Tag: History of Economic Thought

Teaching & Learning History of Economic Thought (HET): Some Observations

The following is a short reflection and response to the lectures, questions, and conversations at the recently concluded 3-day HET workshop at MIDS, Chennai. In personal conversations, many people thought that HET is about economic ideas that originated in a particular context. 

That is, Smith’s economics is a response to his sociopolitical context. And therefore, the implication is that Smith’s political economy be placed in a museum—an archaeological site that we visit occasionally. Another implication to this appears to be that HET is not relevant to contemporary thought because our context is different from that of Smith’s. 

Such an approach to HET, to me, makes it a rather dead subject. Consequently, in the economics curriculum, it serves other core papers such as micro and macro by providing it with context/history and thereby improving student learning/understanding. Yes, this is important, but it makes HET an instrumental subject. However, that, per se, is not an issue because all knowledge in one way or the other are instrumental. 

I see 3 problems with such a view. 

One, it is a reductionist approach because it reduces ideas to the context, be it intellectual (i.e., texts, speeches) or sociopolitical (i.e., laws, wars, conflict). How do we then account for human ingenuity and creativity? Also, how do we understand classics—that have a timeless quality? Or, are we saying that there is nothing in economics that may be applicable across time and space? [On the question of applicability of economic theory, see the discussion in Chapter 6 of my macro book.] 

The second problem is that such a reductionist view of HET inevitably succumbs to the linear view of intellectual progress. Wherein the ideas of Solow are better than Smith objectively speaking and that the ideas of Solow are more relevant to us because, in terms of calendar time, Solow’s work is closer to us than Smith’s. 

The third problem is that we are okay about marginalized ideas remaining forgotten. Studying ideas—texts written by women (and folks whose texts were not popular)—remain invaluable for contemporary thought and action. This perhaps depends on how comfortable we are about ignoring the ideas of our ancestors. (I am currently reading The Penguin Book of Feminist Writing edited by Hannah Dawson; the first text belongs to 1405 and the last one to 2020.)

HET: Understanding Economics

HET allows us to organize past ideas in a meaningful manner. The simplest organizer is that of calendar time. But ideas are forgotten, revived, exhumed, bolstered, expelled, popularized for a variety of reasons and so a simple chronological account cannot provide a sufficient historical account of economic ideas. 

We need to have other ways of organizing so that we understand not only the past better but also the present. Another organizing principle among historians of economic thought is that of ‘school of thought’ or ‘paradigms’. For instance, HET books discuss ‘classical’ and ‘neoclassical’ general equilibrium (Harvey & Gram 1980); ‘neoclassical’, ‘Keynesian’ and ‘Marxian’ (Wolff & Resnick 2012); ‘classical political economy’ and ‘supply and demand theories’ (Bharadwaj 1986). 

Many historians of economic thought, including me, reject the ‘neoclassical’ label. This is because it suggests that there is continuity between ‘classical’ (associated with economists such as Quesnay, Smith, Ricardo) and ‘neoclassical’ (associated with economists such as Say, Walras, Marshall). The analytically satisfactory label is ‘marginalist’—because of their reliance on concepts such as marginal utility, marginal cost, etc. 

HET tells us that competing ideas have always existed; we often only learn about those that have been popular/dominant. For instance, Ricardo disagreed with Say that exchange value is determined by use value. And today’s microeconomics textbooks teach us that commodity prices are determined by cardinal/ordinal utilities. When Keynes and Sraffa were writing, the economic ideas of Marshall were dominant and those of Smith and Ricardo were forgotten. HET allows us to understand that the evolution of ideas has been anything but linear. 

And today as well, research happens in all schools of thought—contrary to what is implied in mainstream textbooks on micro, macro, econometrics, labour. 

The study of HET

We study the world by dividing it into different parts; for instance, the physical and social worlds. Or the natural sciences and human sciences. Or physics and economics. Economics may be further sub-divided into micro and macro. Or labour and ecological economics. 

Within HET, scholars sometimes distinguish between ‘history of economic analysis’ and ‘history of economic thought’ where the former is a subset of the latter. We can find economic thought in Arthashastra but there is no evidence of any theorizing/analysis. 

Another division in HET is that between the internalists and externalists although I think that most of us operate somewhere in that spectrum. The internalists study economic ideas by focusing on previous economic ideas and on the logical framework of that ideas. For example, when studying Ricardo, we read his texts and the texts he was influenced by such as Smith’s Wealth of Nations. My 2021 article ‘On “effectual demand” and the “extent of the market” in Adam Smith and David Ricardo’ is an example of this. When an externalist studies Ricardo, they include his social and political context and interpret his ideas as responses to them. A good example of this is Timothy Davis’s Ricardo’s Macroeconomics: Money, Trade Cycles, and Growth (2005). A good biography warrants a synthesis of the externalist and internalist approaches. 

