Category: History of Economic Thought

Alfred Marshall (1842 ‘ 1924)

Alfred Marshall made lasting contributions to economics. No economist will question that. However, his precise contributions to economics are often forgotten. In a way, the microeconomics that we learn and apply today has strong Marshallian foundations. This post draws on Peter Groenewegen’s excellent (concise) biography of Alfred Marshall (2007) which has been published as part of the Great Thinkers in Economics Series published by Palgrave Macmillan.

Marshall is most famous for his Principles of Economics first published in 1890; the definitive eighth edition was published in 1920. In addition, he wrote Industry and Trade (1919), Money, Credit and Commerce (1923) and Economics of Industry (1879) which he wrote along with his wife, Mary Paley Marshall. Besides these, he also printed and privately circulated his work entitled The Pure Theory of Foreign Trade. The Pure Theory of Domestic Values (1879). Overall, he taught for more than forty years in Bristol, Oxford and Cambridge. The most notable among his students are John Maynard Keynes and Arthur Cecil Pigou.

He took German lessons in order to read Kant in the original. Hegel’s Philosophy of History had a strong influence on his thought. Marshall commenced his study about economics with a close reading of John Stuart Mill’s Principles of Political Economy. He also read the methodological works of Mill on logic and particularly criticised Mill’s conception of the individual as a ‘self-seeking, wealth-maximising homo economicus‘. His other economics readings included Smith’s Wealth of Nations, Ricardo’s Principles and Marx’s Capital. Other important influences were Cournot’s Mathematical Investigations in the Theory of Wealth and von Thunen’s The Isolated State; they motivated Marshall’s use of diagrams.

For Marshall, ‘the proper work of economic science’was solving economic problems’. ‘The necessity of economic theory, the importance of facts and continual striving to keep economic analysis relevant and practical were all crucial parts of Marshall’s promise to devote his professional life to the improvement of economic science’ (p. 74). It is also quite well known now that, for Marshall, the ‘mecca of the Economist lies in Economic Biology rather than in Economic Dynamics’ (p. 106).

Groenewegen informs us that Marshall had a personal dislike of the use of textbooks in university teaching (p. 77). Not surprisingly, ‘[t]he Principles of Economics remained a leading textbook on the foundations of economics not only during the life of its author, that is, from 1890 to 1924, but for the next quarter century as well, that is, until the early 1950s’ (p. 111).

The use of mathematics in the Principles has garnered lot of attention since he ‘banished’ all equations to the appendix. In any case, Marshall considered economics as ‘form of reasoning’. Perhaps, given the use of mathematics during his time, his relegation of equations to the appendix might have been appropriate. I quote an interesting letter Marshall wrote to his student Bowley: ‘(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples which are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often’ (p. 114).

Marshall identified time to play an important role in the theory of value. He developed the concepts of the short and long period. He paid particular attention to ‘elasticity’. Besides these, he laid the foundations for the theory of the firm, use of offer curves or reciprocal demand curves in international trade and distinguished internal and external economies.

This post has only very briefly touched upon the way Marshall viewed economics, especially his use of mathematics and his evolutionary notion. We have not detailed his precise contributions to economics. This post serves the purpose of being a very short introduction to Marshall. As students of (micro)economics, it will be fascinating to read Marshall’s works, especially his Principles.

Undergraduate Economist: The 100th Blog Post

To celebrate the 100th post on this blog, I am sharing my 15 best posts over the past years. Thank you all for the support, in the form of comments, likes, tweets, etc. Thanks once again.

(1) The ‘Micro-Foundations’ of Economic Survey 2009-10

(2) On Financial Markets: The Problematic Assumptions

(3) On Disguised Unemployment: Some Issues

(4) On the Unorganised Sector in India

(5) James Steuart, Strange(r) Economists and the Indian Economy

(6) The Politics of Microeconomics

(7) What Can Indian Economists Learn From Sismondi’

(8) Urbanization in India: What does it mean’

(9) For ‘Social’ Economists

(10) (Mis)understanding Inflation

(11) Employment: The Neglected Variable

(12) Economics: The Study of Commodities

(13) Economic Growth in India: Some Considerations

(14) Krishna Bharadwaj: The Ideal Economist

(15) Sraffa: Production as a Circular Process

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 fa’ade 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).

Krishna Bharadwaj: The Ideal Economist

Krishna Bharadwaj is an economist who made lasting contributions to economic theory. She is especially known for her understanding of the classical theories of value and distribution. In particular, she has successfully traced out the history of classical as well as neoclassical economics. This kind of conceptual history writing is important, especially for the economist who wants to apply these theories in understanding the socio-economic reality. And because of her firm grasp of various theoretical approaches in economics, she was able to judiciously analyse problems of the Indian economy. She was, in fact, the first economist to point out the exploitative nature of inter-linked markets which are prevalent in Indian agriculture. She also placed emphasis on the power relations which dominated the production structure of agriculture in India.

