For ‘Social’ Economists

Over the past years, I have come across many students of economics who complain about the irrelevance of economics to understand practical issues. Among them, some go on to choose sociology, which is considered to be more practical and realistic. This post is for those who think that the dominant practice of economics is not done the right way. It is certainly possible to be a ‘social’ economist. In fact, this post is about ‘social’ economists and not about social economics, a distinct field in economics, which comprises economists who think ethics, values, philosophy, culture, etc are important.

Social economics/socio-economics/new social economics are emerging fields within economics whose central premise is that one cannot study an economy meaningfully without paying attention to social institutions, culture, beliefs, etc. It is disturbing to know that the practitioners of social economics, socio-economics and new social economics distinguish their work among themselves. This trend is largely because of the urge to be ‘pioneers’ in ’emerging’ areas in economics. The following extracts from The Elgar Companion to Social Economics shows this clash of identity:

‘The association that promotes socio-economics, the Society for’ the Advancement of Socio-economics (SASE) advertises itself rightly as’ an interdisciplinary organization. In recent years, socio-economists have’ increasingly used insights from biology, in addition to psychology and sociology.’

‘The association that promotes social economics, the’ Association for Social Economics (ASE), presents itself as a pluralistic’ organization that emphasizes the role of social values and social relationships in economics. Social economists have a variety of additional orientations, including institutionalism, Marxism, feminism, post-Keynesian,’ Kantianism, solidarism, neo-Schumpeterian, environmentalism and’ cooperativism. ‘

‘There is also a quite recent literature termed the ‘new social economics‘,’ which begins with market relationships, and then seeks to add ‘non-economic’ social content to their analysis. That is, rather than embed the’ economy in social relationships, these more recent contributions seek to’ embed social relationships in the market. ‘

In any case, these emergent fields indicate a dissatisfaction with the dominant economics profession. However, in their haste to carve out a separate field, the essentials are often lost. The adjective social prefixed to economics indicates the existence of an economy which cannot be clearly demarcated from the society in any clear fashion. Moreover, this usage also emphasises the role of how society is organised. The following are some questions pertaining to the economic aspects: Are the people motivated by reason’ To what extent does profits motivate entrepreneurs’ On what basis are people employed ‘ caste, gender, religion, academic qualification, political connections, bribes, region’ Can we visualise distinct social classes in the economy based on their ownership of land’ What are the sort of interactions which take place between agricultural, manufacturing and service sectors’ How is finance organised in the country’ How important are informal sources of finance’ Does labour laws apply to all sorts of employment’ How does the government intervene in domestic production and consumption of commodities are services’ What sorts of price and quantity controls exist’ These are some of the questions which aid in understanding how the economic aspects of a society are organised.

Today, economists are asked for their opinion/advice on matters pertaining to financial crises, foreign exchange constraints, poverty, unemployment, inflation, rural development, etc. Only an economist who is reasonably aware of how the society is actually organised will be able to devise strategies and chart plans which can effectively tackle these economic issues. A ‘social’ economist is one who understands the complexity of social studies in general and of economics in particular. In addition, she will always resist the temptation to think in atomistic terms and will resist universal solutions. She will also be aware of the significance of non-market transactions.

Even if the dominant form of economics teaching and research is asocial, the academic enterprise of economics does give space to alternative approaches. However, one must be careful because some of these approaches appear ‘social’ but are in fact static and atomistic. A reading of Adam Smith, the father of economics, easily points to the role and significance of social values and institutions. It is for this reason that we need to return to classical economics, where, as one of the earlier posts argued, economics is’ the study of commodities; but their economic analysis can easily incorporate social values and institutions as well.

