Category Archives: Informal Sector

Reflections on Chayanov’s The Theory of Peasant Economy

Alexander Vasilevich Chayanov, the Russian agricultural economist published the essay ‘On the Theory of Non-Capitalist Economic Systems’ in 1924 and Peasant Farm Organization in 1925, both in Russian. This blog post presents a selective summary of the English translations of these two works, one of the aims being to comment on Chayanov’s method of doing economics. He wrote around 60 books and essays during his lifetime. This blog post, it must be noted, is not an exhaustive survey of the essay and the book.


Chayanov’s essay on non-capitalist economic systems questioned the dominant approach of economic theorising which is conducted in the framework of capitalism. One of the characteristic features of the capitalist system is the presence of wage labour. So, how does such a theoretical framework understand peasant economies, where wage labour is non-existent? This is Chayanov’s question. Since labour is entirely provided by the peasant family, there exists no labour market and therefore no concept of wage labour. Moreover, the peasant family undertakes agricultural production (and engages in simple manufacturing) with the family labour and the surplus (or net product) arising from production cannot be resolved into wages and profits. The notions of profitability present in a family run enterprise, according to Chayanov, is very different from a capitalist enterprise. Chayanov terms the returns from the enterprise as the net product.

The required consumption of each family member is set by custom and habit. Chayanov computes an ‘internal equilibrium for the well-being of the family’ which is given by the intersection of their well-being and drudgery functions (p. 5). The gross product can be increased if more land is cultivated and/or an increase in labour intensity; remember, that the number of workers are given for any peasant farm organization. (This can change, perhaps in the very long-run, if the birth rate of the family is greater than its death rate.) The net product is arrived at by deducting the necessary consumption of the family and necessary consumption of the capital equipment from the gross product. The increase in labour intensity has definite physical limits; according to Chayanov, the family as a farm unit will increase labour intensity (drudgery) until the point when the net product is sufficient to meet the consumption needs of the workers and their dependants (children, parents and grandparents). The family’s access to land will depend on the land price and their ability to buy/lease more land will be constrained by their net product.

After laying out the basic relationships prevalent in a peasant farm, Chayanov concludes the essay by listing the various economic systems (p. 25). The extreme forms are capitalism and communism. In between, he introduces the family economy, slave economy and the feudal system (comprising landlord economy and peasant economy). Chayanow wishes for multiple economic theories catering to the needs of different economic-systems, as his last sentence in the essay shows:

…we have no doubt that the future of economic theory lies not in constructing a single universal theory of economic life but in conceiving a number of theoretical systems that would be adequate to the range of present or past economic orders and would disclose the forms of their coexistence and evolution. (p. 28)


In Chayanov’s 1925 work entitled Peasant Farm Organization, his team carries out a detailed analysis of the agricultural situation in various districts of Russia based on zemstvo statistics, state statistics, independent research and budget studies (p. 38). At the outset, Chayanov points out the ‘coexistence and evolution’ of the capitalist and non-capitalist forms. When the peasant as worker-entrepreneur is unable to make sufficient earnings (owing to a bad harvest, increased input cost or some other factor), he temporarily abandons his undertaking and becomes a wage-labour in order to avoid being unemployed (p. 40). A peasant farm, to reiterate, does not make use of hired labourers.

The peasant farm is an organization that makes use of family labour and receives a single labour income. And, the trade-off between physical effort and material results (already noted in the previous section) is re-emphasised (p. 41). Responding against criticisms against their employing the method of marginalist economics, Chayanov maintains that the trade-off between family member as consumer and as labourer (labour-consumer balance) determines the volume of family economic activity but he does ‘not at all consider it possible to deduce from this a whole system of the national economy’ (p. 46). His objective is not, in modern terms, macroeconomics. The concept of a family has its basis in ‘the purely biological concept of the married couple, living together with their descendants and the aged representatives of the older generation’ (p. 54). Moreover, the gross product of the labour farm includes income from ‘agriculture’ as well as ‘crafts and trades’ (p. 70).

Given the trade-off between manual work and well-being, ‘the annual intensity of labor declines under the influence of better pay, because to remain the same it is absolutely essential that the productivity of the year’s labor (and equally the standard of well-being) should grow in proportion to the increase in the pay of a unit of labour’ (p. 80). In conclusion, as Chayanov states:

Thus, any labor farm has a natural limit to its output, determined by the proportions between intensity of annual family labor and degree of satisfaction of its demands. (p. 82)

One of the problems of such a principle is the exclusion of the relationship between labour intensity and consumption needs of the labourers. For instance, when income increases, there might arise a heightened demand to consume more of luxury products. The consumption needs certainly have a lower limit or a floor, but it is not bounded from above. In other words, labour intensity and consumption needs are interrelated factors.

