A Review of Jean Drèze’s Jholawala Economics

sensesolidarityJean Drèze is a familiar name among social science students and researchers. His contributions unarguably have helped improve the state of social programmes in India and have motivated several students to take up social research. In 2013, he co-authored An Uncertain Glory with Amartya Sen on the importance of public programmes in achieving social development.

Sense and Solidarity: Jholawala Economics for Everyone (2017, Permanent Black) is his second sole-authored book after No.1 Clapham Road, the Diary of a Squat (1990, Peaceprint, published under a pseudonym) on homelessness in London. The 2017 book is divided into 10 sections: draught and hunger; poverty; school meals; healthcare; child development; employment guarantee; food security; corporate power; war and peace; and a set of miscellaneous essays (of which only one was unpublished, but this has now been published in The Wire). His 2017 book is a collection of his previously published essays, mostly in The Hindu, with a fresh general introduction and a section-wise commentary, which sets out the context. This review post engages only with this fresh material.

Vision

Drèze’s vision, like most of the current and future readers of the book, is to “create a good society” (p.3). As he writes, this warrants the abolition of caste and patriarchy. Such a vision requires a progress in “ethics and social norms” (p.3). He titles his approach “research for action” (p.4). This reminds me of Marx, who wrote in the Theses on Feuerbach that: “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.”

It is indeed commendable that Drèze along with Reetika Khera and others have been able to conduct field surveys with student volunteers. Moreover, he has participated in several village meetings, public hearings, and social audits (p.9).

Drèze’s underscoring of “ethics and social norms” is extremely important today. Many public policy measures try to create policies with appropriate incentives as if they are gods. What we truly lack, to use Adam Smith’s phrase, is good “moral sentiments”—sympathy, compassion, friendship, care, etc. These cannot and shouldn’t be quantified or reduced to monetary terms. Nor can they be incentivised. It is here that ‘experience’ plays a significant role. Looking at theory and quantitative secondary data is insufficient to capture most of social reality. It is precisely this reason that has led to the critique on men writing about patriarchy and Brahmins writing about Dalits. Not only is the lived experience missing in these instances but also can it never be obtained.

Methods

Drèze rightly criticizes the quantitative fetishism found in the community of economists and development studies researchers. And, as if they weren’t enough, the public policy specialists have joined this quantitative bandwagon, or rather the bullet train, as it were. This is not to suggest that we abandon quantitative analysis altogether but rather to use it with great care.

I completely endorse Drèze’s recommendation to study literature as a way to understand a society better. He lists the following authors in his book as people who ought to be studied: Bibhutibhushan Bandyopadhyay, Daya Pawar, Laxman Gaikwad, Om Prakash Valmiki, and Shantabai Kamble (p.17). In fact, I strongly think that the economics students would benefit with a compulsory course on ‘Literature for Economists’ alongside ‘Mathematics for Economists’ in the curriculum.

There is not much that Drèze writes on economic theory except his approval of game theory, which is not really a theory but a mathematical method of studying conflict and cooperation. I would go further and argue that there is much to be learnt from the theories of economists such as Smith, Marx, Keynes, Kalecki, and Sraffa. A deep understanding of methods—complexity theory, experiments, field work, game theory, instrumental variables estimation, lived experience, ratio and proportion, regression analysis, textual analysis, etc.—in all their plurality is much needed along with a similar understanding of various theories.

Another important learning from Drèze’s book is the need to engage with publicly available data, reports, and legislations. For instance, some of the legislations/programmes mentioned in this book are the Integrated Child Development Services (ICDS), National Rural Employment Guarantee Act (NREGA), National Rural Health Mission (NRHM), National Food Security Act (NFSA), and Right to Information Act (RTI). As voters, we too should be reasonably aware of their key provisions.

Action

Many students pursue social sciences with the intention of making a change in the society. And currently, there is a palpable sense of disappointment and disillusionment among these students. Perhaps, Drèze’s approach of “research for action” is one solution. At the very least, such research should be recognized and encouraged by academics and the society at large (particularly, parents). Of course, not everyone might have the means or the luck to pursue this course of action. However, this shouldn’t deter anyone from pursuing good research, which can be in the realms of theory, history, methods, action, or some combination of the four.

To me, the central takeaways from Drèze’s book are that as members and analysts of the ‘Indian’ society, we must be sensible in our approach to theory and methods by bringing in pluralism in these two areas. And, more importantly, solidarity warrants collective discussion, engagement, and action, which also aids in the progress of our “ethics and social norms”.

