Undergraduate Economist

Perspectives of an economics student

Archive for the 'Employment' Category

Misunderstanding Economic Growth and Development

Posted by Alex M Thomas on 25th August 2013

If two previous posts dealt with trying to understand how economic growth may or may not translate into development, this post goes a step behind and discusses what economic growth means. More importantly, this post examines what economic growth does not mean. The motivation for this blog post comes from Jagdish Bhagwati and Arvind Panagariya’s 2013 book titled Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries. Note that the following paragraphs are not intended to be a detailed review of the book; only their central premise – ‘the centrality of growth in reducing poverty’ (p. 4) – will be engaged with. The blog post, however, ends with a critical commentary on the authors’ methodology (focusing on authors’ engagement with opposing views, presentation of authors’ own arguments and referencing), as contained in the Preface, Introduction and the first three chapters. Also, no comments are offered on the data analysis present in their book.

A premise is ‘a statement or proposition from which another is inferred or follows as a conclusion.’ Bhagwati and Panagariya start with the premise that economic growth entails increase in employment opportunities and an improvement in income per person. This is also their conclusion, and forms the title of their book. They write:

Bhagwati argued nearly a quarter century ago that growth would create more jobs and opportunities for gainful improvement in income, directly pulling more of the poor above the poverty line and additionally would allow the government to pull in more revenues, which would enable the government to spend more on health-care, education, and other programs to further help the poor. Growth therefore would be a double-barrelled assault on poverty. (p. xix)

Further, they write: ‘growth helps by drawing the poor into gainful employment’ (p. 23). A simple question is sufficient to negate this view. Does the market create jobs after taking into account the abilities and skills of the poor? Of course not! If so, there would not be any unemployment or underemployment. A well-educated (and healthy) workforce is necessary so as to actually ‘gain’ from the newly created employment opportunities. [Not to forget the hardships involved in deskilling and reskilling.] And, it is not logically necessary for employment opportunities to increase when the economy grows. Jobless growth is a possibility where the surplus is not used to create further jobs; more often, it is a question of whether jobs are being created at the same pace as at which the economy grows.

By definition, economic growth entails a rise in income. But whose income? Economic growth can co-exist with the rich getting richer. Or, economic growth can give rise to stagnant wage shares amidst productivity rises. Growth can be export-led. It can be service-led. It might favour capital-intensive over that of labour-intensive technology. A rise in real GDP can happen because of a variety of reasons. It is these ‘reasons’ that one must investigate. For, it is here that we will find answers as to who the beneficiaries of economic growth are. It is to the mechanisms or processes which generate economic growth that we must attend to in order to comprehend which sector/classes/groups are losing out. For example, the nature and consequences of service-led growth will be very different from that of growth that is manufacturing-led. Bhagwati and Panagariya repeat the same fallacy, pointed out in the previous paragraph, in the following passage.

Conceptually, in an economy with widespread poverty, labor is cheap. Therefore, it has a comparative advantage in producing labor-intensive goods. Under pro-growth policies that include openness to trade (usually in tandem with other pro-growth policies), a growing economy will specialize in producing and exporting these goods and should create employment opportunities and (as growing demand for labor begins to cut into “surplus” or “underemployed” labor) higher wages for the masses, with a concomitant decline in poverty. (p. 23; see p. 43 as well)

Conceptually, in an economy with excess labour supply, labour is cheap. Bhagwati and Panagariya argue that a growing economy with cheap labour will adopt labour-intensive techniques. This reasoning assumes that an unemployed farmer or school teacher can easily and naturally be employed in a firm which exports computer parts. The authors’ views seem to indicate a gross misunderstanding of the actual economic dynamics of any society (see below as well). Moreover, one is not just concerned with mere employment, but with employment that provides good working conditions – including sick leave, maternity leave, overtime wages, etc.

