Category: India

Is Marx (Ir)relevant’

Karl Marx (1818-1883) is an important figure in most social sciences. His works have been translated into several languages. One might not agree with his views, but he cannot be ignored. Some love him. A lot more hate him. Note that the like and dislike are not targeted at his works, which are seldom read, like most ‘classics’. Having recently read the first part of Theories of Surplus-Value, 3 volumes of Capital and a discussion with a friend who works closely with Indian realities has resulted in the following blog post.

Classical political economy, according to Marx, begins with William Petty in Britain and Boisguilbert in France and ends with Ricardo in Britain and Sismondi in France. In the Theories of Surplus-Value, Marx mainly scrutinises the works of these classical political economists. However, Marx does not provide an overall summary of their entire work but focusses on his central question: how did these authors conceptualise and comprehend value’ Particularly, he discusses the why and how of classical political economists theorising of ‘appearances’ while forgetting the ‘essence’. In any case, Marx does not have the last word on the theoretical framework on the classical political economists. Hence, reading Marx motivates one to go forward and read the works of the classical political economists.

But, why read Marx or the classical political economists’ They did not write in the 20th century. The world is different today. Facts have changed. Are their works relevant anymore’ Firstly, ‘progress’ or growth of scientific theories does not follow a linear path; the path could be non-linear. The implication is that what was considered unscientific in the past can resurface (with adjustments) with a greater explanatory strength and challenge the contemporary ‘scientific’ theories, at least in principle. For institutional reasons, this might never happen; mainstream journals, scientific associations, university teaching and textbooks are, what I label, institutions in this context. Thus, a priori, there exists no scientific basis for not reading the works of classical political economists, Marx and other economists. Secondly, a distinction needs to be made between theory and fact. A theory is not (necessarily) a fact. A fact is never a theory. A theory is general while a fact is specific. Theory tells us a way of thinking about facts ‘ in identifying them, classifying them and ascribing relations to them. The classical political economists as well as Marx theorised a capitalistic economy; in this regard, the rate of profit was taken to be uniform across industries through the process of competition. It is obvious and very clear that in a country like India, which cannot be classified as capitalist or non-capitalist (perhaps, 10% capitalist), using Marx’s theoretical apparatus blindly is going to result in perverse outcomes. The reason for choosing 10% and not 20% is because the share of the organised sector in the GDP is 10%. Maybe, Marx’s theory has certain insights to offer to the 10% of India. The remaining has been visualised as pre-capitalist. (Remember the mode of production debates.) But, one wonders whether this is the desirable (or even scientific) way of characterising the remaining 90%. When reading an author’s work, it is not solely for the theory. Often, it is for the method too. There has been and will be many books and articles on Marx’s method. But, whatever the agreements and disagreements are, there are always fresh possibilities. Given this, not reading Marx seems unscientific!

Often, the works of classical political economists and Marx are confined to the class rooms of history of economic thought (HET). Teaching their works in HET classes is not considered irrelevant. One reason for this thought arises from the linear view of scientific progress. The other, perhaps, has to do with the pride every generation possesses over their ancestors in terms of knowledge. Although, this ‘pride’ is not solely our own creation but it has been passed on to us. It is perhaps our responsibility to check whether we have been taught the ‘correct’ theories and facts about our world. This is all the more reason to assess the foundations of our current beliefs and theories. HET is one way to do this, in economics.

Marx has interesting insights to offer contemporary economics on property rights, labour conditions, economic crises, concentration of markets (inter-linked markets’) and so on. To conclude, reading Marx is important to an economist. Secondly, his observations regarding the ‘evil’ nature of capitalism can be addressed so as to improve the existing laws, institutions, markets, morals and values. After all, the objective and aspirations of scientific knowledge is to better the lives of all.

Some Logical Fallacies in Economics

Economic theory of various kinds are often employed to formulate policies in the real world. Often, certain conclusions of a particular economic theory are utilised in policy making. For instance, some of the insights/conclusions arising from mainstream economics are: fiscal deficits are inefficient and inflationary; a perfectly competitive economy is desirable because it is efficient; increase in money supply causes inflation and increase in investment (domestic and foreign) will create employment. Hence, we are regularly advised to lower fiscal deficits, encourage ‘efficiency’, etc.