Finally, I felt that the book is expensively priced at Rs. 795 (hardback). One hopes for a paperback edition priced around Rs. 250. Although all but one are previously published essays, Drèze’s introductory chapter and section-wise commentary provides the readers a peek into his valuable philosophy. I end by wishing for the book to be translated into the many regional languages of India.

I acknowledge Abhigna A. S. for her editorial inputs and Aashish Gupta for alerting me to Drèze’s 1990 book.  

Kaushik Basu’s Economic Methodology and the Economic Survey of India 2011-12

As the title suggests, this blog post examines a couple of policy recommendations made in Chapter 2 (Micro-foundations of Macroeconomic Policy) of the Economic Survey 2011-12. This examination is carried out in conjunction with Kaushik Basu’s economic methodology which is scattered across the Economic Survey and very visible in his 2011 book Beyond the Invisible Hand: Groundwork for a New Economics (Princeton and Oxford: Princeton University Press). Note that we are making an assumption, albeit very plausible, that Basu authored and/or significantly influenced the contents of Chapter 2 of the Economic Survey. On the basis of these two texts – Chapter 2 and his 2011 book, this blog post evaluates (1) Basu’s method of doing economics, (2) his affinities towards the micro-foundations approach and (3) his (select) macroeconomic recommendations. The blog post concludes with a critical look at the role of economics as espoused by Basu.

Basu writes in the Economic Survey that ‘monetary and fiscal policies are part science and part intuition and common sense’ (p. 24). This statement reflects the openness to knowledge possessed by the author. However, owing to his role as the Chief Economic Advisor of India, he is an economic architect. Therefore, at a deeper level, one wonders whether he is talking about the ‘intuition and common sense’ of a particular individual (himself?) or a certain group of individuals. We get to read more of his thought on ‘intuition’ in his 2011 book. Some priceless extracts are reproduced below:

‘My view is that in economics, the need for intuitive understanding is much greater than most economists would have you believe. Good economic policy requires a “feel” for things over and above the knowledge of theorems and regression coefficients’ (p. 14).

‘Both interventions and noninterventions have too often been left to the ideological whims of believers. They need to be founded on analysis and reason, not faith’ (p. 23).

‘What we so often take to be features of the world are actually propensities of the mind’ (p. 51).

‘My belief about the puzzle of knowledge lies somewhere between the skeptical and evolutionary claims. I have faith in our intuition’ (p. 53).

‘Causality lies in the eyes of the beholder’ (p. 54).

‘To sum up, scientific knowledge has to be combined with intuition and a shot of skepticism for it to be useful’ (p. 54).

On p. 23, he argues that policy interventions should be based on reason and not faith. However, on p. 53, he asserts that he has faith in (his?) intuition. Most of his comments seem to indicate a certain sense of confusion on what the scientific method entails and the role of economic theory in particular. This is quite unfortunate, since it comes from the pen of the current Chief Economic Advisor of India. If it is not confusion then it seems to be a proposal that ‘any idea goes’ wherein obviously the ‘idea’ is decided by those in power. Whatever happened to reason? At the risk of repetition, let me state that this is an extremely dangerous outlook to possess because bad economic policies have devastating implications for majority of the population.

Basu rightly points out in his 2011 book that ‘the economy must be viewed as embedded in society and politics’ (p. xi). No one disputes this fact of reality. A worthwhile digression follows. Classical economists such as William Petty, Adam Smith, David Ricardo and Karl Marx in their contributions to political economy, as it was called then, never said otherwise. They stressed the need for proper social and political institutions. Coming back to Basu, he further writes: ‘Minimally, a proper understanding of economics requires recognizing that our economic relations are a part of a larger sphere of social and cultural interactions and institutions’ (p. 104). Based on this premise, he criticises neoclassical microeconomics for restricting individual choice to their budget sets for, in reality, they make choices outside their budget sets. In other words, there is a wide range of behavioural options which cannot be captured by the budget set and therefore Basu arrives at the conclusion that traditional microeconomic theory is very unqualified to deal with human behaviour. But, isn’t the aim of microeconomics to explain (economic) prices and quantities? Or, should we consider microeconomics as the study of human behaviour? Basu seems to think of the latter when he discusses economics. For him, economics is primarily the study of human behaviour and actions and not primarily a study of incomes and prices (on this, see Economics: The Study of Commodities). It also must be kept in mind that Basu’s scientific strengths lie in game theory, behavioural economics and related fields. In his 2011 book, he himself states that his analysis ‘belongs predominantly to positive social science’ (p. 98).