One final observation before we move to conclusions. Chayanov, with a view to aiding practical policy, was interested in finding the ‘optimal farm size’ because ‘the optimal combination gives the highest income, and any deviation from it gives the proprietor a reduced profit rate’ (p. 91). In part, and by large, the combination is based on the technical relations between inputs and outputs. Therefore, ‘[a]ny excess of production means available to labor or of land above the technically optimal level will be an excessive burden on the undertaking’ (p. 92). It is also on account of the technological relationship that  the ‘volume of agricultural activity is not a simple arithmetic derivative of the size of area used’ (p. 94). Some of these technological relationships can be better grasped by taking recourse to ‘the basic laws of contemporary agricultural science’ (see especially pp. 138-47 for a rich account of crop rotation, manuring, etc).


First, Chayanov is dissatisfied with economic theory studying capitalist systems alone. But, (neoclassical) microeconomics can perhaps explain certain features of the peasant farm, especially the trade-off between drudgery and well-being (the backward bending labour supply curve is a good example). Also, the search for the optimal farm size can also be conducted by certain microeconomic procedures. One does not need to accept the marginal productivity theory of distribution which is a central feature of microeconomics. To put it differently, the ‘science of choice’ can explain the trade-offs which Chayanov is talking about by making appropriate changes in the parameters.

Secondly, treating the farm output as being ‘determined by the proportions between intensity of annual family labor and degree of satisfaction of its demands,’ as noted earlier, assumes them to be independent of each other which need not be the case. But in his credit, Chayanov undertakes a very detailed analysis of the farm households which provides content to the maximization problem. Also, the tabular and visual representation of the data is remarkable.

Finally, the co-existence of different economic organizations like capitalist and peasant farms is characteristic of economies like India. Often, they are called a dual economy. Self-employment, as opposed to wage employment is a significant feature of the Indian labour force; so is informal versus formal employment. Understanding their innate dynamics as well as their interrelationships is of much use. They require a combination of good theory, data collection methods, statistical analysis and an understanding of the socio-economic history of the particular locality.

Rosa Luxemburg: An Introduction

Previous posts have commented on a diverse set of economists – Krishna Bharadwaj, Pierangelo Garegnani, Alfred Marshall, V K R V Rao, Knut Wicksell among others. In a similar manner, this blog post discusses the main ideas of the economic theorist, Rosa Luxemburg (1870-1919). Born in Zamosc, she studied philosophy and natural sciences and then moved to economics. Her PhD thesis is an empirical analysis of Poland’s industrial sector which was seen to depend on backward eastern markets. This statistical finding would later develop into a theoretical one.

She studied Marx’s work closely and critically. The three volumes of Capital demonstrate the workings of a capitalist economy characterised by wage labour and profit maximization. According to Marx, a capitalist system is able to reproduce itself by maintaining a sizeable reserve army of labour and by appropriating the surplus value created by the workers. However, Marx sees the possibility of crisis in a capitalist economy where production decisions are unplanned and are coordinated by different markets. Luxemburg asks a related yet different question: how does capitalism survive in the real world? Or, in her words, ‘what are the objective historical limits to capitalism?’ This question resulted in her main work, The Accumulation of Capital.

Luxemburg answers this question by extending Marx’s analysis after making certain modification. First, Marx conducts his analysis by examining the fundamental units of capitalism – that of a commodity and the workings of individual capital. This working is succinctly encapsulated in the relation M-C-M^ where M^ is greater in value than M. Second, his theoretical investigation is restricted to that of a capitalist system. Luxemburg looks at the total capital, an aggregate magnitude. Some commentators consider this to be one of the early attempts at a macroeconomic analysis. Moreover, in her attempt to understand the workings of capitalism in the real world, she introduces a real-life facet – that of the existence of both capitalist and non-capitalist systems. These modifications lead her to the conclusion that capitalist systems depend on and exploit non-capitalist systems for their survival. The exchange which takes place between these two systems stops the capitalist enterprise from crumbling.

