Undergraduate Economist – Page 30 – Perspectives of an economics student

The Fellowship of Economics

The essence of Economics or Political Economy as it was called earlier (According to Adam Smith) was to provide a good livelihood for the people and also to bring in money for the state. Nowadays, economics has got lot many divisions and specialities, that I feel the essence is getting compromised.

These are some of the subjects which are closely related with economics.

Anthropology is the science that deals with the origins, physical and cultural development, biological characteristics, and social customs and beliefs of humankind.

Economic anthropology analyses decisions and behaviour of economic agents who are embedded in the networks of social relationships and cultural influences. Economic Anthropology is directly concerned with the most central anthropological issues of human nature, choice, values, and morality. [Thomas 2006]

Geography is defined as the science dealing with the areal differentiation of the earth’s surface, as shown in the character, arrangement, and interrelations over the world of such elements as climate, elevation, soil, vegetation, population, land use, industries, or states, and of the unit areas formed by the complex of these individual elements. [Dictionary.com]

Geography forms an integral part of Environmental Economics, which studies the externalities, both positive and negative, arising out of human activities.

Moreover, natural endowments have a significant correlation to the natural progress of an economy. Studies have shown that nations with abundant natural resources have grown faster.

Geographical factors can lead to poverty also. Jeffrey Sachs, in his book ‘The End of Poverty’ has given an account of this.

Demography, the study of Population draws extensively from the science of geography.

History is the branch of knowledge dealing with past occurrences. Tirthankar Roy, an Economic historian says that Economists engage with history from a desire to make the theory of economic growth more complete and intelligible. Without comprehending the history of Britain during the 1700’s one could never understand what Adam Smith tried to say. Students find Classical theories to be otiose, due to their lack of understanding of history.

Political science or politics seem to have attracted a lot of ire, but with out a proper political institution, there will be no freedom. It is a branch of social science dealing with political institutions and with the principles and conduct of government. It is therefore essential that economic policies can be framed keeping the objectives of the political institution prevailing. ‘The disjuncture between economics and politics in India’s democratic system has also been growing’ says Bimal Jalan in his book ‘The Future of India’.

Psychology is the science that deals with mental processes and behaviour. Theories like consumer preferences, irrational exuberance and specializations like behavioural economics and game theory draws heavily from psychology. Behavioural Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. [Mullainathan and Thaler]

Sociology is the study of human social behaviour, especially the study of the origins, organization, institutions, and development of human society. Economic sociology has emerged as a separate branch in Economics; Robert Gibbons of MIT defines it as the sociology of economic actors and institutions.

Philosophy is the rational investigation of the truths and principles of being, knowledge, or conduct. J D Sethi, who specializes in Gandhian Economics, said that ‘Science of Economics is in crisis. Indeed, the main reason for the crisis is that modern economics has no philosophy whatsoever’. To understand an Economist’s theories, we ought to know the prevailing philosophy at that time. Moreover, debates were carried out to decide whether Economics was a normative science (based on values) or a positive science (based on empiric).

Thus, it becomes pertinent that the teaching of economics also touches subjects like history, psychology etc so that the student gets a more realistic picture of the event. These days, economics has become a strict discipline with various specializations and one who ventures into one specialization is unaware of the effects of variables which is outside his or her area of interest. I do not know if ‘division of labour’ is applicable in such cases as it tends to distort the real picture. Thus the need arises for a more comprehensive learning of the social sciences.

India and it’s ‘Segregated Growth’

This article tries to show that high rates of GDP in India need not trickle down to the rest of the masses and also strives to explain why ‘segregated growth’ further fuels inequality. By ‘segregated growth’, I refer to growth which takes place in sectors which employ relatively a small percentage of the total labour force.

The IT revolution is happening but the GDP contribution of agriculture is decreasing.’ One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

Sustained economic growth requires progress in several dimensions ‘ education, health, infrastructure, legal institutions, etc. [Noll 2006] For the whole of the population to enjoy sustainable growth, it is essential that growth takes place in all sectors of the economy. Otherwise, it will lead to growth, but only in a few sectors, like the IT boom which India faced. This growth is not sustainable in the long run. Another consequence of such ‘segregated growth’ is that, the GDP figures will show an increase. And as the GDP is the most commonly used (By the media) measure among the masses to portray economic growth, the picture presented will appear rosy.