Since his objective is to study human behaviour, he proposes that we expand the scope of economics. This proposal, as we all know, has important repercussions on economic theory and eventually on economic policy. As Malthus pointed out, to study wealth and its distribution, one needs depth and not breadth; in short, the boundaries or scope of economics must be clearly outlined, however limited they might seem. Introducing several aspects of culture as Basu suggests will only make the explanatory and causal content of economic theory very weak. In fact, it might make economic theory too open that it can be used to explain everything. This must be resisted at all costs for it is knowledge that is at stake here (see also Malthus: The Scope of Political Economy). Basu therefore hopes to expand the scope of economics by altering and widening its foundations in order to usher in the micro-foundations approach in macroeconomic theory as well as in policy making. One glance at the title of Chapter 2 of the previous three Economic Surveys is sufficient for this purpose – 2009-10: Micro-Foundations of Inclusive Growth; 2010-11: Micro-foundations of Macroeconomic Development and 2011-12: Micro-foundations of Macroeconomic Policy. The mark of Kaushik Basu is indelible.

Basu seems to be doing exactly what Gary Becker did when he applied microeconomic tools to a variety of human behaviour around the 1970s. Although, things have improved since then and research in game theory and behavioural economics have been reasonably successful in dispelling the very nice-to-hear qualities of the individual/agent in the economy. Cooperation, reciprocity, trust, etc have once again (Adam Smith talked about a lot of this in his Theory of Moral Sentiments; although he believed that it was necessary to assume certain behavioural propensities when studying the generation and distribution of wealth) begun to play an important role in economics. Basu does provide the reader with many such insights in his 2011 book by drawing upon his earlier research. As a consequence, he criticises the manner in which mainstream neoclassical/marginalist economics employs methodological individualism, especially the textbook version of it. Basu is unhappy because the agent in mainstream economics still does not carry out identity-based behaviour (p. 49). He demands an agent who is more social which does not imply a complete rejection of methodological individualism. Basu is candid about this: ‘It is not within my ability to break away from methodological individualism to the extent that we will eventually need to in order to have a more powerful social science and at the same time retain rigor’ (p. 101). He wants an increased role for identities in economic theory – caste, gender, race, language, etc. As pointed out earlier, bringing too many variables when studying a specific problem often muddies and obfuscates the phenomenon under study. Moreover, the cognizance of such identity-based behaviour can easily be taken into account while formulating policies without having to call for an overhaul of economic theory. Therefore, Basu calls for widening the scope of economics:

‘A fundamental step in broadening the scope of economics is to recognise that the feasible set of actions open to individuals is much larger than our models make it out to be’ (p. 27).

‘Minimally, a proper understanding of economics requires recognizing that our economic relations are a part of a larger sphere of social and cultural interactions and institutions’ (p. 104).

‘How a nation functions at the level of macroeconomic aggregates depends a lot on the nuts and bolts of the economy. In our concern with managing the large and attention-catching variables, it is easy to let attention slip on the small, which may be vital’ (p. 39, Economic Survey 2011-12 ).

Given Basu’s view about the scope of economics, it is easy to understand why he promotes the micro-foundations approach in macroeconomics. This is undertaken in a manner which shows complete disregard for alternative/heterodox macroeconomic schools such as the Post-Keynesians, the Sraffa inspired Classical/Keynesians, the Marxians or the Kaleckians. These schools of thought are built on the belief that the economy is a system which has a logic and working distinct to itself. They criticise the neoclassical/mainstream economists of committing the fallacy of composition when they conceptualise the economy as an aggregation of individuals (see Some Logical Fallacies in Economics). Basu strongly advocates using the micro-foundations approach to macroeconomic issues in the Economic Survey. He writes:

‘The error has usually been in misreading the incentives and behavioural traits of the individuals who are to benefit from the policies and those who are supposed to carry out their day-to-day functioning. Fortunately, this is beginning to change both in the discipline of economics as well as in the design of policies in India. There is increasing recognition that flawed micro-foundations can devastate the best of macro intentions’ (p. 24).

‘Macroeconomic policymaking entails a mix of science and intuition. To ignore either of these would be a mistake. We need to marshal the best scientific knowledge available and study the microeconomic foundations of these macroeconomic concerns and then blend them with intuition and commonsense to craft policy’ (p. 25).

In short, according to Basu, micro-foundations is THE way forward both of economic theory and for policy.