Employment: The Neglected Variable

Today, the issue of employment receives attention in public discussion mainly because of NREGA. It is economic growth or GDP growth which is given prominence in most policy documents. In economics, employment generation and related aspects form a part of macroeconomics alone. Financial economics, international trade, monetary economics, etc hardly comment on the issue of employment. Increasingly, the question of employment is getting less attention in most academic and policy oriented discussions. This post attempts to revive certain issues pertaining to employment. For this purpose, we revisit the 1943 paper of a neglected macroeconomist ‘ Michal Kalecki. His paper straddles the fields of industrial economics, financial economics, public economics and macroeconomics, and provides insights regarding employment generation.

The generation of more employment, rather full employment, according to Kalecki, is beneficial to both government and capitalists. In addition, it also benefits the class of workers. Employment can be generated by capitalists or by the government. However, the government is restricted from generating employment because apparently government investment crowds out private or capitalist investment. In Kalecki’s words:

‘The economic principles of Government intervention require that public investment should be confined to objects which do not compete with the equipment of private business, e.g. hospitals, schools, highways, etc. Otherwise the profitability of private investment might be impaired and the positive effect of public investment upon employment offset by the negative effect of the decline in private investment.”

It is for this purpose that we have Acts such as the FRBM Act to ensure sound finance. This Act regulates and limits the employment generation capacity of the government. As for the corporate sector, they never support public investment. Hence, the employment generating capacity gets solely determined by the corporate sector/capitalists.

Kalecki questions this stance of the capitalists. For, full employment, as noted above, clearly benefits the capitalists by providing them greater profits. He argues that it is the ‘political realities’ associated with the maintenance of full employment which prevents the government and big business or capitalists from doing so. Given that the Government has to adhere to sound finance, largely, the capitalists determine the volume of employment in an economy. The capitalists tend to increase employment and output if they expect a good economic and political environment to be forthcoming. This environment is a dynamic and complex function of government policies, international events, political outcomes, etc. In economics, we call it state of confidence. Today, one factor which reflects this state of confidence is the bullish trend seen the stock markets. It is for this reason that, in India, SENSEX occupies such an important place in everyday news. Hence, the state of confidence assumes such an important role only in an economy where the government is supposed to maintain sound finance. As Kalecki points out:

‘The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the ‘state of confidence’.’

Similarly, on the politics involved in capitalists pressing for sound finance, Kalecki powerfully notes that:

‘Under a laisser-faire system the level of employment depends to a great extent on the so-called level of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives to the capitalists a powerful indirect control over Government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.’

Thus, regardless of whether we agree with Kalecki or not, he provides an interesting way to examine the issue of employment creation; especially for the Indian economy where FRBM Act is taken seriously and because of the growing significance of SENSEX. Such an analysis also calls for greater interdependence between macroeconomics, public economics, industrial economics and financial economics on one hand and between economics, political science, sociology and culture studies on the other. The latter sort of interdisciplinary inquiry will provide descriptions of actual processes by which such ‘politics’ take place. This analysis by Kalecki also revives the classical notion of ‘political economy’ which understands that economics cannot be divorced from politics. For practical purposes, it is of utmost importance that we pay more attention to the variable ‘ employment, in our economics curricula and debates, especially in a country like India.

References

Kalecki, Michal (1971), ‘Political Aspects of Full Employment’, in Selected Essays on the Dynamics of the Capitalist Economy 1933-1970, Cambridge: Cambridge University Press. (full text available at Monthly Review)

Further reading

Bhaduri, Amit (2006), ‘The Politics of Sound Finance’, Economic and Political Weekly, 4 November.

 

Economic Survey of India 2010-11: A Critical Look

The Union Budget is presented based on the Economic Survey conclusions and recommendations. Therefore, the Economic Survey becomes a crucial document to examine and interpret. This time as well, the hands of its architect remain quite visible. Like the previous attempt, there is an increased use of economic theory ‘ game theory, mechanism design, rational choice theories, etc ‘ which provide support to various policy recommendations. According to this economic architect, all solutions are to be found in incentives. If the right incentives are provided, then economic and political governance will be smooth like that of the most competitive market. Agreed! What commonsense and insights from various social processes tell us is that individuals have heterogeneous preferences and what is an incentive for one might be poison for another. This blog post will examine some of these suggestions in detail (from Chapters 1 and 2 of Economic Survey 2010-11). In particular, the suggestions examined below will be those which have been favoured or disregarded based on arguments drawn from (neoclassical) economic theory.

