1. When I was a student in the 1960s, we basically thought of economics as being divided into two segments: there was "economic theory" on the one side, and there was a whole mish-mash of economic history, "Indian economics" and "development economics" on the other. Those who were very bright and mathematically competent (the two were taken as synonymous) did the former and were on a par with the most highbrow sahibs , while those who were less so did the latter (large chunks of which were sometimes pejoratively referred to as "cowdung economics"). Nowadays, ever since a host of game theorists and other mathematically-oriented economists have invaded the domain of development economics, this absurd stigma attached to the latter has diminished somewhat, though it has by no means disappeared, but the basic dichotomy still persists, between "economics" (or "economic principles" if you like) and "development economics". In almost every university in the world, including every Indian university, there is a whole set of lectures on "economic theory" which makes absolutely no reference to the developing countries or their problems. Then there is a whole set of separate lectures on "development economics" which deal exclusively with these problems, in which some of the tools of analysis learned in the first set of lectures are occasionally applied. Now, the question arises: how can such a dichotomy be justified?

2. The most obvious answer to this question would probably be as follows: the developed economies and the underdeveloped economies have very different institutions, notwithstanding the fact of an overlap of institutions between them. The former represent by definition a higher level of development than the latter. It follows then that the institutions prevailing in the former must constitute the central focus of analysis, from which the study of the latter economies, though necessarily separate because of their specificities, can still benefit, both because of the overlap referred to, and also because the former represent the ultimate goal. Looking at it differently, since developing countries are those which happen to lag behind the developed ones along the road of development, there is an obvious rationale in studying the institutions of the former as the central focus and then looking at the specific reasons why the laggards lag behind.

This perception, interestingly, is not confined to "mainstream" thinking alone; it is to be found even within the Marxian tradition. Marx's remark that "the country that is more developed industrially only shows, to the less developed, an image of its own future" (1977, p.91), which was made in the context of Britain and Germany, is often universalized to cover the case of even the underdeveloped economies, which are presumed to follow, quite spontaneously in the normal course, the path traversed by Britain and the other developed countries. From this it follows that focussing on the analysis of these developed economies taken in isolation constitutes the first priority while the reason why some others lag behind can be discussed subsequently. At any rate the two inquiries are essentially separate according to this perception.

Of course one can have an alternative, and more sophisticated justification for this procedure within the Marxist tradition. One can argue that the law of motion of a particular mode of production, whether capitalist or feudal, seen in its internal unity and as an "ideal type", must take precedence over, or form a prelude to, the "concrete analysis of the concrete conditions", of economies caught in a process of transition, with admixtures of capitalist and pre-capitalist characteristics. On this reasoning, whether or not the underdeveloped economies ever manage to make the transition to capitalism , i.e. whether or not they are only "laggards" who would eventually "catch up", there is a purely theoretical case for a dichotomy between two areas, which we traditionally designate as "theory" (focussed primarily on, but not referring concretely to, the advanced countries) and "development economics" (referring concretely to the underdeveloped countries).

3. There is however a basic flaw in this entire perception: it sees the developed economies, or "capitalism" for that matter, in exclusive isolation. It is predicated on the view that capitalism is a self-contained system which can therefore be legitimately analyzed in isolation from its pre-capitalist environment. Indeed the reason why both "mainstream" theory and certain tendencies within the Marxist tradition converge on this question of dichotomy is that they both view capitalism as a self-contained system, no matter how basic their other differences about its nature may be. To be sure, the existence of trade relations is recognized, but "mainstream" economics sees trade merely as enlarging the opportunities available to a country, but not as essential for an economy's existence and growth (on this more later). Trade in short is seen to benefit every country, and to constitute an additional bonus for all. Trade theory, though a part of "economic theory" (indeed a special case for the application of its basic conclusions) does not therefore enter the core of it.

Even within the Marxist tradition, the scope for viewing capitalism in isolation, as being self-contained, arises, despite Marx's acute awareness of the phenomenon of colonial exploitation and his remarks about the "primitive accumulation of capital" through colonial loot, because in his model of Capital (Volume I) international trade scarcely figures. Whether this is a result of the imprint of Classical Political Economy (especially Ricardo) on Marx, or a reflection of the unfinishedness of Marx's project, is beside the point. It makes possible the emergence of the above-mentioned theoretical dichotomy within the Marxist tradition as well, even though the literature on imperialism that came up around the First World War within this tradition, makes the tradition as a whole immune to the charge of upholding this dichotomy.

The result of this dichotomy, however, which "mainstream" economics so assiduously cultivates, is to impoverish both "economic theory" as well as "development economics" . In other words it does not merely detract from an understanding of the problems of development; it makes the so-called economic theory itself largely irrelevant. I shall cite three examples from economic theory to illustrate this point.

4. My first example relates to "mainstream" Growth Theory. I shall refer explicitly only to Solow's model (1956), even though what I say applies to Growth Theory in its other incarnations as well. The basic conclusion of the theory is that the rate of growth of a capitalist economy is tethered in the long-run to the exogenously given rate of growth of its labour force in "efficiency units" (in recent "endogenous" growth theories, this rate of growth is not entirely exogenous, but the exogenous component nonetheless exercises a restraining effect on long-run accumulation^[1]). This is because, unlike in the Classical or Von Neumann models, labour here is a "rent good"; it cannot be internally produced or acquired in adequate quantities at the going wage rate.

At first sight this appears a plausible assumption. Even though the advanced countries may not have full employment, they have reserve armies of labour which can get exhausted quickly; and the very process of exhaustion would put pressure on the wage rate and lower the rate of accumulation (as Goodwin (1967) had argued). What is wrong then in asserting that accumulation is constrained by the exogenously given rate of growth of the labour force?

