the event. These days, economics has become a strict discipline with various specializations and one who ventures into one specialization is unaware of the effects of variables which is outside his or her area of interest. I do not know if ‘division of labour’ is applicable in such cases as it tends to distort the real picture. Thus the need arises for a more comprehensive learning of the social sciences.