Marshallian Economics: Some thoughts

This post deals with the discipline of Economics as to how Alfred Marshall saw it in 1890. Here are some of the excerpts which i found interesting.

“Economics cannot be compared with the exact physical sciences: for it deals with the ever changing and subtle forces of human nature.”

“It is essential to note that the economist does not claim to measure any affection of the mind in itself, or directly; but only indirectly through its effect.”

“The economist studies mental states rather through their manifestations than in themselves. He estimates the incentives to action by their effects just in the same way as people do in common life.”

“A shilling may measure a greater pleasure (or other satisfaction) at one time than at another even for the same person; because money may be more plentiful with him, or because his sensibility may vary. It would therefore not be safe to say that any two men with the same income derive equal benefit from its use; or that they would suffer equal pain from the same diminution of it.”

“A stronger incentive will be required to induce a person to pay a given price for anything if he is poor than if he is rich. The benefit that is measured in the poorer man’s mind by the cost is greater than that measured by it in the richer man’s mind.”

“Economics takes man just as he is in ordinary life: and in ordinary life people do not weigh beforehand the results of every action, whether the impulses to it come from their higher nature or their lower.”

“Economists study the actions of individuals, but study them in relation to social rather than individual life; and therefore concern themselves but little with personal peculiarities of temper and character. The measurement of motive thus obtained is not indeed perfectly accurate; for if it were, economics would rank with the most advanced of the physical sciences; and not, as it actually does, with the least advanced.”

“It is the business of economics, as of almost every other science, to collect facts, to arrange and interpret them, and to draw inferences from them. “Observation and description, definition and classification are the preparatory activities. But what we desire to reach thereby is a knowledge of the interdependence of economic phenomena…. Induction and deduction are both needed for scientific thought as the right and left foot are both needed for walking.”

Reference

1)Principles of Economics, Alfred Marshall

Market and the Government

The conflicting ideologies in Economics have more or less revolved around mainly two institutions- Markets and Governments. The Capitalists believe ‘Markets’ to be the panacea for all economic problems, while the Socialists replace the ‘market’ with the ‘government’.

On Markets

Market is the institutional framework within which the act of exchange takes place or the institutional milieu which is the context of the relationship of exchange between the parties. [Kurien 1993] Thus market is an institution which allows for exchange. This exchange is only possible if one of the parties have adequate purchasing power.

Markets exclude people as consumers or buyers of goods and services if they do not have any incomes, or sifficient incomes, which can be transalated into purchasing power. People experience such exclusion if they do not have assets, physical of financial, which can be used (or sold) to yield an income in the form of rent interest or profits. [Nayyar 2002]

So, relying on markets alone will exclude a large chunk of the populace of a nation. Those with relatively higher purchasing power will benefit over those will less purchasing power. And for the former, the world will become a flatter place, as Thomas L Friedman says.

On Government

A government is a body that has the authority to make and the power to enforce rules and laws within a civil, corporate, religious, academic, or other organization or group. In its broadest sense, “to govern” means to administer or supervise, whether over a state, a set group of people, or a collection of assets. [Wikipedia]

In our formal analysis of exchange and producation, the role of social norms ( Smith proposed that market exchange is sustained by the underlying social ‘norms’ resulting frm sympathy, for example, trust in exchange, respect for contracts etc.) are left out and we tend to exaggerate on one hand, the efficiency of an abstract market mechanism based on an invented ‘auctioneer’. On the other, we tend to neglect the roles which the state could play in either reinforcing or destroying these norms which are essential for the functioning of the market economy. [Bhaduri 2002]

On Globalization

Globalization is predominantly a ‘market’ centric process.

Globalization, both then and now, has been associated with an exclusion of countries and of people from its world of economic opportunities. [Nayyar 2002]

Economic globalization challenges the political authority, which the nation state had attained by undermining gradually many of the norms of the traditional civil society.[ Bhaduri 2002]

Globalization has resulted in high growth only in a selected few sectors. [Thomas 2007]

Conclusion

Relying solely on the Government to undertake the functions of the market will lead to social unrest and will result in economic inefficiency. And government regulations are a check on the markets so that a market failure does not occur.

Can markets and governments exist peacefully’ Can market and governnment produced goods and services reach an equilibrium’ Will this result in a state, where those excluded from the market will be included by the government machinery’ Is this sustainable in the long run’

References

1)Deepak Nayyar (edited), Towards Global Governance, Governing Globalization, 2002.
2)Amit Bhaduri, Nationalism and Economic Policy in the Era of Globalization, Governing Globalization, 2002.
3)C. T. Kurien, On Markets in economic Theory and Policy, 1993.

On Indian Agriculture

There is a consensus about the crisis which the Agricultural sector is facing in India. The contribution to GDP has been falling and it is under 20% of the GDP now. The sector provides employment to about 60% of the population. Most of the farmers under this sector fall under the ‘informal sector’ where there is a dearth of reliable statistics. This can be one of the causes for the low share of agriculture in the GDP. From the figures of employment and ‘contribution to GDP’, we can conclude that there is the presence of a high degree of disguised unemployment.

