Category: Adam Smith

The Indian Constitution and Human Dignity: for Economists

The field of law and economics is a glamorous one with economists such as Ronald Coase, Gary Becker and Richard Posner. It was Coase who provided the inspiration to law and economics through his introduction of ‘transaction cost economics.’ And Becker was the one who extended the domain of economics to virtually any social phenomena. Issues such as law, crime, marriage, family, etc came to be studied by economists. Although, the tools used never varied. It was the same old microeconomic baggage of neoclassical economics. Suddenly, neoclassical economics started feeling successful all over again. Their theory of value and pricing started explaining various social and cultural processes in the economy. However, this post is not a commentary on law and economics that is practised. For an excellent commentary on its origins and methodology, see the article by William Davies ‘Economics and the ‘nonsense’ of law: the case of the Chicago antitrust revolution’ in Economy and Society published in 2010.

The content of this post certainly falls under the label of law and economics. However, this post discusses certain aspects of the Constitution of India in the the light of economic policies undertaken-that of liberalization. The quotations in this post are from Dr. Durga Das Basu’s Introduction to the Constitution of India, reprinted in December 2009.

Economic Justice

The banishment of poverty, not by expropriation of those who have, but by the multiplication of the national wealth and resources and an equitable distribution thereof amongst all who contribute towards its production, is the aim of the State envisaged by the Directive Principles. Economic democracy will be installed in our sub-continent to the extent that this goal is reached. In short, economic justice aims at establishing economic democracy and a ‘Welfare State’.

The idea of economic justice is to make equality of status meaningful and life worth living at its best removing inequality of opportunity and of status-social, economic and political.

That is, an increase in growth rate is seen as the way to banish poverty. This principle is certainly based on the idea that growth trickles down. As has been witnessed in India, all that liberalization has achieved is ‘jobless growth’. Hence, the need for policy documents to shout for ‘inclusive growth’.

Now, all those who contribute to wealth by being producers are supposed to be compensated. It is on this class, that the burden of development falls. For, they do not have the adequate social and economic voice to demand for ‘just distribution’.

Can India claim social justice just by making opportunities equal’ Equal opportunities perform their function only in an already just and equitable society, and not in countries where inequality of income and wealth is so skewed. Thus, an active intervention is necessary at the level of production as well as distribution of GDP.

Nehru’s idea of Socialism is that ‘every individual in the State should have equal opportunity for progress.’ However, this idea cannot hold any water until the institutions in the State are examined- judiciary, executive, military, private enterprise, unorganised sector, etc. For instance, some groups of people are exploited as producers, where they are paid less than minimum wages. Therefore, as a consumer, they get exploited as well. This then passes on to their access to health, schooling, sanitation, housing, and so on.

Individual Liberty

The Preamble, therefore, says that the State, in India, will assure the dignity of the Individual. ‘All citizens men and women equally, have the right to an dequate means of livelihood, just and humane conditions of work, and a decent standard of life and full enjoyment of leisure and social and cultural opportunities.’

When economists and policy makers talk of ‘inclusive growth’, it is the dignity of the individual which is at stake. Often, India’s characteristics such as high reliance on agriculture, a large percentage of unorganised sector, immobility of labour and the like are labelled as detrimental to India’s growth and development. One cannot help but ask: Whose growth’ Such perceptions by the academia are largely a result of the manner in which human beings figure in micro and macro economics. If you take a moment to think about it, you will realise that poor people-who are a heterogeneous group- is absent from our theoretical edifice. Why’ Who are we analysing’ And to discuss poverty, we have created a sub-discipline called ‘development economics’.

In any case, human dignity appears to be of lesser importance than the computation of growth rates using yearly and quarterly data. We are satisfied to decipher whether stock market exhibits volatility or not’ Or whether market A is co-integrated with market Z. Does this satisfaction come from the fact that stock market data is easily available’ What about the farmers, the child labourers, the migrant labourers who are forced to leave their place and family, of street vendors, and all the others who actually engage in production’

Until dignity of human life features implicitly or explicitly in economics, it will continue to be a lifeless endeavour. Sadly enough, we are taught economics is the study of choice’ Whose choices’ Those who have the ability to choose’ It is time we discarded such economics and re-visited economists such as Adam Smith, Joan Robinson, Amit Bhaduri, and others whose works show a concern for humans.