Apart from struggling to show the distinct and superior nature of classical economics over neoclassical economics, Bharadwaj also relentlessly worked on Indian economic issues. In particular, Bharadwaj analysed the structural linkages between agriculture and industry in India and also examined the production conditions which characterise Indian agriculture. In her latter study, she pointed out the inadequacies of neoclassical economics in understanding Indian agriculture. She particularly criticised the application of production functions. In addition, Bharadwaj explained the origin of neoclassical economics and how it suffers from various logical as well as other methodological issues.

For Bharadwaj, theory was only a tool to understand the questions and problems which arose from the social reality. This is why, she promoted the teaching of different economic approaches in Centre for Economic Studies and Planning (CESP) at Jawaharlal Nehru University (JNU), such as classical, Marxian, Keynesian as well as Walrasian. As Prabhat Patnaik writes in a foreword of The Krishna Bharadwaj Memorial Lecture, ‘according to her [Bharadwaj]…we had to evolve a research-cum-teaching agenda of our own. No centre in India could flourish, by international standrads, merely by mimicking what was happening abroad, merely by showing proficiency in solving problems which were posed abroad. The problems has to be rooted in the social reality of our own country, and the effort to grapple with them had to be, very consciously, located within the intellectual endeavour of our country…[However] Her emphasis on taking up problems rooted in the Indian social reality was not a plea for turning one’s back upon theory or theoretical struggles. On the contrary, her plea for investigating our real problems, was simultaneously a plea for a richer theory, a theory with a body to it, one which is all the more powerful because it has been used for investigating real problems facing economies like ours.’

From her work on economic theory and its applications to the Indian economy, what becomes clear is her philosophy that economic theory should be based on concepts which can be observed and be amenable to measurement in reality. This is one of the reasons why she criticised the demand and supply theories; for, values were determined by subjective utilities. Another quality worth mentioning is her firm belief that economic theories are not mere intellectual constructs; rather, they arise out of a particular socio-historical situation, often to promote a certain ideology. In her R C Dutt Lecture, which was later published as a book in 1986, she makes it clear that the emergence of demand and supply theories were primarily a reaction against Ricardo and Marx. For, in both Ricardo and Marx, a conflict of interest is visible between social classes. In order to promote the ‘idea’ of a just and harmonius system, the theories (especially the labour theory of value) of Ricardo and Marx were criticised as being limited, and an alternative was proposed. This new theory completely did away with social classes. Individuals were chosen as the primary unit of analysis. Social classes, actually was modified into ‘factors of production’. A very interesting and important methodological shift, with powerful political implications! All the factors of production were assigned equal importance, and it was also shown how both labour and capital recieved incomes according to their contribution to the production process. That is, a capitalist system, with free mobility of labour and capital and with clear property rights (contracts), is essentially a just and stable system.

To conclude, the following are the reasons why Krishna Bharadwaj is an ideal economist. (1) She had an in-depth understanding of the various theoretical approaches in economics, be it, Marxian, Classical, Neoclassical, Austrian or Keynesian. (2) She did not blindly apply these theories (mainly Classical and Marxian) to understand the Indian economy; instead, her inquiry was based on extensive empirical observations, which made the theory richer. (3) She considered it very necessary to understand the history of economic theory, especially because of the historical specificity of all theories. Also because, most theories are responses to certain socio-political events or interests. (4) Lastly, she applied all her experience in setting up a new centre, which paid close attention to both economic theory and its application to the Indian economy, in close connection with other disciplines.

References

Bhaduri, Amit (1992), Krishna Bharadwaj, Economic and Political Weekly, Vol. 27, No. 10/11 (Mar. 7-14, 1992), p. 490.

Bharadwaj, Krishna (1963), ‘Value Through Exogenous Distribution’, The Economic Weekly, August 1964.

Bharadwaj, Krishna (1986), Classical Political Economy and the Rise to Dominance of Supply and Demand Theories, Calcutta: Universities Press.

Harcourt, G C (1993-94), ‘Krishna Bharadwaj, August 21, 1935 – March 8, 1992: A Memoir’, Journal of Post Keynesian Economics, Vol. 16, No. 2 (Winter, 1993-1994), pp. 299-311.

Patnaik, Utsa (1991), ‘Krishna Bharadwaj: 21 August 1935 – 8 March 1992,’ Social Scientist, Vol. 19, No. 12. (Dec., 1991), pp. 63-67.

Patnaik, Prabhat (1996), Foreword, in Time as a Metaphor of History: Early India, by Romila Thapar, The Krishna Bharadwaj Memorial Lecture, New Delhi: Oxford University Press.

Roncaglia, Alessandro (1993), ‘Krishna Bharadwaj, 1935-1992. In Memoriam’, Metroeconomica, Vol. 44, No. 3, pp. 187-194.