Agriculture in the Budget

The proposals to revive the agricultural sector are:

  • Farm credit raised to Rs 1,75,000 crore, providing relief to additional 50 lakh farmers.
  • At 7 percent interest rate farmers receive short-term credit from NABARD, with Rs 3,00,000 upper limit on principal amount.
  • The outlay for Accelerated Irrigation Benefit Programme (AIBP) has been raised by 58.22 per cent to Rs 7,120 crore for 2006-07 from Rs 4,500 crore during 2005-06.
  • Banking sector to credit-link an additional 3,85,000 Self-Help Groups (SHGs) in 2006-07.
  • NABARD to open a separate line of credit for financing farm production and investment activities.
  • The corpus of Rural Infrastructure Development Fund (RIDF) in 12 tranches to be increased to Rs 10,000 crore.
  • The programme for repair, renovation and restoration of water bodies to be implemented through pilot projects in 23 districts in 13 states. The estimated cost of the programme stands at Rs 4,481 crore.

[Via Surfindia]

The current budget has addressed the farm credit, pulses, plantation sector, irrigation, rainfed area development, restoring water bodies, ground water recharge, training of farmers, fertilizer subsidies, agricultural insurance, social security etc. [Budget 2007-08]

Are these enough to significantly affect the agricultural sector’ Moreover since India claims to growing at over 8% in GDP, are these allocations sufficient’

An important constituent of the strategy to revive agricultural performance in the country must be to increase the level of public investment in agriculture research and development and rural infrastructure. Increase in public investment in agriculture in turn requires significant rationalisation and restructuring of government subsidies on food and agricultural inputs, including power, canal irrigation and fertilisers. Greater public investment in agriculture research and extension and rural infrastructure would stimulate private investment in agriculture and agro-processing. A policy of higher investments without commensurate reforms in the institutions endowed with the charge of managing the resources created is, however, unlikely to succeed. Participatory management and selective privatisation can contribute greatly to improving the delivery of major inputs to agriculture. [Sharma and Gulati 2005]

Reasons for the crisis

Only 2 reasons are being highlighted as all the other reasons are associated to there too or spring form these two. So broadly speaking, the crisis is due to

<!–[if !supportLists]–>1) <!–[endif]–>Pressure on land: Population has outstripped land supply. Faster growth of population goes with slower rise in per capita output. [Vaidyanathan 1988] The rate of growth of population is more in the rural areas than in the urban areas. Population growth can be said to be indirectly proportional to education. Where there are more family planning programmes and adequate education, which lays emphasis on both the male and female child, the tendency to have more children is less. Moreover, with the rapid expansion of SEZ‘s, the pressure on agricultural land is further aggravated.

<!–[if !supportLists]–>2) <!–[endif]–>Structural deficiencies: Indian agriculture is characterized by inefficient distribution, marketing and financial institutions. As more of the agriculture falls under the ambit of the informal sector, there is a dearth of efficient institutions. The loans are hard to come by as they lack the necessary assets to keep as collateral. Moreover, with the current rates of inflation, the prices of inputs will rise, further adding to the farmers’ distress. The distribution systems fail as the agricultural produce most often does not reach the targeted population.

US and Indian Agriculture

Rich nations preach free trade but practice protectionism against poor nations, especially in agriculture. For example, the United States severely limits sugar imports from Latin America to benefit American sugar beet growers, even inhibiting imports of Brazilian cane-based ethanol, which is far cheaper and more energy efficient than domestic ethanol. [Noll 2006]

The subsidies that the developed nations offer their farmers’ vis-‘-vis to what the developing countries can offer is very large. The developing nations find it difficult to withstand this competition in the world markets. If the subsidies are not reduced by the US and the EU, it will be the developing nations who will have to bear the brunt. [Thomas 2006]

Globalization and Indian Agriculture

Once again, there are some individual cases where globalization has led to deprivation and suicide. About 800 km away from Mumbai is the cotton-growing region of Vidarbha, perched on the Deccan Plateau. Hundreds of cotton farmers here have killed themselves in recent years. The reasons are complex and varied. Among the reasons is this one: farmers here cannot compete with cheap cotton imported from the United States, whose farmers are lavished with huge subsidies by a government that preaches the virtues of competitive markets to the rest of the world. Their deaths can be linked to imperfect globalization. More generally, though, reform and globalization have led to faster growth and sharp drops in poverty levels. [Knowledge Wharton 2007]

The article talks about individual cases which resulted from imperfect competition. I wonder if anything in this world can work in a perfect way! And in Vidarbha, it is not individuals who are dying but ‘groups of individuals‘. Yes, globalization has led to faster growth but ‘sharp drops’ in poverty levels is hard to agree, though the statistics does say so.

