My new book on Macroeconomics

I started blogging as an undergraduate student, in 2006. Since then, I have written posts about (i) the Indian economy, (ii) history of economic thought, (iii) classical political economy, and (iv) critiques of marginalist or neoclassical economics. In the recent years, most of my writing time has been devoted to articles and book reviews in journals and less to blogging. Although I do frequently wish I could spend more time blogging. 

I am now happy to share that several issues I have written about in this space has significantly helped me in writing my book Macroeconomics: An Introduction (2021), published by Cambridge University Press. The conceptual discussions are situated within the Indian context. 

For a preview, see Google Books

If you have institutional subscription to Cambridge Core, you can access the ebook

The price for the Indian edition is Rs. 495 and will soon be available through Amazon and independent bookstores. 

I had given an early book talk at BITS Pilani, Hyderabad; the video recording is available on my YouTube channel

International pre-orders have opened in many countries; for a list see here

Economic Survey 2019-20 and the Missing Role of the Government

According to the Economic Survey 2020 (ES hereafter), wealth is created by the ‘invisible hand supported by the hand of trust’. This is another way of saying that economic prosperity can be achieved by free markets with the government playing the role of an enabler (primarily to enforce private property rights). The introductory paragraphs of the first chapter states the following: ‘During much of India’s economic dominance [in the past], the economy relied on the invisible hand of the market for wealth creation’; ‘the evidence across various sectors of the economy illustrates the enormous benefits that accrue from enabling the invisible hand of the market’; and that the ‘invisible hand needs to be strengthened by promoting pro-business policies’ (p. 1). In the chapter, there are quotes from old texts from the ‘Indian’ subcontinent such as Arthashastra and Thirukural to point out that wealth creation was strongly encouraged. Subsequently, as empirical evidence, they show India’s (historical) contribution to world GDP.

It is surprising to notice that our Chief Economic Advisor (CEA), Krishnamurthy Subramanian, the person responsible for the writing of the Economic Survey, did not object to the following mistake: ‘The ultimate measure of wealth in a country is the GDP of the country’ (p. 14). While GDP or income is a flow concept (measured over a period of time), wealth is a stock concept (measured at a point in time); however, let us try to believe that the chief economic advisor meant income when he wrote wealth. Otherwise, it is an elementary mistake.’

The ES misunderstands Adam Smith’s political economy when it talks about ‘invisible hand’. It is stated that ‘wealth creation and economic development in several advanced economies has been guided by Adam Smith’s philosophy of the invisible hand’ and ‘During much of India’s economic dominance, the economy relied on the invisible hand of the market’ (p. 6). What is the meaning of invisible hand in Smith’ Smith used ‘invisible hand’ as a metaphor to indicate that there are unintended consequences to individual actions and it figures only once in his Wealth of Nations. However, it is true that this term has been appropriated subsequently to paint the image of Smith as a free market economist, which he unarguably was not. As a counter to the view of Smith as a free-market apologist, it is important to note that Smith believed that education should be provided by the government to offset the cognitive ill-effects from division of labour and that it should be affordable to the worker who earns the lowest wage (for more on this, see Thomas 2019).’

According to the dominant economic theory (popularly termed neoclassical but marginalist more accurately), given preferences, technology, and endowments, under conditions of perfect competition, equilibrium prices (of commodities as well as labour) are (Pareto) efficient. [Pareto efficiency means that no one can be made better off without making someone else worse off.] Of course, mainstream economists recognise that an outcome might be efficient but it need not be fair. The ES reduces this formal idea to the following: ‘the market economy is based on the principles that optimal allocation of resources occurs when citizens are able to exercise free choice in the products or services they want’ (p. 6). Leaving aside the conceptual issues with the marginalist theory of value and distribution, how can the market economy in reality not just reproduce but also exacerbate the inequalities of wealth (or endowments), income, caste, and gender”

The ES appears to grossly misunderstand both the historical position and conceptual basis of Smith’s ‘invisible hand’. But was the market economy dominant during the time of Arthashastra as claimed by the ES’ Here are two excerpts from Thomas Trautmann’s 2012 book Arthashastra: The Science of Wealth (for my critical assessment, see Thomas 2016).’

