Classical Economics – Undergraduate Economist

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.

A Case for Pluralism in ‘Microeconomics’

[My return to blogging is motivated by the extremely warm response I’ve received in person – in the last 6 months – from several people who have been readers of this blog. I’m also happy to announce the publication of my co-edited book on the history of economic thought.]

The subject matter of microeconomics is enshrined in the economics curriculum at all levels – school, undergraduate, postgraduate, and doctoral. The central objective of microeconomic theory is to provide a solution for equilibrium price and quantity in both the commodity (say, apples or coconuts) and factor (wage and ‘capital’) markets. Indeed, questions of what is the source of value and what is the exchange value of two commodities have been posed much earlier. You can find answers in Kautilya, Aquinas, Petty, and Cantillon – all of them writing prior to Adam Smith’s foundational treatise on political economy.

Kautilya’s Arthashastra contains discussions of a fair price. Aquinas, drawing inspiration from Aristotle and Christianity, tries to arrive at the notion of a just price. One of the founders of political economy, William Petty, derives the distinction between necessary price and political price and possesses a rudimentary labour theory of value. Following Petty, Cantillon distinguishes between ‘intrinsic value’ and ‘market price’ based on a land-cum-labour theory of value. The contributions of Smith, Ricardo, Marx, and Sraffa to value theory follow this tradition of objectively determining value.

The dominant theory of value in contemporary economics is not the objective theories of value found in Ricardo, Marx, or Sraffa but the subjective theories of value whose pioneers are Jeremy Bentham, William Stanley Jevons (whose son taught at Allahabad University), Alfred Marshall, AC Pigou, and Paul Samuelson. The value theory (or microeconomic theory, as it is now called more fashionably) found in the textbooks of Hal Varian or Gregory Mankiw take the following as data when solving for equilibrium prices and quantity: (i) preferences, (ii) technology, and (iii) endowments. On the other hand, Piero Sraffa’s value theory, found in his Production of Commodities by Means of Commodities (1960), takes the following as given when arriving at a solution for prices and one distributive variable: (i) size and composition of output, (ii) technology, (iii) the real wage or rate of profit.

How do you measure the data listed above’ While technology, endowments, and real wage can be measured in terms of the commodity-mix, the rate of profit is a pure number. However, how are preferences measured (or ordered)’ They are measured in a subjective manner. This is one of the core differences between the dominant marginalist theory of value and the Classical/Sraffian objective theory of value. Given this core difference, it is incorrect to treat the objective theory of value found in Ricardo or Marx as a precursor or rudimentary version of modern subjective theory of value. And therefore, it is important that students of economics learn about different value theories in microeconomics.

I shall end by drawing your attention to the practical implications of believing in the marginalist conception of the labour market vis-a-vis that of the classical economists (see an earlier post on wages). Under conditions of perfect competition, the equilibrium real wage is determined by the marginal product of labour. Any intervention, such as a minimum wage legislation or collective bargaining by the workers, results in imperfections and consequently leads to unemployment. However, in classical economics, real wage is exogenously determined though historical and social factors. If you believe in the marginalist conception, the logical policy recommendation is to eliminate any intervention/imperfection (such as minimum wage legislation or collective wage bargaining) whereas if you believe in the classical conception, you would treat collective wage bargaining and minimum legislation as legitimate ways of improving workers’ conditions.

This post argues that value theory matters for both contemporary politics and policy. And consequently, the teaching of microeconomics needs to become pluralistic. Moreover, as pointed out earlier, the politics of microeconomics ought to be made explicit. It is, as Keynes, said that we are the ‘usually the slaves of some defunct economist.”

Malthus: The Scope of Political Economy

In these difficult times we live in, what economics needs is perhaps, depth and not breadth. Unemployment, poverty, inflation, food insecurity, financial fragility, debt crisis, etc can be better understood and tackled by diverting increased resources (time and financial) in understanding the production, distribution, exchange and consumption of wealth. This blog post very briefly examines Thomas Malthus’s (1766-1834) view of political economy ‘ its method, scope, uses and limitations. ‘For this purpose, I have used John Pullen’s definitive variorum edition of Malthus’s Principles of Political Economy published as 2 volumes by Cambridge University Press in 1990.

According to the Cambridge Advanced Learners Dictionary, ‘scope’ is defined as the ‘range of subjects covered’. In the context of political economy, scope refers to the range of subjects it covers. That is, the scope of political economy informs us about the sphere of analysis, the boundaries or limits, the kind of situations it describes and its applicability in the real world or, its relevance. Keeping in mind that mathematics played only a small role in political economy during Malthus’s time, let us see what his view of political economy is: ‘the science of political economy bears a nearer resemblance to the science of morals and politics that to that of mathematics’ (p. 2). Undoubtedly, morals played and still play an important role for interventions in the economy based on what we consider to be a ‘good society or economy’. And politics, distributional conflicts over income, land, natural resources and employment are integral part of any economy. Thus, it is important that political economy (and economics) takes into account these distributional conflicts when theorising or modelling an economy. However, for purposes of theory, these conflicts can be taken as given from outside economics (exogenous) or can be determined within economics, in the manner of behavioural economics.