Conclusion

On the whole, the condition of Indian Agriculture is bleak. If the current allocations of the budget will help the agricultural sector will be seen in the next few years. The sector is pressurised by the domestic as well as the international economy. Agriculture finds it hard to compete in international markets with other products which are highly subsidised. More of funds need to be devoted to research in agriculture which should aim at improving agricultural production and productivity. The size of agricultural markets needs to be increased. This can be facilitated by the extension and improvement of transport. [Vaidyanathan 1988]

Agriculture is a sector which cannot be neglected as majority of the Indians depend on it for their livelihood. Targeted policies which bring about favourable outcomes are necessary. Of late, the rhetoric is about the booming GDP and bulling bourses; that significant issues like ‘agriculture’ are not getting adequate attention.

References

<!–[if !supportLists]–>1) <!–[endif]–>Pooja Sharma and Ashok Gulati, Can the Budget Boost Agricultural Performance’, EPW, May 21, 2005.

<!–[if !supportLists]–>2) <!–[endif]–>Alex M Thomas, Why fear subsidies’, Undergraduate Economist, August 16, 2006.

<!–[if !supportLists]–>3) <!–[endif]–>Roger G. Noll, The Foreign aid Paradox, SIEPR Policy Brief, October 2006.

<!–[if !supportLists]–>4) <!–[endif]–>A Vaidyanathan, India’s Agricultural Development in a Regional Perspective, 1988.

Further Readings

<!–[if !supportLists]–>1) <!–[endif]–>On Private Participation in Agriculture- M Rajivlochan (Via the commenter, Chetana)

On Veblen Effect

Students of Economics have come across the ‘Veblen Effect’ while learning about the exceptions to the law of demand. The law of demand that ‘other things remaining the same, the demand for goods increased when price fell and vice versa.’ Veblen said that when prices of certain goods rose, their demand also increased. The explanation behind this was that such goods had ‘snob value’ owing to which certain people would pay more as the price rose.

Thorstein Veblen referred to ‘the noble and the priestly classes, together with much of their retinue’ when he meant the leisure class, whose activities are exceptions to the law of demand.

The concepts of Consumer Surplus and Price Discrimination will aid in explaining the ‘Veblen Effect’.

On Consumer Surplus

Consumer Surplus refers to the difference between what the consumer is willing to pay and what is actually paid. For example, if a consumer goes to a shop thinking that he can spend till Rs. 20 on a Chocolate and then purchases one costing Rs. 15, then his consumer surplus can be said to be Rs. 5.

[Source: Bob Beachill]

On Price Discrimination

Selling different units of output at different prices is called price discrimination. [Varian 2003]The sellers discriminate the buyers on the basis of their consumer surpluses. Those with a larger consumer surplus will have to pay more for the same good (With conspicuous alternations made in the product) than consumers with a lower consumer surplus. The ‘conspicuous alterations’ are made so that the higher end consumers do not choose the ones meant for the lower consumer surplus individuals. Does this mean that the consumers really have an option to choose’

An example which is used commonly is that of an airlines which attaches different prices to the ‘business class’ and the ‘economy class’. There is a significant variation in prices between these classes.

Some Observations

These days, it is a common to see those with a large ‘consumer surplus’ opting for the good that is higher priced. Now a days, prices tend to indicate the quality differences too. Same products get priced differently with certain alterations made to the appearance and way of processing which is ‘conspicuous’ to the consumer. In the case of food products, this is seen commonly.

Now, what happens to this consumer surplus in the case of such ‘product differentiation’ and ‘price discrimination” They get absorbed by the producers. Thus, the firms are able to exercise significant control over the choices of the consumers.

On Veblen effect

When commodities and services are priced more, consumers having a high consumer surplus will purchase such goods. This effect can take place either due to the ‘snob appeal’ of the good or because of the’ firms’ price discriminating strategies’. Both these factors act together to create an exception to the law of demand.

[More of Veblen might come in the forthcoming posts]

References

1) Hal R. Varian, Intermediate Microeconomics, Sixth Edition, 2003.

Update

Thanks to one of the commenter, Ashish Tyagi, i was able to get more information and in the paper titled ‘Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand‘ by H. Liebenstein in 1970 1948, he differentiates between snob, bandwagon and veblen effect.

To be more specific, he proposed analysis is designed to take account of the desire of
people to wear, buy, do, consume, and behave like their fellows; the esire to join the crowd, be “one of the boys,” etc. ‘ phenomena of mob motivations and mass psychology either in their grosser or more delicate aspects. This is the type of behaviour involved in what we shall call the “bandwagon effect.”

On the other hand, we shall also attempt to take account of the search for exclusiveness by individuals through the purchase of distinctive clothing, foods, automobiles, houses, or anything else that individuals may believe will in some way set them off from the mass of mankind ‘ or add to their prestige, dignity, and social status.

[More on this paper in the forthcoming posts]

‘Clarification

As a reader points out, price discrimination and product differentiation cannot be used interchangeably, like i did.

The former is typically associated with Bertrand competition situations (say, price competition over goods of different varieties) whereas the latter is associated with quantity competition in oligopoly (typically monopoly) over a homogeneous good.