‘As regards the quantity of rations to be issues to inmates in the king’s household: for upper-caste (Arya) males, the measure is one prastha of rice, one-fourth prastha curry (supa), salt one-sixteenth of the curry and butter or oil one-fourth of the curry. For lower castes, the measures are less. It is one sixth prastha of curry, and half the butter or oil. For women the measure is less by one quarter, and for children, it is less by one half. Thus ration units are proportionate to the status of the person and the body size.”(pp. 57-58)


‘In the case of commodities distant in place and time, the Overseer of Trade, expert in determining prices, shall fix the price after calculating the investment, the production of goods, duty, interest, rent and other expenses.’ (as quoted on p. 130)

The above two passages dispel the myth propagated in the ES that market forces had a ‘free’ reign in the past. In fact, it was exactly the opposite. There was a ‘division of labourers’, to use BR Ambedkar’s phrase, and food rations were provided on the basis of caste. Therefore, there existed no mobility of labour, and this is hardly surprising in a caste-based society. Moreover, prices were controlled because they believed in the concept of a ‘fair price’ which the market would not be able to set.’

ES also believes that the growth in incomes will trickle down to all: ‘Greater wealth creation in a market economy enhances welfare for all citizens’ (p. 11; emphasis added). ‘Wealth creation in the economy must ultimately enhance the livelihood of the common person by providing him/her greater purchasing power to buy goods and services’ (p. 14). How’ This happens in theory only if you make strong assumptions and neither is there strong empirical evidence to back this claim. On the same page, it is mentioned that the ‘freedom to choose is best expressed in an economy through the market where buyers and sellers come together and strike a bargain via a price mechanism’ and the reason is the following. ‘Where scarcity prevails and choice between one use of scarce resources [sic] another must be made, the market offers the best mechanism to resolve the choice among competing opportunities’ (p. 11). This is indeed the mainstream teaching of marginalist economics. It is true that marginalist economics views economics as a science of choice (under conditions of scarcity). However, what we require is a theory of production–available in the political economy of Adam Smith, David Ricardo, Karl Marx, and JM Keynes. In India, there is neither scarcity of labour nor of capital. Ipso facto there can be no scarcity of commodities. What we are faced with is surplus labour and capital; the former is manifested in high labour unemployment and the latter in high excess capacity. The macroeconomic problem is thus one of aggregate demand deficiency.’

The current economic survey applies a (marginalist) microeconomic analysis to our central macroeconomic problem–unemployment (this is not particular to this year; for another such attempt when Kaushik Basu was the CEA, see Thomas 2012). Thus, it argues ‘that government intervention hurts more than it helps in the efficient functioning of markets’ (p. 12). Within the marginalist paradigm, government intervention reduces ‘economic efficiency’ and therefore is discouraged. However, for the most important macroeconomic problem of unemployment, the government ought to play a key role in the economy. This is necessary because domestic private investment is volatile and foreign private investment even more so. It is extremely unjust for any government to transfer its core macroeconomic responsibility of full employment to the private sector.’

[This is a revised version of my talk delivered at a public discussion on the Union Budget on 16 February 2020 organised by Bengaluru Collective, Centre for Social Concern, Ashirvad, and St. Joseph’s College. The link to the video is:’’v=8VA6OmzDp6A]


On free individual choice and collective inaction

PIC-blog post-collective inactionThe logic of contemporary economies is built on our belief in the virtues of ‘free’ individual choice. Adherents of this view, which include (most) governments, corporations and many individuals, believe that regulating individual choice is bad for the economy. However, among this syndicate, some do recognise the pitfalls of employing this principle in the development and growth of institutions relating to education and health. In economic parlance, the ‘failure’ of individual choice in yielding a socially beneficial outcome is termed a market failure ‘ suggesting that markets, in general, do not fail. It is important to state the logic of individual choice explicitly owing to its enthralling grip over contemporary political and economic imagination. John Maynard Keynes in his 1926 critical essay ‘The End of Laissez-Faire’ makes explicit this logic: ‘by the working of natural laws individuals pursuing their own interests with enlightenment, in condition of freedom, always tend to promote the general interest at the same time!