His macroeconomic policy recommendations are problematic because of two reasons. First, his method of doing economics seems to be lack focus on the issues at hand – unemployment, poverty, inflation, agricultural growth and so on; instead, his entire focus is on human behaviour and micro-foundations. Second, he appears to lack a solid understanding of macroeconomics, especially its alternative schools. In any case, let us take a look at two of his major macroeconomic proposals – on fiscal deficit and Government as an enabler.

‘In the interest of medium- to long-term growth, it is important for us to bring the fiscal deficit down. While an expanded deficit can boost consumption and economic growth, this is medicine akin to antibiotics. It is very effective if properly used and in limited doses, but can cause harm if used over a prolonged period. Hence, government’s aim must be to effect rapid fiscal consolidation. A large deficit over a long period tends to squeeze out the private sector from the credit space. This dampens private investment and productivity and, more significantly, worsens the options of the inflation-growth mix available to government’ (p. 27).

‘This is what is meant by the enabling role of government. It should create a setting where it is in the interest of private agents to deliver on what needs to be delivered’ (p. 28).

As long as the economy is not at the full-employment level of output, crowding-out can never happen. Moreover, Basu forgets that the economy is not a stagnant organism; instead it is a growing one. The idea that government investment crowds-out private investment precariously hinges on the notion of scarcity in the economy. In a setting where the Central Bank controls interest rates so as to maintain price stability, it is difficult to see how crowding-out occurs as a result of government expenditure (see Introductory Macroeconomics: On Crowding Out). As for the enabling government, Basu seems to forget that India requires significant government expenditure/intervention in the form of Right to Food, Right to Education, Right to Employment, Right to Information, etc so that a dignified ‘setting’ can be constructed for everyone.

To conclude, it appears that as a game theorist who has important socially relevant insights, Basu is well on the mark. However, his macroeconomics, unfortunately, is grounded on extremely weak foundations and therefore is well off the mark.

On Perfect Information

Four persons A, B, C and D have to share Rs 4 among themselves in units of one rupee. First A proposes a distribution and all of them, including A vote on it. If at least 50% of those voting agree with A, the proposal is accepted. If not, A loses her voting rights and B gets to propose a distribution and all except A vote on it. Once again B’s proposal is accepted if at least 50% of those eligible to vote agree on it. If not, B also loses her voting rights and C gets to propose and so on to D. Assume that each person prefers more money to less and will always vote against a distribution in which she gets zero. What distribution would A propose?

This is a sequential game. It is one in which players make decisions (or select a strategy) following a certain predefined order, and in which at least some players can observe the moves of players who preceded them. If no players observe the moves of previous players, then the game is simultaneous. [Game Theory.net]

This is also one of perfect information. If every player observes the moves of every other player who has gone before her, the game is one of perfect information. [Game Theory.net]

In the sequential game with perfect information, A will propose 3 for himself and 1 to D. This will be accepted by both A and D. D will accept anything more than 0; the reason being that, if all the proposals are rejected and the 4 rupees come in Cs hand, he will take all 4 for himself and since he will will vote for himself, the proposal will get accepted.

In such a game, the one makes the move first will have undue advantage.

On Perfect Competition

This market environment is extensively studied in Economics and is considered as a “Perfect” environment especially on the basis of efficiency.

This write up explains the concept of perfect competition succinctly.

Is such an environment favourable for all ? Competitive markets emphasise the importance of having perfect information as a pre requisite for a competitive equilibrium; one which is also Pareto Efficient.

The consumption decisions taken are sequential in nature. The consumer decides to purchase the commodity or service keeping in mind the price; which has been fixed earlier keeping in mind the consumers preferences. The outcome will always favour the producer (In a perfectly competitive market) as he makes the decision of pricing first.

On Pareto Efficiency

An outcome of a game is Pareto efficient if there is no other outcome that makes every player at least as well off and at least one player strictly better off. That is, a Pareto Optimal outcome cannot be improved upon without hurting at least one player. [Game Theory.net]

Conclusion

If the objective in an economy is Pareto Efficiency, then it can be achieved by a competitive market. But, it does not take into consideration equity in distribution. For example, in the game mentioned above, an allocation which leaves A with all the 4 rupees is Pareto Efficient, because in order to make someone better off, A has to be made worse off.

In India, the objective is to reduce Poverty and make growth more wide spread rather than growth being segregated in nature.

The idea that we cannot achieve the ideal state of perfectly competitive market equilibrium might seem pessimistic. Some economists insist upon holding the capitalist system to a standard of competitive equilibrium. Failure to meet this standard constitutes a “market failure” that warrants government intervention.[MacKenzie 2006]

So, is a market environment with perfect information desirable?