Moreover, the per capita income will also show a rise due to the increase productivity coming from ‘such sectors’. This increased GDP will not trickle down as many economists and others state. This increased income accruing to the denizens of ‘such sectors’ will only be spent in conspicuous consumption. Thorstein Veblen coined the words ‘conspicuous consumption’ in his book ‘The Theory of the Leisure Class’. The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name are leisure and a conspicuous consumption of goods. [Veblen 1899]

On Poverty

And though the country (India) has made significant strides ‘ poverty levels are roughly 35%, down from close to 60% in the 1970s, (by the World bank’s $ 1 a day definition of poverty, though precise numbers are the subject of never-ending debate) – the benefits of this rapid growth are yet to trickle down to the masses. [Bhusnurmath 2006]

Development agencies define poverty as an income of less than $2 per person per day (about $3,000 annually for a family of four). By this standard, nearly 3 billion people are poor. [Noll 2006]

I wonder why India still defines poverty as an income of less than a dollar per day for a person. I had argued for a restructuring of the current poverty line in another article of mine. Probably the present estimate makes it easier to state that poverty levels have come down from 60% to around 35%!

On Development

Amit Bhaduri, in his recent paper in the Economic and Political Weekly, wonders if it is Developmental Terrorism or Development which is taking place.

Destruction of livelihoods and displacement of the poor in the name of industrialisation, big dams for power generation and irrigation, corporatisation of agriculture despite farmers’ suicides, and modernisation and beautification of our cities by demolishing slums are showing everyday how development can turn perverse. [Bhaduri 2007]

Conclusion

Thus, the Indian populace is dichotomized in terms of economic growth; there are certain areas where growth levels are very high along with a majority of sectors which are witnessing a decline. Thus, this kind of ‘segregated growth’ fails to ‘trickle down’ to other sectors of the economy.

References

1) Roger Noll, The Foreign Aid Paradox, SIEPR Policy Brief, October 2006.

2) Thorstein Veblen, The Theory of the Leisure Class, 1899. (Full book available here)

3) Mythili Bhusnurmath, Time for a reality check, www.forumblog.org, November 25, 2006.

4) Amit Bhaduri, Development or Developmental Terrorism’, EPW, February 17, 2007.

Is Consumer really the King’

In free market economics, consumers dictate what goods are produced and are generally considered the center of economic activity. [Wikipedia]

Is the price of commodities and services determined by the consumers’ Does the consumer have significant control over the prices of good they purchase through their ‘purchasing power” Or is it just a farce’

Who is a consumer’

Consumer is an individual who has the necessary purchasing power to consume good and services.

On Consumerism

The prices in an economy are said to be dictated by the consumers. The law of demand states that ‘other things remaining the same, as more and more good are demanded, the prices rise and vice versa.’ In accordance to this law, when the consumers demand a great amount of a particular good or service, their prices tend to rise. The reasoning behind it being, when there is more demand, the producers raise the prices in order to acquire a larger profit arising out of the increased demand.

Consumer and ‘Choice’

The consumer is always at an advantage when there is competition because competition means choice. Their votes determine the fate of the manufacturer or service vendor. [Pai 2001]

The theory of consumer choice in Economics states that consumers take into account the following factors before making a purchase. They are

1) How much satisfaction they get from buying and then consuming an extra unit of a good or service

2) The price that they have to pay to make this purchase

3) The satisfaction derived from consuming alternative products

‘ ‘ ‘ 4) The prices of alternatives goods and services

[Source: Tutor2u]

Rarely do consumers make this kind of analysis. Moreover these days, all sorts of attractive offers are given along with commodities and even services, which attract the consumer towards a particular commodity or service. In the R and D labs of the companies, huge chunks of monies are invested to create a brand image and to promote the product. The scary thing being, the advertisements go to which ever extent possible to attract the consumer.

Rather than the consumer going through the price of alternatives, the company in question provides a comparison table along with the advertisement; making it easier for the consumer. (Hopefully!)

If the consumer had the resources to make the above mentioned comparisons and then make a transaction based on that, probably the consumers would have been the King. Moreover, most of the information is kept as secret by the company. With regard to the existing informational asymmetries in the markets, the Right to Information Act passed by the Government of India is a welcome step.