‘The pie has to grow; growth is a necessity’ (p. xx). Yes, a larger surplus makes it feasible for each claimant to get a greater share, including the government. The contention is with respect to the feasibility and who these claimants are. According to Bhagwati and Panagariya, growth automatically and naturally generates higher incomes per person thereby ‘directly pulling more of the poor above the poverty line.’ Growth is not manna from heaven which everyone gets in equal amounts. It is based on definite political, economic and social institutions/processes – wage bargaining, possibilities of reskilling, mobility of labour, gender, caste, family structure, social security nets (family based or from the government) and so on. In this context, the authors rightly note the negative effects excessive licensing, government monopolies and protectionism can have on the growth of an economy (p. xii).

Given the authors’ belief in a strict one-way causation running from economic growth to development, they argue for carrying out growth-enhancing reforms first, which they refer to as Track I reforms. Subsequently, the surplus can be redistributed by the government to achieve development; this can be through transfer payments of various kinds. These are known as Track II reforms. They argue:

Track II reforms can only stand on the shoulders of Track I reforms; without the latter, the former cannot be financed. (p. xxi)

Of course, they can be financed through government borrowing and there is ample literature on the issues surrounding debt-sustainability in relation to achieving full employment. One wishes to see a more nuanced understanding of such matters.

This separation of growth from development is not just illogical and untrue, but also dangerous to public policy. Often, for purposes of economic theorising, in order to carefully study the causal relations between variables, some boundaries are drawn and certain assumptions are made. But, an import of this technique into the domain of public policy is methodologically flawed, where the abilities of individuals to seek jobs and actually work and earn (higher) incomes crucially depend on their social, cultural and economic backgrounds. In other words, while the distinction between economic growth and development might be reasonable for some purposes, in practical politics, they go together. Moreover, if the policy objective is to ensure good quality of life for all, then it must be the case that, to use the authors’ terminology, both Track I and II should be undertaken at the same time, with perhaps a greater emphasis on Track II reforms.

A fundamental error underlies the authors’ belief that ‘growth’ is an automatic process which takes place when the government lets the private players have a completely free hand, international trade is free, and capital can freely flow in and out of the country. It is this notion which makes the authors’ note that ‘Track II reforms involve social engineering…’ (p. xxi). That is, in their view, Track I reforms require no ‘social engineering’. Nothing could be farther from the truth! A ‘market’ is an engineered institution. The belief that ‘free markets’ will deliver both economic and social justice is quite easily discernible from their statements. Making commodity markets free (from both government and private monopolies) is certainly beneficial for economic growth as well as for wider socio-economic development. But, given the (historical or otherwise) arbitrariness (as opposed to ‘merit’) involved in the ownership of various forms of assets, and the tendency of markets to favour the powerful, there is always a crucial role for the government and civil society to intervene in order to ensure social justice (especially in the arenas of education and health). After all, is this not what we mean by participatory democracy?

The preceding commentary is based on a partial reading of Bhagwati and Panagariya’s book, as noted in the introductory paragraph. Their conception of growth, at best, seems superficial and at worst, they misunderstand the dynamics of economics growth as well as development. The view of ‘free markets’ generating growth with rising incomes per person is never an automatic process. It requires visible hands and is indeed social engineering. We end with a few observations on their methodology. For them, all that their critics say are myths; Part I of their book is titled ‘Debunking the myths.’ On one occasion, some of the critics, who are hardly ever named (and therefore not cited), are accused of being ‘intellectually lazy’ (p. 25; also see p. 32, p. 34, p. 35 for the unnamed critics). On the other hand, the following phrases are used for arguments in their own support: ‘state-of-the-art techniques’ (p. 31), ‘detailed state- and industry-level data’ (p. 31), ‘compelling nature of evidence on the decline of poverty under reforms and accelerated growth’ (p. 33), ‘irrefutable evidence’ (p. 37), ‘evidence…is unequivocal’ (p. 38) and ‘these authors’ superior methodology’ (p. 43). Out of the total number of references excluding data sources and reports (around 125 in number), about 37% (around 47 in number) are references to the authors’ work, either as a sole author, a co-author or as the editor of the volume. This is very striking. And, out of citations to Panagariya’s work (about 27 in number), 14 of them are newspaper articles published in the Times of India or Economic Times. It is indeed unfortunate to come across so many fundamental errors in a book like this, because growth does matter, although not at all in the way Bhagwati and Panagariya expound in their book!