How did private vice transform into private interest (and choice)’ And how is it that private choice is at the core of today’s economics and politics’ Albert Hirschman’s The Passions and Interests:Political Arguments for Capitalism Before its Triumph (1977) provides us with one compelling historical account. The idea that free individual choice results in socially beneficial outcomes is now commonplace. This was not always the case. In fact, Montesquieu, the French philosopher, wrote about the socially beneficial outcomes from pursuing honour which ‘brings life to all the parts of the body politic’ and ‘it turns out that everyone contributes to the general welfare while thinking that he works for his own interests.‘ By the seventeenth century, it was recognised that the ‘disruptive passions of men’ could not be restrained by moral philosophers and their religious counterparts although attempts to convert the disruptive passions into ‘constructive’ passions were already underway. For instance, anticipating Adam Smith, Pascal, another French philosopher, writes that man ‘has managed to tease out of concupiscence an admirable arrangement’ and ‘so beautiful an order.’ Subsequently, the idea of ‘countervailing passions’ started gaining currency in political thought. However, as Hirschman also notes, what forces actually ensure that groups (of individuals) with conflicting passions/interests result in a gain for all‘ If the contemporary politics of climate change is taken as an example, the outcome runs contrary to such an expectation.

Today, the widespread belief especially among policy makers is that unregulated individual choices ‘ whether as a consumer or a producer ‘ will ensure that the fruits of economic growth trickle down to the poorest person. However as Keynes warned us very persuasively in The General Theory of Employment, Interest and Money (1936), this belief is flawed and we need government intervention so as to eliminate labour unemployment. Clearly, the pursuit of individual gains has not brought social gains. Mainstream economics accommodates this big flaw in marginalist economics under the label of externalities. Unintended consequences of economic actions may be positive or negative for the society. In the determination of output and employment, Keynes pointed out that the tendency towards full employment (a more modest claim than public interest or social welfare) is a fluke in liberal capitalism. To put it differently, unemployment of labour is the expected consequence in liberal capitalism.Both theoretically and empirically, all evidence points to one inescapable fact: liberal capitalism does not result in the full employment of labour. Another charge by Keynes against this view is that it commits the fallacy of composition: what is good for an individual may not be good for the society. For example, while saving is good for an individual, if all individuals in a society save, who will consume the output’

Amitav Ghosh in The Great Derangement: Climate Change and the Unthinkable (2016), his recent* work of non-fiction, forcefully argues that the paralysis of climate change politics lies in our idea of individual freedom; our ‘calculus of liberty’ has no place for nature and natural systems. How then can our idea of freedom – a product of Enlightenment thinking ‘ and its close relative, democracy, ever effectively address our environmental issues’ A solution to our environmental problems warrants collective and concerted action. This is consistently absent in current politics, which has been reduced to individual morals and choices. Indeed, the onus of resisting environmental degradation has been passed on to the individual by appealing to her morals. As Ghosh puts it in his The Great Derangement, ‘This then is the paradox and the price of conceiving of fiction and politics in terms of individual moral adventures: it negates possibility itself.‘ Both fiction and politics, at their core, are, or rather, ought to be about possibilities ‘possibilities for the individual as well as the society as a whole.

The idea that free pursuit of individual interest yields a socially beneficial outcome is a flawed piece of political and economic imagination. Unfortunately, this principle does not function in today’s capitalist societies and the belief that it does is a dangerous one to safeguard. The idea that free individual choices yield socially beneficial outcomes must therefore be challenged in all possible spaces committed to documenting and exploring socioeconomic possibilities, particularly in humanities, journalism, literature, and the social sciences.