Division of Labour: some comments

Division of labour is generally associated with Adam Smith (1776). The concept of division of labour attains significance because it helps in formulating an endogenous growth model, along with the extent of the market. The idea is that specialization has a positive effect on the extent of the market, which in turn leads to more division of labour.

Apart, from this, in everyday life, we come across division of labour in various shapes and sizes. A very strong example of this is that of outsourcing. Earlier, physicians attended to a patient and they were quite knowledgeable in many aspects of medicine. Now, we have ENT specialists, paediatricians, cardiologists, nephrologists, neurologists, orthopaedicians, etc. This is visible in the IT industry as well. And specialization has not left academic untouched either. Within economics, one finds econometricians, economic historians, experimental economists, macroeconomists and so on.

In the Wealth of Nations, Smith [1776] talks of pin-making to illustrate division of labour:

“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.” [p. 15]

Today, while going through Sir William Petty’s ‘Another Essay in Political Arithmetick Concerning the Growth of the City of London‘ which was published in 1682, I found division of labour mentioned. Petty illustrates it using the example of watch-making:

‘In the making of a Watch, If one Man shall make the Wheels, another the Spring, another shall Engrave the Dial-plate, and another shall make the Cases, then the Watch will be better and cheaper, than if the whole Work be put upon any one Man.’ [p. 473]

Then, while going through the Campbell and Skinner edited Volume of Wealth of Nations, I noticed that in the first foot note, they refer to Petty as probably being the first modern author to talk about division of labour.

Interesting to know that William Petty, hailed by Marx has the first political economist, had developed notions of division of labour!

On Prices/Values

Economics, rather Political Economy attempted at providing a coherent theory of value. Economists such as Adam Smith, David Ricardo, Karl Marx, etc are associated with a ‘theory of value’. Currently, in economics, ‘value’ is not discussed in courses of relevance. However, students are exposed to value theories such as labour commanded, labour embodied and so on.

This post is the second in the series of posts ‘On Prices’. This posts attempts at clarifying concepts such as values, prices and costs of production. Note that all prices which are mentioned in economics textbooks (microeconomics, introductory economics, principles of economics, etc) pertain to relative prices or long-run prices. That is, they do not talk about market prices. The reason for this is because it is assumed/believed that market prices tend to fluctuate or hover around these relative prices. In other words, given a particular technology, these relative prices, in some sense, reflect the interrelationships in the economy. Hence, these natural/normal proces are studied in order to understand the workings of a capitalist economy.

Let me start with what is usually taught in various economics and management institutes across the world and even in higher secondary schools. Prices are determined by the interaction of supply and demand. This implies that an excess dmand leads to a price hike. Let us look at an example: Suppose I go to a toy shop and ask for a Meccano set and immediately, another customer asks for the same set. But, the shop has only one Meccano set. Will the price of the Meccano set increase’ Is such an explanation intuitive or common sensical’ This example talks of an isolated case.

Economics is interested in the formation of a spectrum of prices at the level of the economy. Interestingly, macroeconomics has nothing to offer on price formation. Often, or rather everywhere in the world, economics is taught as microeconomics and macroeconomics. The interdependence and interrelationship present in any economy is inadequately addressed. The closest one comes is probably through the ‘circular flow’ diagram which highlights the role of the firm as well as the households. In this diagram, the complex and strutural interdependence is oversimplified to that of a 2-way interaction between the firm and household via labour market, capital market, etc and the state is shown to play the role of a facilitator. The interrelated production structures goes unnoticed or is seldom mentioned. Why is this important’

How can prices be determined’ (The dominant factor will be mentioned.)

1) Demand & Supply – The prices which are determined in this way are the prices of vegetables and fish, prices of shares in the stock markets, price of real estate, etc. In some sense, these prices can be said to be supply determined. For, these commodities are more often subject to variations in supply than in demand.

2)Costs of Production – An alternative view which is present in the literature is that the prices of commodities are prices according to the prices paid to the means of production as well as adding a certain percentage as profit. According to Kalecki, the percentage depends on the monopoly power of the firm. What if the firm’s final product is an input for another firm’ Will this affect the price of the product’ This aspect is often forgotten in economics.