Tags: , , , , , , ,
Posted in Book reviews, Development Economics, Economic Growth, Economics, Education, Employment, GDP, Government, India, Labour Economics, Macroeconomics, Markets, Neoclassical Economics, Poverty, Unemployment | No Comments »

The 2012-13 Economic Survey of India (with Raghuram Rajan)

Posted by Alex M Thomas on 4th March 2013

The Economic Survey (ES hereafter) is a document which presents the macroeconomic situation of India during a given period. It is drafted by the Ministry of Finance (MoF), Government of India with the Chief Economic Advisor (CEA) playing a chief role. The current CEA is Raghuram Rajan. At the MoF website, detailed profiles of the people who drafted the Economic Survey 2012-13 are available.

This blog has analysed the previous three economic surveys (2009-10; 2010-11; 2011-12) undertaken under the guidance of Kaushik Basu, the predecessor to Rajan. The current analysis is broadly divided into two parts. The first part deals with the ES’s view of economic growth and employment and its theoretical underpinnings. Here, we discuss the gloomy industrial performance, issues surrounding productivity of labour and the role of government expenditure. The second part focuses on select policy proposals and examines it in brief; the debates surrounding oil subsidies, high current account deficit and attracting foreign capital fall under this section.

I

The underlying theory of growth outlined in the ES is what economists’ term supply-side growth theory. Growth in output per worker is determined by growth in the supply of factors – labour and capital (more precisely, produced means of production). Whatever be the growth in their supply, the demand will automatically adjust. In other words, aggregate demand adapts to aggregate supply and investment adjusts to saving. Thus, in equilibrium, there can be no unemployment of factors, including that of labour. It will presently be seen that it is such a framework which enables the ES to recommend a reduction of government expenditure which will apparently promote growth.

Rajan deserves praise for underscoring the importance of quality employment right in the beginning of the ES. In Chapter 2 entitled ‘Seizing the Demographic Dividend’, a case is made for improving labour productivity and for increasing both the quantity and quality of employment.

Policymakers are usually focused on short-run economic management issues. But the short run has to be a bridge to the long run. The central long-run question facing India is where will good jobs come from? Productive jobs are vital for growth. And a good job is the best form of inclusion. (p. 26)

‘Productive jobs’ refers to jobs where the productivity levels are high. Growth in per capita income is primarily determined by labour productivity, growth in the working population and growth in the working population who find jobs – the employment rate (p. 30). Labour productivity rises with greater investment in physical and human capital. The reason for low agricultural productivity is identified to be low investment and therefore the solution proposed is an increase in capital per worker (p. 32). Yes, technological advances are necessary but so are transformations in agrarian relations pertaining to caste and gender. Moreover, the presence of inter-linked markets makes agricultural markets very coercive, and less competitive.

Furthermore, low labour productivity is linked to rigid labour laws and excessive government regulations. It is of course necessary that the current labour laws be examined and improved upon whereby workers are provided decent wages, adequate sick and maternity leaves, indexation with inflation, etc. As the chapter rightly concludes, ‘We need to examine carefully whether regulations constrain businesses excessively and, if so, strip away the excess regulation while ensuring adequate protection and minimum safety nets for workers’ (p. 54).

But, the question remains: what is the mechanism by which employment rises? The answer provided is that saving generates investment and investment generates employment. ES points out that investment can be increased by increasing saving.