Broadly, two kinds of logical fallacies are committed by economists and policy makers. Firstly, there are logical fallacies in the domain of economic theory. Secondly, a logical fallacy is committed when real-world policy decisions are derivatives of conclusions from a particular economic theory. This blog post makes use of Stephen F Barker’s’book‘The Elements of Logic‘(1965) to illustrate some of the logical fallacies in economics.

According to Barker, a ‘fallacy is a logical mistake in reasoning.’ He identifies three broad categories of logical fallacies: (1)’non sequitur, (2)’petition principia‘and (3) inconsistency. Fallacies of’non sequitur‘(Latin: ‘it does not follow’) occur when there is an’insufficient link‘between premises and conclusion. ‘If the premises are related to the conclusion in such an’intimate way‘that the speaker and his hearers could not have less reason to doubt the premises than they have to doubt the conclusion, then the argument is worthless as a proof, even though the link between premises and conclusion may have the most cast-iron rigor,’ logical fallacy of’petition principia‘(Latin: ‘begging the question’) occurs. Lastly, fallacies of inconsistency occur ‘when someone reasons from a set of premises that’necessarily‘could not all be’true.’

Logical fallacies in economic theory

An economic theory like any scientific theory begins from a set of premises. These premises can be based on observation, fact, other theories, (reasonable) assumptions, etc. Obviously, these premises have to be sufficiently’general‘for it to be a ‘theory.’ From these premises, through the process of (deductive) reasoning, we arrive at certain conclusions. Note that unrealistic assumptions do not render an economic theory fallacious. However, their utility in real-world policy making is contingent on how ‘approximate’ the assumptions are to the particular context.

Hence, given the premises, if the conclusions do not follow, the economic theory under consideration is said to be logically fallacious. This, in fact, happened to the marginalist theory of value and distribution. In the 1960s, it was demonstrated bySraffa,’Garegnani‘and others that marginalist theory of value and distribution is logically fallacious. This was shown so clearly that defenders of the theory, notably,’Paul Samuelson, admitted this defect. The main reason for this logical fallacy was/is that prices (value) and distribution are interdependent and hence are simultaneously determined. Therefore, the distribution theory in neoclassical economics (marginal productivity theory) cannot be logically prior and independent of the theory of prices (value). In other words, capital cannot be treated as a distinct factor of production, independent of prices. This is because, at an aggregate level, capital is comprehensible only as a value magnitude. Therefore, the construct of the aggregate production function breaks down and with it the whole neoclassical edifice of value and distribution crumbles. In any case, to circumvent such logical critiques, the concept of inter-temporal equilibrium was constructed. So far, it seems to have been ‘successful’ in warding off capital-theoretic critiques. But, this shift towards inter-temporal equilibrium from long period equilibrium has seriously compromised the relevance of such economic theory. For, ‘anything goes’ in temporary equilibrium. The capital theoretic fallacy is of the’non sequitur‘type as there is an insufficient link between the premises and conclusion.

Marginalist economics studies human behaviour. It is a science of choice thanks to Lionel Robbins who presented a clear definition of neoclassical economics (which originated in the works of Jevons, Walras and Menger in 1870s). Hence, the theory assumes scarcity of both factors and commodities. The central problem in economics becomes that of ‘ allocation. The theory starts with specifying endowments to agents and concludes’ that there is full employment of resources. After all, if the issue is that of allocation, there will necessarily be a full-employment of resources both before’and‘after the process of allocation (carried out by the market forces of demand and supply). In this case, the premises and the conclusion are connected in such an intimate manner that it seems to commit the fallacy of’petition principia.

Consumers maximize utility. Producers maximize profits. This gives us equilibrium. However, is there a clear line of demarcation between a producer and a consumer’ What if an agent is both a consumer and a producer’ In the language of set theory, what if the intersection between consumers and producers in an economy is not a null set’ If so, is it logically consistent to have a’strict‘demarcation between producers and consumers’

Logical fallacies in economic policy

Economists, policy makers and journalists argue for a particular economic policy based on certain premises. These premises are nothing but an admixture of various economic theories. Note the emphasis on ‘theories’, for there is not just one economic theory but multiple economic theories. Most of them are competing paradigms, i.e., they ask similar questions but provide dissimilar answers. Examples include Austrian economics, Marxian economics, Classical economics and Keynesian economics. The dominant paradigm, of course, is the marginalist one; variants of this include New Classical Macroeconomics, Monetarism, New Keynesian Macroeconomics, Microeconomics, etc.