Summing-up

HET allows us to understand the ebb and flow in dominant paradigms. It makes us aware that history is replete with debates across as well as within paradigms. Indeed, debates spur knowledge production. While most economics textbooks suggest consensus, economics journals (both orthodox and heterodox) suggest dissensus. There are conceptual debates, refinements, revivals and contextual critiques, challenges, applications. Furthermore, adopting an HET perspective in the teaching of microeconomics and econometrics will provide the learner with a critical grounding in history, politics and philosophy. 

I thank Thair Ahmed for helpful comments.

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.

Sraffa: The Origins of ‘Marginal’ Analysis

Since the advent of the ‘marginal’ method, the doctrines of the old classical economists have been submerged and forgotten. It is this standpoint that Sraffa revives in his 1960 book Production of Commodities by Means of Commodities. Being third in the series of posts [Post 1; Post 2] on Sraffa, this post examines the origin of the ‘marginal’ method and its subsequent (mis)use by the neoclassical economists. The posts concludes with a brief mention of how history of economic thought is important so as to place theories in a proper context.

In the preface of his book, Sraffa points out that in a system of production where the scale of an industry or proportions of factors of production remained unchanged, one would not be able to locate marginal product and marginal cost. To put it differently, marginal analysis is done by considering ‘potential change’. That is, we try to find out variations in equilibrium quantities and prices with respect to infinitesimal changes in the neighbourhood. [Bharadwaj 1986, p 39]

What we do not pay adequate attention to, is that the most familiar case of ‘marginal analysis’ is that of the product of marginal land (also known as no rent land) in agriculture, when lands of different qualities are cultivated side by side. This refers to the well known differential rent theory of David Ricardo. In fact, it is the case of diminishing marginal returns on land which is at the junction of the ‘fundamental methodological shift from classical to equilibrium theory’. [Bharadwaj 1986, p 40] This can be understood only through a discussion of ‘extensive’ and ‘intensive’ margins.

Cultivation on lands of different qualities is visualised as the outcome of a process of ‘extensive’ diminishing returns. On the other hand, successive use of more output producing techniques refers to the process of ‘intensive’ diminishing returns. [Sraffa 1960, p 76] In the case of ‘extensive’ margins in cultivation, ‘the rents can directly worked out on the basis of the single observed situation.’ [Bharadwaj 1986, p 41] Whereas, in the case of ‘intensive’ margins, the calculation of rent requires a quantitative change in the situation. That is, successive doses of labour and ‘capital’ need to be added to the land. And, a further assumption is made on the nature of these ‘doses’. These ‘doses’ are considered to be homogeneous. As Krishna Bharwadwaj explains: ‘At any moment of observation, no dose is distinguishable from each other. No ‘marginal product’ can, therefore, exist in this case without introducing potential change.’ [Bharadwaj 1986, p 42]

Thus, it is the Ricardian theory of rent which provided the basis for the neoclassical theory of distribution by providing an inverse relationship between successive doses of labour and ‘capital’ and their remuneration. This theory of Ricardo was intended to explain the origin of rents. In the hands of later authors, this was generalised to labour and ‘capital’. Hence, we see the inverse relation between ‘capital intensity’ and rate of profit in microeconomics textbooks of today.

From this excursion into the Ricardian theory of rent, two aspects are very clear. First, the concept of ‘marginal’ or ‘margins’ was used exclusively in the domain of cultivation. In ‘intensive’ cultivation, it is obvious that the output would increase only until a certain point, owing to the quality of that piece of land. Whereas, in the case of ‘extensive’ cultivation, the output would increase till all the acres of land are cultivated- notice the scarcity element here. What is not clear is the rationale of extending such an analysis into the area of manufacturing! Also, it is well accepted that land is scarce; but, is ‘capital’ or produced commodities scarce in a similar way’

No book of microeconomics mentions the origins of the famous ‘marginal’ analysis. And this method is so entrenched in the profession, that it is almost impossible to throw it away. It is in this context that other conceptual frameworks, that pay more attention to the changing historical conditions, assume importance. Probably, we need to revisit earlier theories and theorists not just for their own sake but for our sake as well in throwing light on contemporary issues. Sraffa’s work has inspired a lot of work on the history of economic thought, which will be summarised in a later post.

References

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

Sraffa, Piero (1960), ‘Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory‘, Cambridge University Press: Cambridge.