If India were to follow a similar path [like that of China], it would need to increase savings and investment, both of which will follow from the demographic transformation. But it will also have to increase the intrinsic productivity of jobs…. (p. 31)

But, why will aggregate investment increase without a corresponding rise in aggregate demand? And, where will this increase come from if all the individuals save more, based on the recommendation by the ES? (One only needs to recollect the ‘paradox of thrift’.) Investment is undertaken so that the commodities and services that are being produced can be sold. Only if they are sold can profits be realised.

The adherence to a supply side theory of growth is clearly visible in the chapter dealing with industrial performance (Chapter 9). Owing to this belief, the analysis carried out in that chapter mistakes correlation for causation and also gets the causal chain wrong.

The moderation in industrial growth, particularly in the manufacturing sector, is largely attributed to sluggish growth of investment, squeezed margins of the corporate sector, deceleration in the rate of growth of credit flows and the fragile global economic recovery.

Low investment is considered to be the primary cause of poor industrial performance with a slight mention of decline in foreign demand. Further, the authors’ of the ES maintain that a low investment has resulted in excess capacity (obviously!) and also a decline in capacity utilization. Yet, they fail to point out that it is a fall in demand for industrial products which has caused the fall in capacity utilization and to a reduction in investment! Although, unconnected to their narrative of industrial decline, they note a reduction in the rate of growth of sales of listed manufacturing companies. The rate of growth ‘declined from an average of 28.8 per cent in Q1 of 2010-11 to 11.4 per cent in Q2 of 2012-13, the latest quarter for which comparable set of data are available.’ Hence, in order to increase investment, the authors’ want to attract foreign direct investment (FDI). But, the problem is not a lack of investment but a deficiency of demand.

In a similar line of supply-side thinking, the ES argues that fiscal consolidation or a lowering of government expenditure will result in a ‘higher growth in real GDP.’ As the ES clearly states,

Staying on the indicated fiscal consolidation path is critical to sustaining the desirable macroeconomic outcomes not only in terms of higher growth in real GDP and lower inflation, but also in easing the financing of the widening current account deficit (CAD), for which India’s sovereign credit rating is important. (p. 56)

While it is unfortunately true that credit rating agencies and foreign capital considers government spending to be a threat, the claim that fiscal consolidation enables faster growth seems to lack any solid proof. Unless, we treat inflows of foreign capital to be a source of sustainable and high economic growth!

In sum, the theoretical framework underlying the current Economic Survey is problematic because of its inability to explain labour unemployment (or excess capacity) as a permanent feature of capitalist economies. This unemployment is primarily owing to a deficiency of aggregate demand. Furthermore, owing to the supply-side underpinnings, the recommendations are to increase savings. This is clearly stated as objectives in the ‘Press Statement on Release of Economic Survey: 2012-13’. (1) ‘Increase government savings, especially by reducing distortionary subsidies’ and (2) ‘increase opportunities for savers to get strong real returns on financial investment.’ Therefore, a deficiency in saving is identified as the main hurdle for the Indian economy.

II

In this part we briefly examine the reasons why fuel subsidies are harmful to India in the long run and the problems surrounding India’s current account deficit. Fuel is a basic commodity in the sense that it enters as an input into the production of all commodities. And, petroleum is an exhaustible resource. The price in the international market does reflect its scarcity. A high price indicates that demand is over stripping supply. Fuel subsidies are a short term solution which takes the burden of innovation from Indian oil companies and the responsibility of proper use from Indian consumers onto the shoulders of the Government. Yes, workers need to be insulated from high oil prices. One way to do this is by indexing wages to inflation. A high fuel price also quickens the search for alternative sources of energy and better agricultural and manufacturing machinery which uses less fuel. One final point. The argument that fuel subsidies need to be reduced so as to reduce budget deficit so that there is economic growth is, as pointed out earlier, based on the flawed economics of supply-side growth theory.