The question we are interested in asking is: what is the basis on which a particular economic policy is favoured. A few examples are provided below.

I

Premise: Increase in money supply causes inflation.

Conclusion: Therefore, increase interest rates to reduce inflation.

II

Premise: Inflation is determined by inflation expectations.

Conclusion: Therefore, the Central Bank should target inflation expectations.

III

Premise: Given full-employment of all resources, an increase in expenditure will raise prices.

Conclusion: Fiscal deficits are inflationary. Therefore, reduce fiscal deficits.

The premise in the first example is from a Monetarist paradigm; the premise in the second one is a New Keynesian perspective and the premise in the third example is a typical neoclassical/marginalist view. Are these kinds of policy conclusions logically correct’ Do the conclusions follow from the premises’ Or, are we taking a leap of faith’ For, the economies which the premises talk about and describe aretheoretical worlds‘which (hopefully) have certain characteristics of the real-world. In any case, hasty conclusions should not be made. This is especially important for policy making in an economy like India which is very distinct from the theoretical worlds mentioned above.

Yet another commonly used argument is to favour a policy based on its success in another economy. For a long time, India followed economic doctrines which were promoted in the advanced economies of the West. Today, we see a similar trend where examples and case-studies from ‘other emerging economies’ are used to argue for a particular policy recommendation in India. But, India is structurally ‘ socially, culturally, politically and economically different from these other economies. Hence, we again take a leap of faith. I end with such a’claim which was made‘to argue that FDI is favourable: ‘in Indonesia 10 years after allowing 100 per cent FDI, 90 per cent of the retail sector is controlled by the small shopkeepers.’

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

What Can Indian Economists Learn From Sismondi’

Although J.-C.-L. Simonde de Sismondi (1773-1842) lived in Geneva and wrote on economics, history and public policy, his concerns about the role of political economy is valid even today, especially for India. Marx considered Sismondi to be the last classical economist. Sismondi engages with the economics of Adam Smith, David Ricardo and J B Say in his 1819 work New Principles of Political Economy: Of Wealth In Its Relation to Population. This work has been translated into English by Richard Hyse in 1991 (available at Google Books). According to Sismondi, the objective of Political Economy is to ensure that majority of the population live a happy life.

Indian realities

Sainath informs us that India has seen over a quarter of a million farmers’ suicides between 1995 and 2010. The total figure according to National Crime Records Bureau (NCRB) is 256,913. And, since 1998, at least 15,000 farmers have committed suicide very year. More unsettling is that fact that the total number of farmers have been declining significantly. In Andhra Pradesh, it is alleged that 90 farmers committed suicide, that too, in rain-fed areas, in the last few weeks.

The inflation of food articles has reached double digits. Food inflation doubly affects the actual cultivators. Since, the prices are fixed by the Government (minimum support prices), the price rise does not benefit the actual cultivators. Secondly, their ability to purchase their usual consumption basket also falls when price rise. It is in this context that M S Swaminathan’s reminders need to be understood. He rightly asserted: ‘If agriculture goes wrong, nothing else can go right for this country.’

Very recently, Dreze and Sen pointed out the nature of the asymmetrical growth that is driving India with a majority of the population living without access to basic amenities. They concluded their article in the Outlook by stating that one of the ways forward is to have a ‘radical broadening of public discussion in India to development-related matters’rather than keeping it confined to simple comparisons of the growth of the gnp, and naive admiration (implicit or explicit) of the high living standards of a relatively small part of the population. An exaggerated concentration on the lives of the minority of the better-off, fed strongly by media interest, gives an unreal picture of the rosiness of what is happening to Indians in general, and stifles public dialogue of other issues.’ In other words, how much has the socio-economic condition of majority of the Indian populace (who happen to be farmers and weavers) improved’

Sismondi

In the hurry to build sophisticated DSGE models and while working out monetary and/or fiscal solutions to inflation and economic growth, it is often forgotten that actual human livelihood is at stake. How can Indian agriculture not be a necessary component of the curriculum in economics’ Within economics, steep walls which cannot be crossed exist between agricultural economics, macroeconomics, monetary economics, labour economics, development economics, etc. The so-called specialization in these fields (to be understood as literature which is not easily accessible or comprehensible to an economist from another field) has reached alarming levels. Sismondi says the following on the nature of economic inquiry:

However, I believe I should protest against the manner, so often superficial, so often false, in which a work on the social sciences is judged in the world. The problem which they offer to resolve is tangled in quite another way than those that arise from the natural sciences; at the same time it appeals to the heart as well as to reason. The observer is called upon to recognize unjust sufferings that come from man, and of which man is the victim. We cannot consider them coldly and pass them over, without seeking some remedy‘(Sismondi 1819: 13).