In The Accumulation of Capital – An Anti-Critique (1972), she clarifies the differences involved in studying individual units versus aggregate ones: “…the standpoint of total capital differs basically from that of the individual employer. For the individual, the luxury of’ high society’ is a desirable expansion of sales, i.e. a splendid opportunity for accumulation. For all capitalists as a class, the total consumption of the surplus value as luxury is sheer lunacy, economic suicide, for it is the destruction of accumulation at its roots” (p. 56). This important methodological fact has been overlooked by neoclassical economics where the aggregate is seen to behave in a similar way as its individual parts. This is clearly untrue and their reasoning commits the fallacy of composition. Such discussions by Luxemburg were certainly a methodological improvement.

The major (historico-)theoretical insight she provided relates to the manner in which capitalist systems avoid permanent crises. Luxemburg argues that capitalism survives based on its coercive relations with non-capitalist systems. She poses the question thus:

“After we have assumed that accumulation has started and that the increased production throws an even bigger amount of commodities on to the market the following year, the same question arises again: where do we then find the consumers for this even greater amount of commodities?” (p. 57).

Her answer follows.

“They must be producers, whose means of production are not to be seen as capital, and who belong to neither of the two classes – capitalists or workers – but who still have a need, one way or another, for capitalist commodities” (p. 57).

She elaborates this further.

“In reality, capitalist production is not the sole and completely dominant form of production, as everyone knows, and as Marx himself stresses in Capital. In reality, there are in all capitalist countries, even in those with the most developed large-scale industry, numerous artisan and peasant enterprises which are engaged in simple commodity production” (p. 58).

To conclude, Luxemburg made positive contributions to economic methodology and theory. Her analysis of accumulation can prove useful in countries like India where non-capitalist production systems are very prevalent. In addition, it can enrich the analysis of economic relations between the developed and developing countries.


(1951), The Accumulation of Capital, trans. Agnes Schwarzschild, intro. Joan Robinson, London: Routledge & Kegan Paul.

(1972), The Accumulation of Capital – An Anti-Critique, ed. and intro. Kenneth Tarbuck, trans. Rudolf Wichmann, New York: Monthly Review Press.

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).

To Economists: please pay attention to the ‘real’ problems

A talk by Arundhati Roy and watching Peepli Live has motivated the contents of this post largely. I have been forced to rethink what ‘economics’ as a discipline should do in a country like India. How can it contribute to economic growth and human development. It is often forgotten that, economics studies the big black box that transforms the labour of the labourers into commodities for consumption by the labourers. People or rather, people who work, appear at both the ends of the tunnel. The black box or the tunnel consists of varied actors, markets, institutions, laws, power groups, social classes, etc.

Some economists try to make sense of this complex interaction using tools such as game theory, which throws light of certain aspects of the interaction. This in turn is supposed to aid in the design of better institutions. A few study labour, the main actor in the whole economic process. Some look at institutions and how various legal arrangements affect the economic outcomes. It remains to be asked: outcomes for whom? In this manner, the entire profession of economics has been divided into various sub-disciplines, each specialising in a particular aspect of the economy. And it is evident that communication between the above mentioned sets of economists happen rarely. Very often, the larger picture is forgotten. Each group presents their results with a tremendous sense of certainty, which is entirely misplaced. And, the joke that economists love their ceteris paribus clause comes true here. Except that, the clause in this case, assumes as constant the remaining processes or aspects of the economy!

Who are the real producers in an economy? What role do farmers (small, marginal and large) play in our society? Do they live in dignity? When inflation occurs, do these farmers get more incomes? Or do the intermediaries pocket the increase? Are proper institutions in place to provide them with adequate credit? Can these formal institutions compete with the informal ones, such as money lenders and chitti funds?

It is accepted that farming is not a profitable enterprise any more. Policy makers are calling for industrialisation. They want the farmers to come away from their lands and work in industries. And so arises the slums in and around major cities, where their living conditions are perhaps worse than in the villages. Or, most of them are forced to become construction workers. Urbanisation implies buildings, which creates construction jobs in plenty. Once the space in big cities are exhausted, the urbanisation will take place in small cities. Workers will be in demand. In short, labour migration and increasing labour distress, owing to improper housing conditions will become even more intense. It is time, serious attention is paid to farmers and the role of farming in the development of India.

To conclude, it is time we paid more attention to the condition of India and not blindly follow academic fashions. It is the duty of the civil society and especially, the academicians to study the problems and issues thrown up by the society. When the problems of the majority of the population in India –those who live in the rural areas, those who work in the informal sector and those who are farmers– are forgotten and relegated as “deviations from the normal” or “problems of the Indian economy” and not as characteristics of the society we live in, it is indeed a pitiable situation.