India’s current account deficit has reached worrisome levels. The value of imports has been rising mainly on account of higher international oil price. Exports have fallen due to a slowdown in foreign demand. India’s main imports are (1) petroleum, (2) pearls (for re-export) and (3) gold. Owing to the surplus in invisibles (services such as transport and software; and private investment income transfers) some of the deficit in the merchandise trade balance is absorbed. Apart from the surplus in invisible trade, the other avenue for meeting the merchandise trade deficit comes from the capital account. The major source of (net) capital inflow is foreign investment, which comprises foreign direct investment and portfolio investment. The other source of foreign exchange is loans. Given this situation, the Economic Survey proposes measures which attract foreign investors and by imposing duties which make gold imports costlier. Both these are extremely short-sighted measures and the former one makes economic growth to hinge crucially on foreign capital which is not advisable. The long term solution, as suggested in the case of oil subsidies, ought to be technological innovations in the export industries so that they are internationally competitive. Also, the propensity to imports should be reduced by promoting industries which can produce similar commodities. Moreover, there is a huge potential in the Indian tourism industry. And, as the ES also recognises, ‘the best way to reduce gold imports in a sustainable way will be to offer the public financial investment opportunities that generate attractive returns.’

Conclusion

The move to reduce government spending and measures which attract foreign capital are therefore based on the flawed supply-side theory of economic growth; we require an increase in employment and incomes and in aggregate demand. Moreover, the proposed measures to deal with structural problems of the Indian economy are not just short-term but short-sighted and unsustainable in the long-run. These measures also discourage technological innovations especially in the area of alternative energy sources.  Oligopolistic markets should be replaced with competitive markets with good labour laws which ensure that part of the productivity gains go to the workers.

Tags: , , , , , , ,
Posted in Demographic Dividend, Economic Growth, Economics, Employment, Foreign Exchange, GDP, Government, India, Industrial sector, Macroeconomics, Neoclassical Economics, Supply side economics, Unemployment, Wages | No Comments »

Wages in Economic Theory and Reality: Some Issues

Posted by Alex M Thomas on 2nd January 2013

Wages is the payment made to a labourer for the number of hours worked – sowing seeds, rolling tobacco, developing computer software or providing medical care in a hospital. How are these wages determined? Are they determined in a similar manner as that of commodities? That is, are they determined based on some sort of demand and supply mechanism? Or, are they predominantly set by non-economic forces which are not easily quantifiable? This blog post looks at the dominant neoclassical or marginalist viewpoint and contrasts it with the theoretical approach of classical economics. In this light, the post examines certain characteristics of the Indian economy relating to labour and employment.

The basic principles of neoclassical economics tell us that the price and quantity demanded and supplied of a commodity are determined by the intersection of its demand and supply curves. This is the demand and supply approach to economics. When extended to labour, the intersection of the demand and supply curves of labour is supposed to determine the wages per hour (the price of labour) and the number of hours worked (the quantity of labour). Therefore, an increase in the demand for labour relative to its supply is expected to raise the wage rate and a relative increase in supply of labour (say, from an increase in the working population commonly termed the demographic dividend) leads to a fall in the wage rate.

Classical economics, a distinct theoretical framework in economics, has a very different view of wages. It largely considers wages as an exogenous variable; that is, wages are not determined by market forces – demand and supply of commodities or of labour. Of course, temporary changes can be brought about by market forces. In the theoretical world of classical economics, wages are determined primarily by socio-cultural factors such as trade union strength, the collective notion of minimum wages for different occupations and the society’s views on trust, risk, etc. In this theoretical world, which to me, seems closer to the reality, an improvement in social institutions lead to an increase in subsistence wages. Wages, in this framework, has a subsistence (relatively fixed) component and a surplus (relatively flexible) component. Hence, classical economics allows for an increase in wages, in its surplus component, when GDP is rising on account of higher labour productivity.