Maybe, the idea of modern science does not allow investigators to be moved by the ‘object’ under study. Nevertheless, as Sismondi reminds us, economic problems and their solutions affect people (who are not ‘objects’) in a significant manner. The state of Indian farmers and weavers is certainly to be given attention, especially in terms of livelihood building, through providing employment and incomes in a dignified manner.

The following lines from Sismondi echoes what Dreze and Sen recently pointed out as regards Indian growth:

If they find a tremendous accumulation of riches, an improved agriculture, a prosperous business community, manufactures which multiply without end all products of human industry, and a government that disposes of almost inexhaustible coffers, as in England, they call the nation opulent that has all these things, without stopping to inquire whether all those who work with their hands, all those who create this wealth, are not reduced to mere subsistence; whether every tenth member among them must not apply each year to the public welfare; and whether three-fifths of all individuals, in a nation that is called rich, are not exposed to more privation than an equal proportion of individuals in a nation called poor (Sismondi 1819: 22).

In India, the wealth creators, the farmers, are forced to live below even ‘subsistence levels’ as Sainath’s commentary on farmer suicides indicate. Even though we have 53 agricultural universities in India, their contribution to the farming population is circumspect. Three to four decades before, working on agricultural economics and debating issues related to agriculture was fashionable and ‘important’. Today, it is even more important but, perhaps, not very attractive. In fact, the Government admits that the farm sector has been neglected.

Admitting that the government is neglecting research in the farm sector, the agriculture ministry has sought more funds in the next Five Year Plan (2012-2017) for significant jump in food grain production.

But, focussing on aggregate food grain production is clearly insufficient. One needs to look at the ‘production conditions in Indian agriculture’. As Sismondi points out very clearly

Commercial wealth is augmented and distributed by exchange; and even the produce of the ground, so soon as it is gathered in, belongs likewise to commerce. Territorial wealth, on the other hand, is created by means of permanent contracts. With regard to it, the economist’s attention should first be directed to the progress of cultivation; next to the mode in which the produce of the harvest is distributed among those who contribute to its growth; and lastly, to the nature of those rights which belong to the proprietors of land, and to the effects resulting from an alienation of their property (Sismondi 1819: 133).

In 1974, Krishna Bharadwaj published a book Production Conditions in Indian Agriculture. In the same period, economists such as Amit Bhaduri, Ashok Rudra, Amartya Sen, K N Raj, C H Hanumantha Rao, Pranab Bardhan, etc wrote extensively on various aspects of Indian agriculture. The issues Sismondi pointed out were discussed and debated. Bharadwaj points out the significance of examining property relations, technology, local patterns of power, etc. Moreover, she notes that non-economic variables such as tradition, customs, caste and religion determine the economic position of a farmer and thereby determines their income and asset levels. The rise in food inflation has prompted many commentators to hold employment guarantee schemes (NREGA) responsible. If agriculture generated adequate incomes (to maintain a decent and dignified life) employment guarantee would not be necessary. In other words, employment on and off farm cannot be treated as independent of each other. Further, in India, markets are interlocked through both price and non-price links (with the Government playing an ambiguous role). These interlocked markets are exploitative as it denies the following freedoms to the agricultural farmer, who is very much an entrepreneur.

(1)” What to produce’

(2)” How much to produce’

(3)” For whom to produce’

(4)” When to sell the produce’

Conclusion

As Sismondi reminds us, we cannot ignore the majority of the Indian population who do not have access to the basic necessaries of life. Agriculture provides livelihood to more than half the Indian workforce. A farmer is an entrepreneur who produces food, the most basic of all commodities. Although, it might not be academically fashionably and profitable to study Indian agriculture but as Sismondi notes: ‘We cannot consider them coldly and pass them over, without seeking some remedy.’