Fiscal policy

Economic Survey 2010-11 assures the reader that India has recovered from the global financial crisis because of the high growth rates. For all practical purposes, this information indicates that we can now call for fiscal consolidation or lowering of the fiscal deficit. The usefulness of the government is over; let market forces function peacefully now without any government intervention!

‘With clear evidence of economic recovery in 2009-10 as indicated by the Advance Estimates of the GDP, the Budget for 2010-11 resumed the path of fiscal consolidation with a partial exit from the stimulus measures.’

It is at the same time interesting and worrying to see this sort of rhetoric. Such rhetoric rests on the following premise: the opportunities for investment are limited (read: scarce) and the entry of the government will crowd out private investment. Surprisingly, this neoclassical idea, which is much promoted in our academic textbooks, fail to point out the fallacy of composition on which this argument is based. This argument does not recognise the interdependence in an economy. Wages generated from government jobs are not only used to purchase goods and services from the government sector. In fact, the wages and salaries generated by the government sector are spent in consuming goods and services produced by the private sector. It is certainly time policy makers understood the benefits of crowding in effects of government intervention. The expenditure, one should look for, is mainly in social services ‘ education, health and employment.

Agriculture

Agriculture has been identified to be critical for macroeconomic stability and growth; although services sector is our potential growth engine. This can be read as: agriculture needs to grow at a level which will enable (the favourite word of the economic architect) the service sector to grow. Agriculture is carried out by majority of our fellow Indians (around 60 %) and it provides us food and raw materials. Our economic architect argues:

‘The rise in prices of agricultural produce would in part help incentivize production; the moot question remains what proportion of the rise accrues to the producer and what proportion gets appropriated by middlemen. The creation of more direct farm-to-fork supply chains in food items across the country would be critical in incentivizing the farmer with higher producer prices and at the same time would lower the prices for end-consumers.’

Why are middlemen always blamed’ Are they not the ones who aid production’ Who exactly are these middlemen’ Be that as it may, what is clear is that the middlemen have often more power (economic and social) than the actual producers. Majority of the farmers are forced to sell their product immediately after harvest owing to debt obligations. In addition, the (small) farmers do not benefit from the price rise because they do not have adequate storage facilities. As a matter of fact, even the Government only stores certain food grains in its godowns. Vegetable and fruits are not procured by the government. The undue emphasis placed on incentives by our economic architect is of concern. For one, production can only be carried out if the farmers have sufficient capital to purchase inputs. In India, the phenomenon of inter-linked markets is common in agriculture. That is, the same person provides credit as well as inputs to the farmers, thereby enjoying a very strong bargaining position over the farmer. Now, when our economic architect recommends FDI in retail food because they incentivise production, he is being blind to the production conditions of Indian agriculture. This can exacerbate the plight of the Indian farmer by making him/her subject to the contracts of the foreign firms. In this scenario as well, the farmer, owing to his/her weak bargaining power will never be able to enjoy higher prices. But yes, this could mean a lowering of prices for our urban consumers!

Inflation & employment

The subject of inflation has been dealt with in great detail in Chapter 2 of the Economic Survey 2010-11. In recent times, inflation has affected both the rural and urban consumers. However, as we know, the effect of inflation on the consumers are not equal in magnitude. Consumers who have very less income will be deeply affected by inflation. For instance, the small and marginal farmers are severely impacted when prices rise. Given this plight, the following statement by our economic architect is indeed baffling:

‘It may be mentioned that food price inflation during the last financial year was mainly driven by high inflation in pulses, cereals, and sugar due to bad monsoon. The rise in the purchasing power owing to the rapid growth of the economy and inclusive programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) partly might have contributed to the upward trend in inflation.’