A conflict is present in the distribution of GDP between workers and capitalists. Neoclassical economics eliminates this conflict by recourse to marginal productivity theory. By employing logically fallacious concepts (especially of capital), a theory of distribution has been erected where both labour and ‘capital’ are ‘justly’ remunerated. In this framework, trade unions distort the market and causes injustice! According to classical economics, the presence of strong trade unions and fair labour laws ensure that workers get a fair share of productivity gains, which will otherwise entirely go as profits of the capitalists. The Global Wage Report 2012/13 published by the International Labour Organisation (ILO) notes that in several countries wage rises have not matched the increase in employment and productivity (see especially p. 28).

There are enormous disparities in wage rates across the states in India, with Kerala paying relatively high wages. One reason for the high wages is the presence of strong trade unions. As per the Labour Bureau (as part of the Rural Labour Enquiry) report on ‘Wage Rates in Rural India’ for September 2012, the average daily wage rates for men for engaging in sowing in Gujarat is 132 rupees; in Kerala, it is 500 rupees; and in Tamil Nadu, it is 222.02 rupees. A carpenter in Gujarat is paid 233.33 rupees daily; in Kerala, he is paid 514.05 rupees and in Tamil Nadu, he is paid 388.6 rupees. The differences are starker with respect to unskilled labour: a male unskilled worker in Gujarat gets paid 109 rupees; in Kerala, he earns 411.32 rupees; and in Tamil Nadu, he earns 223.54 rupees. The corresponding wages for a female worker are: 101.71 rupees in Gujarat, 266 rupees in Kerala and 159. 76 rupees in Tamil Nadu. Note the gender-wage inequality in Kerala. Also, the economic condition in rural Kerala is significantly better than rural Tamil Nadu; therefore, the statistics will have to be interpreted with some restraint.

Subsistence wage, as a concept, has enormous theoretical and practical significance. In fact, the legislations pertaining to minimum wages in India ought to look at socio-cultural factors too, such as gender, caste, geographic location, kind of labour (formal vs. informal, rural vs. urban) and so on. The enforcement of minimum wages has been beset with difficulties as evident from a recent study (published in 2011) by Patrick Belser and Uma Rani; the proportion of salaried workers and the proportion of casual workers below the minimum wage at the national level is 25.3 and 50.6 per cent respectively. Discussions on and about subsistence wages, and by extension, on minimum wage legislations are much needed. Moreover, discussions surrounding subsistence wages can also result in more dignified definitions of poverty and minimum wages.

Tags: , , , , , ,
Posted in Agricultural sector, Classical Economics, Classical Political Economy, Development Economics, Economics, Employment, India, Kerala Economy, Labour Economics, Wages | 2 Comments »

A Foreword to Keynes’s General Theory

Posted by Alex M Thomas on 5th September 2012

Published in 1936, The General Theory of Employment Interest and Money remains a valuable book for both economists and policy makers. The recent financial crisis and the ongoing economic crisis have revived popular interest in this 1936 classic. The year 2009 saw the publication of two concise books on Keynes by two eminent scholars, Skidelsky and Clarke; an earlier blog post reviewed both their works. Not much will be said about the author – John Maynard Keynes, in the following paragraphs. The main objective of this blog post, as the title suggests, is to provide a foreword to The General Theory. By foreword, we mean the following: ‘The introduction to a literary work, usually stating its subject, purpose, scope, method, etc.’ (Oxford English Dictionary).

The rapidly expanding market for economics textbooks has, to a significant extent, substituted the reading of original works. In this environment, where our understanding of Keynes is based upon what Blanchard, Branson, Mankiw or Romer write, the following blog post strives to remain faithful to Keynes unlike the IS-LM version of Keynes proposed by Hicks and popularised by these textbooks. Keynes labelled Ricardo, Marshall and Pigou as Classical economists; this definition is not adhered to in the present blog post for Classical economics is a system of economic theory (to which Ricardo belongs) which is distinct from and a rival to Marginalist economics of which Marshall and Pigou are important members (see Thomas 2011 for more).