This forgetfulness is strongly associated to the lack of importance mainstream and even some heterodox economic theories gives to interrelationships in the production structures in an economy. To have a glimpse into this, one needs only to look at an Input-Output table.

If we assume (correctly) that production structures in a capitalist economy are interrelated then we can conceptually distinguish goods/services into – Basics and Non-Basics. [Sraffa 1960] Basic goods are those goods which directly or indirectly enter into the production of every commodity in the economy including its own. An obvious example would be foodgrains because they are needed for labourers and labour is required in all activities. And a tax on a basic good will have cascading effects on the prices of all the goods in the economy.

I shall quote Sraffa to point out the significance of accepting and studying interdependence.

The exchange-ratio (or relative prices) of non-basics is “merely a reflection of what must be paid for means of production, labour and profits in order to produce them – there is no mutual dependence.” [p 8, Sraffa 1960]

“But for a basic product there is another aspect to be considered. Its exchange-ratio depends as much on the use that is made of it ….” [pp 8-9, Sraffa 1960]

It is because of these issues that Sraffa uses values/prices than costs. Also, Sraffa knew that in an economy, “costs of production cannot be measured independently of, and prior to, the determination of the prices of products.” [p 9, Sraffa 1960] To conclude, dan we therefore think that Sraffa’s analysis is similar to the neoclassical analysis of price using demand and supply’

In brackets, Sraffa writes “one might be tempted, but it would be misleading, to say that ‘it depends as much on the Deamnd side as on the Supply side.'” [p 9, Sraffa 1960]

References

1) Kalecki, Michal (1971), Costs and Prices, in Selected Essays on the Dynamics of the Capitalist Economy 1933-1970, Cambridge University Press, pp. 43-61.
2) Sraffa, Piero (1960), Production of Commodities by Means of Commodities, Cambridge University Press.

Foucault and Economics

This post is more of a suggestion than an explanation. There has been hardly any scholarly work done with respect to applying Michel Foucault’s ideas and approaches to political economy or economics. On searching the internet, all I could find was a conference conducted in 2005 titled ‘Rethinking Foucault, Rethinking Political Economy’ at University of Leicester, UK and a PhD thesis submitted by Iara Vigo de Lima at the University of Stirling in 2006. This post is a result of my reading of certain sections of Dr. Lima’s thesis and the sadness associated with the knowledge that economists have not studied/read/understood Foucault.

I find it difficult to believe that nobody has tried to think/rethink the methodology and historiography of Economics by applying Foucauldian themes. To do justice to this area of research, it is necessary that I quote certain sentences from Dr. Lima’s thesis, as my knowledge of Foucault is limited.

‘Foucault followed Nietzsche’s genealogical approach aiming not ‘simply to gain access to the unfamiliar past’, but mainly ‘to articulate and illuminate the familiar present’, and ‘the past, then, becomes a means to access the present’.’ [p. 16]

‘For Foucault, concepts, notions, theoretical frameworks, methods, etc., are bounded by time and culture.’ [p. 21]

‘Michel Foucault’s particular insight, especially his way of thinking about history – which he preferred to call ‘history of systems of thought’ – does offer elements that let us think about this question, and specifically in economics (given that he applied it to the history of economic thought). According to him, every age has its way of producing ‘the truth’, which can be uncovered as we think about history.’ [p. 24]

‘… one of his objectives in OT: to find out how political economy established itself as a discipline (discourse) at the end of the 18th century.’ [p. 29]

Very often economics is taught (in India) as if the present day economics is what has evolved out of the previous economic theories. Therefore, the multiple paradigms that prevail in economics are seldom expressed clearly. It is not uncommon to learn the theories of Adam Smith, David Ricardo, Thomas Malthus, etc under Classical theories. Then, they are forgotten. They are mentioned as the initial thinkers. No more are they mentioned nor their relevance. For, neo-Smithians, neo-Rocardians, neo-Malthusians, etc are very much present. And, they do come out with better theories than the neoclassical economists.

This post suggests that one ought to know that there are ‘other’ truths (heterodox economic theories) apart from the truth that we are taught ‘ neoclassical economics. And in this aspect, a reading of Foucault will prove to be immensely insightful.