First of all, the above statement indicates an inadequate understanding of inflation. Secondly, what about the rising purchasing power of the urban consumers or the employees of BPOs. What makes our economic architect point fingers at those who barely manage a living’ If the beneficiaries of NREGA were surviving by barely subsisting before NREGA, their purchasing power would not have risen so much post-NREGA to contrbute, as our economic architect suggests, to inflation. In fact, such statements indicate a gross misunderstanding of inflation, a lack of knowledge of how rural India operates and a insensitivity towards subsistence and livelihood in general.

Conclusion

It is high time that we seriously examined some of the tenets of conventional (neoclassical) economic theory. Today, a lot of students and professors of economics world over are questioning the premises and logic of neoclassical economics. However, we find neoclassical economics still domination in various forms, such as new institutional economics, mechanism design, law and economics, microeconomics etc. Given that some of the foundations of economic theory are in question, it is surprising to see how much our economic architect bases the policy recommendations on such apparent scientific and objective truths!

Who prices the products’

Recently, Indians have witnessed an escalation in onion prices followed by a hike in fuel prices. Price rise is a phenomenon which affects all sections of the society in varying degrees. Earlier, through the work of Michal Kalecki, a Russian economist, this blog showed the difference between cost-determined and demand-determined prices. The current post examines how products are priced. Majority of the arguments in this post is taken from the book Smart Pricing, authored by Jagmohan Raju and Z. John Zhang published in 2010.

Textbook economics teaches us that it is demand and supply which determine prices. Are the prices of vegetables, rice, chicken, train travel, milk, bread, toothpaste, parathas, etc determined in a similar way’ When price changes are attributed to demand and supply, it means that prices are taking their ‘normal course’. In other words, price movements arising from demand and supply are considered as normal as the law of gravitation. Economic theory ascribes the term ‘invisible hand’ to denote demand and supply factors which cause prices to alter. However, as repeatedly pointed out in this blog, manufactured goods and producer/consumer services are not priced in the market via bargaining. As Raju and Zhang rightly point out, ‘Price setting is a tangible process with a tangible outcome ‘ a dollar figure. The process of arriving at that number might not be tidy, but it cannot be so mysterious that it does not involve any human intervention. Someone, somewhere must make a concrete, numerical decision about the price of a product or service’ (2010, p 2). Further, they argue that ‘the market does not set prices. Marketers do. All the prices we observe in the marketplace do not just spring out of an autonomous, impersonal market. The managers’ hands in setting those prices are entirely ‘visible,’ regardless of whether such interventions are acts of expediency or strategy’ (Ibid, p 11-12).

According to Raju and Zhang products are usually priced based on three approaches: (1) cost-plus based, (2) competition based and (3) consumer based. An overwhelming majority of U.S. Companies use this approach to set prices. Here, the mark-up is determined by the company’s targeted internal rate of return on investment or by some vaguely defined industry convention. Competition based pricing is the second most popular approach and is considered to be strategic. In this approach, the prices are fixed taking into account the prices of similar products in the market. In the case of consumer based pricing, the company tries to determine how much each consumer is willing to pay and then accordingly fixes a price. All the above mentioned approaches indicate that price fixing is a conscious and deliberate action carried out by the company or individual producer.

In microeconomics textbooks and in the media we find statements which ascribe price rise to demand-supply factors. The group of individuals ‘ the capitalists, the brokers, the intermediaries etc ‘ who cause the prices to rise with their actions are completely absent in this account. The book by Raju and Zhang therefore is a must read for all economists who wish to understand how products are actually priced in today’s consumerist society.

Reference

Raju, Jagmohan and Zhang, John (2010), Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability, Pearson Education: New Jersey.