Asymmetric Information and Consumers

Asymmetric information in markets is aggravated by the advertisements, as they portray the best in their respective products, by employing the best possible personnel. This not only distorts the true image of the product, but also places the consumer in a difficult position. [Thomas 2006]

Conclusions

Thus, in an economy characterized with sharp informational asymmetries, the presence of trans and multi national companies, a booming advertisement market coupled with more than 50 per cent of the Indian populace earning less then $2 a day, the consumers will really find it extremely hard in making informed choices.

References

1) Alex M Thomas, The Economics of Information, Undergraduate Economist, 2006.

2) M.R. Pai, Consumer Activism in India, 2001.

UPDATE

This article which was pointed out to me is an article too important to miss.

Montague’s hunch was that the brain was recalling images and ideas from commercials, and the brand was overriding the actual quality of the product.

While neuroscientist Montague’s ‘Pepsi Challenge’ suggests that branding appears to make a difference in consumer preference, BrightHouse’s research promises to show exactly how much emotional impact that branding can have.

Thanks to Riot, who pointed out this interesting yet shocking read.

On Economic Growth

‘Economic Growth’ is a term which one often sees in the media. It is also looked at closely by the economists, the government and the people. Economic growth tends to show the rate of growth of an Economy

The chart graphs the growth rate of the Indian Economy.

What is this ‘Economic Growth”

Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. [Wikipedia]

Economic growth has become the Holy Grail of the 20^th century. [Lewis 1974] The ‘saga’ continues. Governments like projecting a target rate of growth (The higher the better) for the economy and the economists like to fiddle around with the projected targets.

Why ‘growth’ happens’

One factor which caused growth is said to be the increments in capital. This ‘link’ was given to us by Roy Harrod in the 1940’s. This causality led to the policy of increased expenditure on capital mainly by the government, so as to ‘grow in GDP’.

In the 1950s, Robert Solow (1956) of MIT generalised the relationship between capital, labour, technology and output in the neat little ‘neoclassical production function’, which still lies at the heart of contemporary growth accounting exercises. Other theorists (as well as planners and policy-makers) also emphasised the importance of education (human capital) and technological development in spurring sustained growth. [Acharya 2006]

Economic growth was caused by capital accumulation, or a rise in the ratio of investment to income and/or increasing efficiency and productivity. [Roy 2006]

Thus, basically with growth in labour, capital (Physical and Human) and technology, there will be growth in the economy too.

According to Paul Romer, three broad factors contribute to growth in output per capita:

1) Increases in physical capital ‘ the buildings, machinery, and infrastructure that we use in daily life.

2) Increases in human capital ‘ the skills and experience of the workforce.

3) Increases in productivity ‘ a catchall category that includes the many large and small discoveries that lead to the introduction of new goods and services or to more efficient production of existing goods and services.

The significance of economic growth

History shows us that a small permanent increase in the trend rate of growth can profoundly alter our quality of life. [Romer 2001]

Keeping this in mind, economic growth acts as an important indicator. So Governments try to achieve high rates of growth so as to provide their respective nations with a high quality of life. But, quality of life is better measured using the HDI rather than GDP.

There is, indeed, a positive relationship between rapid economic growth and a victory over poverty. But this does not happened automatically. A good economics that concentrates on the even distribution of economic opportunities and benefits is essential. And further, good economics has to be also combined with sensible and responsible politics. [Alexander 2005]

Early works on Economic Growth

Robert M. Solow, the Nobel Prize winner in 1987 says in his Prize lecture ‘Growth theory did not begin with my articles of 1956 and 1957, and it certainly did not end there. Maybe it began with The Wealth of Nations; and probably even Adam Smith had predecessors.’

Some of the economists who worked on growth models prior to Solow were Roy Harrod, Evsey Domar and W. Arthur Lewis.

Conclusion

It is the GDP rate which appears to be more of a concern than the HDI, which does not enjoy the limelight as GDP does. Both these criteria are important and thus the need for understanding both of them.

References

1) Shankar Acharya, Economic Growth: Some Reflections, November 4 2006, EPW.

2) Tirthankar Roy, The Economic History of India 1857-1947, Second Edition, Oxford Textbooks.

3) Paul M. Romer, Growth Policy, 2001 SIEPR Policy Brief.

4) John M. Alexander, Economic growth and the Millennium Goals, 2005, The Hindu.

5) [Indian Growth trend picture]