*I thank Vivek Nenmini for pointing out an error. Earlier, I had written that The Great Derangement is Ghosh’s first work of non-fiction.

The Broken Headlights of the Union Budget 2017

The union budget is an annual planning document of the central government, which lays bare its economic priorities for the upcoming year. Since it outlines expenditure plans and revenue expectations (from tax proceeds), it has a significant impact on everyone, directly or indirectly, in the Indian economy. The consensus on the current union budget is largely that it is a ‘positive and progressive’ budget. Although seemingly it looks like a good budget, it suffers from a deeper malaise ‘ of lacking a robust economic vision.

A government that is committed to economic development cannot not focus on employment generation and reduction of income and wealth inequalities. Further, employment generation has to happen in conjunction with decent wages. The former is an outcome of (both private and public) investment. It needs to be noted that the National Rural Employment Guarantee Scheme (NREGS) is only an employment safety net and not an engine of employment; one must be very careful not to conflate the two. Decent wages call for worker-friendly labour laws and adequate minimum wages. The inequalities of wealth (notably land and financial assets) keep rising unless structural reforms are undertaken, such as land reforms, wealth tax, and capital tax. (To formulate such reforms, information on the personal ownership of assets as well as their social distribution is required. Hence, the publishing of the caste census becomes a socio-economic necessity.)

With respect to wage policy, the variable of socio-economic significance is the real wage and not the market wage. The real wage tells us how much goods and services that a unit of the market wage buys. The real wage is therefore dependent on inflation and the capacity of the worker to access transportation, health services, and a clean environment. The class of economists who ignored real variables at the expense of the apparent ones were labelled as ‘vulgar’ by the economist’philosopher Karl Marx.

In addition, a piecemeal reading of the budget, while appropriate from the standpoint of individuals and firms, is inappropriate from a macroeconomic perspective. This is because the economy is an interconnected system, and one sector’s gain can lead to another’s loss, and multiple sectors can gain simultaneously. More generally, both private and public economic actions have unintended consequences; for instance, while the increased budgetary allocation for physical infrastructure is welcome, what are its effects on the natural environment’

The Indian economy is facing aggregate demand deficiency because of damp rural incomes, stagnant manufacturing, self-imposed fiscal austerity, and weak external demand. Tax cuts (for low-income individuals and MSMEs) and increase in public expenditure (on railways, roads, and the small increase in NREGS allocation) positively affect the aggregate demand, whereas demonetization-induced low activity levels, fiscal consolidation, volatile external conditions, agricultural distress, low real wages, and stagnant manufacturing sector all negatively affect aggregate demand.

On the aggregate supply front, the Indian economy is constrained by low agricultural productivity, poor working conditions for the majority of the population, inadequate physical infrastructure (access to drinking water, electricity, and roads), and environmental degradation. In short, India fares badly in terms of both physical and human capital. While the current budget gives some importance to physical capital, the allocations to human capital are deplorable. Moreover, the negative consequences of physical infrastructure creation on the natural environment and on the displacement of people must be accounted for in the balance sheet of economic development. Therefore, the paltry allocations to improve aggregate supply give us nothing to cheer. And on balance, the current budget significantly falls short of its intended goal of economic development.

Lastly, in his budget speech, the Finance Minister Arun Jaitley repeats the rationale for the demonetisation move of November 2016. He states that post-demonetisation, ‘GDP would be bigger and cleaner’. Moreover, he asserts (without any argumentation) that the demonetisation-induced fall in economic activity is a ‘transient effect’ and that this ‘is not expected to spill over into next year’ (contradicting the more cautious prognosis contained in the current Economic Survey). It seems that the FM is unaware of the concept of hysteresis: the short-term equilibrium can permanently affect the long-term equilibrium. This is part of the reason why mature democracies are extremely intolerant of labour unemployment. However, it is highly unlikely that official data will reflect the long-run adverse effects of demonetisation, because of its inability to adequately capture the economics of the informal sector.

In sum, there is no cause for any celebration but many reasons to be very worried for the economic present and future of India.