It would not have mattered if political economy was/is not a very important branch of knowledge. Reminiscent of Keynes’s words, Malthus writes: ‘The science of political economy is essentially practical and applicable to the common business of human life. There are few branches of human knowledge where false views may do more harm, or just views more good’ (p. 12). But, Malthus wrote it more than a century earlier. (See also Sismondi’s words of a similar nature). Since Malthus viewed political economy to have significant practical applications, the complete title of his book reads ‘Principles of Political Economy Considered with a View to their Practical Application‘. The editor, Pullen, gives us a bit more information on this matter. ‘This was apparently a lifelong concern. As a student at Cambridge in 1786 Malthus wrote to his father: ‘I am by no means, however, inclined to get forward without wishing to see the use and application of what I read. On the contrary I am rather remarked in college for talking of what actually exists in nature, or may be put to real practical use” (p. 291, Vol II; all other page numbers excepting this refer to Vol I).

Malthus understands that ‘To trace distinctly the operations of that circle of causes and effects in political economy which are acting and re-acting on each other, so as to foresee their results, and lay down general rules accordingly, is, in many cases, a task of very great difficulty’ (p. 12). Economic processes are caused by a multiplicity of causes and often not by a single one. Owing to this and because of his view of economics as a practical science, he maintained that ‘[t]o know what can be done, and how to do it, is, beyond a doubt, the most valuable species of information. The next to it is, to know what cannot be done, and why we cannot do it’ (p. 17). In other words, we must be very aware of the ‘scope’ of our knowledge.

Furthermore, if our objective is to understand the problems of unemployment and poverty, we must perhaps, as mentioned in the introduction, study in-depth the process of generation and distribution of wealth. I conclude with a statement by Malthus: ‘If we wish to attain anything like precision in our inquiries, when we treat of wealth, we must narrow the field of inquiry, and draw some line, which will leave us only those objects, the increase or decrease of which is capable of being estimated with more accuracy’ (pp. 27-8).

For ‘Social’ Economists

Over the past years, I have come across many students of economics who complain about the irrelevance of economics to understand practical issues. Among them, some go on to choose sociology, which is considered to be more practical and realistic. This post is for those who think that the dominant practice of economics is not done the right way. It is certainly possible to be a ‘social’ economist. In fact, this post is about ‘social’ economists and not about social economics, a distinct field in economics, which comprises economists who think ethics, values, philosophy, culture, etc are important.

Social economics/socio-economics/new social economics are emerging fields within economics whose central premise is that one cannot study an economy meaningfully without paying attention to social institutions, culture, beliefs, etc. It is disturbing to know that the practitioners of social economics, socio-economics and new social economics distinguish their work among themselves. This trend is largely because of the urge to be ‘pioneers’ in ’emerging’ areas in economics. The following extracts from The Elgar Companion to Social Economics shows this clash of identity:

‘The association that promotes socio-economics, the Society for’ the Advancement of Socio-economics (SASE) advertises itself rightly as’ an interdisciplinary organization. In recent years, socio-economists have’ increasingly used insights from biology, in addition to psychology and sociology.’

‘The association that promotes social economics, the’ Association for Social Economics (ASE), presents itself as a pluralistic’ organization that emphasizes the role of social values and social relationships in economics. Social economists have a variety of additional orientations, including institutionalism, Marxism, feminism, post-Keynesian,’ Kantianism, solidarism, neo-Schumpeterian, environmentalism and’ cooperativism. ‘

‘There is also a quite recent literature termed the ‘new social economics‘,’ which begins with market relationships, and then seeks to add ‘non-economic’ social content to their analysis. That is, rather than embed the’ economy in social relationships, these more recent contributions seek to’ embed social relationships in the market. ‘

In any case, these emergent fields indicate a dissatisfaction with the dominant economics profession. However, in their haste to carve out a separate field, the essentials are often lost. The adjective social prefixed to economics indicates the existence of an economy which cannot be clearly demarcated from the society in any clear fashion. Moreover, this usage also emphasises the role of how society is organised. The following are some questions pertaining to the economic aspects: Are the people motivated by reason’ To what extent does profits motivate entrepreneurs’ On what basis are people employed ‘ caste, gender, religion, academic qualification, political connections, bribes, region’ Can we visualise distinct social classes in the economy based on their ownership of land’ What are the sort of interactions which take place between agricultural, manufacturing and service sectors’ How is finance organised in the country’ How important are informal sources of finance’ Does labour laws apply to all sorts of employment’ How does the government intervene in domestic production and consumption of commodities are services’ What sorts of price and quantity controls exist’ These are some of the questions which aid in understanding how the economic aspects of a society are organised.

Today, economists are asked for their opinion/advice on matters pertaining to financial crises, foreign exchange constraints, poverty, unemployment, inflation, rural development, etc. Only an economist who is reasonably aware of how the society is actually organised will be able to devise strategies and chart plans which can effectively tackle these economic issues. A ‘social’ economist is one who understands the complexity of social studies in general and of economics in particular. In addition, she will always resist the temptation to think in atomistic terms and will resist universal solutions. She will also be aware of the significance of non-market transactions.

Even if the dominant form of economics teaching and research is asocial, the academic enterprise of economics does give space to alternative approaches. However, one must be careful because some of these approaches appear ‘social’ but are in fact static and atomistic. A reading of Adam Smith, the father of economics, easily points to the role and significance of social values and institutions. It is for this reason that we need to return to classical economics, where, as one of the earlier posts argued, economics is’ the study of commodities; but their economic analysis can easily incorporate social values and institutions as well.