For Marshall, Pigou and marginalist economists of today, unemployment is a transitory phenomenon caused by ‘imperfections’ in the operation of the market forces. In their theoretical world characterised by competition, full employment is the ‘general’ case. However, Keynes demonstrated that this notion was based on assumptions contrary to the real world such as flexibility of money wages, absence of store of value function of money and rate of interest as a real phenomenon capable of equilibrating savings and investment and hence can only be considered a ‘special’ case. As he writes, ‘there has been a fundamental misunderstanding of how in this respect the economy in which we live actually works’ (p. 13). Opposed to this state of affairs, Keynes argued that the ‘general’ situation in an economy with competitive markets is the prevalence on unemployment. In other words, the central purpose of Keynes’s work is to demonstrate that unemployment is the usual situation in a competitive economy.

The main subject matter of The General Theory is the determination of aggregate employment and income or ‘the theory of output as a whole’ (Preface, p. vi). This needs to be seen against the then prevalent mode of economic analysis which was largely Marshallian in nature. Marginal productivity theory along with the principle of substitution was employed to understand the allocation of a given level of output; under conditions of competition, in equilibrium, full employment was (and still is) expected to prevail. And questions concerning the determination of the level of output were carried out within a theory whose primary subject matter was allocation, and not determination, of output levels. (On this, see especially Keynes’s preface to the German edition of his 1936 book.)

Marginalist economics, in the 1900s, looked up to the works of Marshall, and Pigou.  Keynes was brought up on a large dose of their works. Theories of production concentrated on determining the output levels in individual markets, and more often on allocation of output. Similarly, theories of distribution examined the allocation of income to workers and capitalists. Policy recommendations were made on the basis of such theories. The remedy to unemployment, according to Pigou and other orthodox economists, consisted in lowering workers’ wages. Economics certainly did not have an apparatus or a framework to study the ‘level of output as a whole’, or macroeconomics as it is called today. Besides output levels, Keynes also stressed the role played by money in ‘real’ analysis – the examination of income, employment, investment, consumption and saving. Rate of interest, according to Keynes, is a monetary phenomenon which depends on liquid preference. In short, the scope of his work remained the same as that of earlier economists – the study of wealth. Today, economics has broadened its scope to include any subject which can be examined by employing some form of the cost-benefit analysis. (See Malthus: The Scope of Political Economy)

Being brought up in the marginalist Marshallian tradition, Keynes attempted to completely break away from their method. In the preface to the German edition, he makes his desire explicit: ‘It was in this [Marshallian] atmosphere that I was brought up. I taught these doctrines myself and it is only within the last decade that I have been conscious of their insufficiency. In my own thought and development, therefore, this book represents a reaction, a transition away from the English classical (or orthodox) tradition.’ However, his attempt was not entirely successful. This is especially visible in his analysis of investment, where he develops the ‘marginal efficiency of capital’; much has been written on this in the context of the capital theory debates. The role he assigned to ‘expectations’ and the links to investment levels have been considered an improvement of the economists’ toolkit and consequently seen as an improvement in the capacity of economic theory to understand reality.

The aim of this blog post has been mainly to put The General Theory in the 1936 context, where Marshallian economics reigned supreme. Today, central governments, central banks and policy makers employ macroeconomic theory to understand the real world and to frame policies which increase output levels, stabilise prices and ensure financial stability. However, majority of these theories remain rooted in the orthodox tradition (variants of Marshall, Walras, Pigou and others resurface in the form of DSGE, New Classical macroeconomics or New Keynesian macroeconomics) which Keynes broke away from. Truly, The General Theory published in 1936 remains an economics classic, which is of enduring value to those who find terrible problems with the current orthodoxy!

Tags: , , , , , ,
Posted in Economic Thought, Economics, Employment, Keynes, Macroeconomics, Malthus, Marginalist economics, Neoclassical Economics | 3 Comments »