The error consists in believing that capital has available to it only the labour force of its country of origin. In fact the entire labour force of the world is at its command, and the reserve army at the world level is so large that the constraint on accumulation cannot conceivably be attributed either to any absolute labour shortage or to any pressures on the wage rate arising from the process of its exhaustion.

This is no idle speculation. In fact, throughout history, capital accumulation by the metropolis, whether located in the metropolis itself or outside of it, has always drawn on world labour reserves (located in particular in India and China) whenever the need has arisen. In the nineteenth century, there were two huge streams of migration: of European labour migrating to the temperate regions of white settlement, occupying land by forcibly dispossessing the local population, and having capital migration following in its wake; and of tropical labour, mainly from India and China, migrating to other tropical lands to serve the needs of European capital in mines and plantations. These two streams were kept strictly separate by migration controls, and their wage rates (or incomes per head) too were vastly different (owing to the former's access to "free land"). But each of these was a mighty stream, involving as many as 50 million persons^[2]. Similarly, in the post-Second World War years when Keynesian demand management lowered unemployment in the metropolis, substantial migration took place from less developed countries to the metropolis to serve the needs of capital, from Turkey to Germany, from Algeria to France, from the Indian subcontinent to the U.K., from Mexico to the U.S., and so on. Given this enormous scale of migration that has unfailingly occurred historically to serve the needs of capital, to believe that capital meekly adjusts to the "natural rate of growth" of labour force within its country of origin is nothing short of a travesty. Indeed, as Nicholas Kaldor came to emphasize in his later writings (Kaldor 1978), the one thing that capital accumulation has never been constrained by is shortage of labour. But the poverty of "mainstream" theory here arises because of looking at the capitalist economy in isolation, as a self-contained entity, with no access to labour from pre-capitalist economies.

5. The second example relates to the so-called Non-Accelerating Inflation Rate of Unemployment (NAIRU)^[3]. The monetarist version of it is the Natural Rate of Unemployment (NRU) which is nothing else but de facto full employment. Let us consider the monetarist version first. At NRU the supply price of labour equals the marginal product of labour. The level of employment can be increased beyond what is given by the NRU, but only if the workers do not anticipate inflation. And even in such a case, it can be maintained at this level only if expectations are adaptive and not rational, and then too only at the expense of accelerating inflation. The presumption underlying all this is that a given amount of labour is supplied only if a particular real wage is expected to be obtained; if the expected real wage is lower, then only a smaller amount of labour would be supplied. Now, in third world economies saddled with massive labour reserves this is patently untrue; even when real wages secularly decline, without there necessarily being any divergence between the expected and the actual real wage, the labour supply never starts drying up. From this fact it follows that in so far as commodities produced by third world labour enter the production process in the metropolis as inputs, talking of a Natural Rate of Unemployment is meaningless.

Even if we take the more general concept of NAIRU which is in no way linked to de facto full employment, the same question again arises: as long as there are workers, located within an ocean of labour reserves, whose ex-ante wage-claims are compressible in real terms, we cannot talk in terms of a NAIRU. If these workers are located outside the capitalist economy, so that their lower real wage rate expresses itself as lower terms of trade for the outside economy's product vis-a-vis that of the capitalist economy, then one can talk of a particular level of NAIRU within the capitalist economy, associated with each level of the terms of trade . But since the real wage rate of these workers is ex ante compressible, i.e. can be actually lowered without causing accelerating inflation, it follows that the terms of trade can always be turned against their products, to the extent required to prevent accelerating inflation in the metropolis, no matter what the level of employment. It follows in other words that the capitalist economy can settle at any level of employment without experiencing accelerating inflation, as long as labour reserves exist outside of it, in the surrounding pre-capitalist economies. The fact that the contrary has been asserted, and on the basis of it the possibility of Keynesian demand management has been denied, is only because the capitalist sector has been seen in isolation, as a self-contained entity.

6. My third example concerns Trade Theory^[4]. There is a basic presumption underlying the theorems of Trade Theory which is worth re-iterating, if only because it is not always appreciated. And that is the following.

All the propositions of Trade Theory, such as "Free trade is better than no trade", or "Free Trade is better than restricted trade" etc. are propositions which are supposed to hold independently of what the actual post-trade income distribution is going to be. The term "better" in other words is given a specific meaning, namely that the Utility Possibility curve associated with the supposedly "better" option lies outside that associated with the "worse" option, which in turn would happen only if a vector-wise larger bundle of goods becomes available through trade compared to the pre-trade situation. In other words, the proposition that trade would be unambiguously beneficial, i.e. would increase "potential welfare" (Samuelson 1950), can hold only when it enlarges, vector-wise, the bundle of available goods compared to the pre-trade situation. This in turn can only happen when each country produces (in the simple two-good case) both the goods in the pre-trade situation. In other words, "mainstream" trade theory, no matter whether we are looking at the Ricardian or the Heckscher-Ohlin versions of it, necessarily assumes that each country can produce, and does produce, in the pre-trade situation both the commodities in positive amounts.

This however is quite obviously an erroneous presumption. Trade between the metropolitan countries and the tropical colonies was precisely of the sort where the former obtained through trade commodities from the latter which they themselves could not produce, commodities like tea, coffee, rubber, cocoa, sugar, fruits, cotton etc. Indeed Ricardo's famous example of England and Portugal engaging in trade to mutual benefit was a complete fudge, since the presumption that both England and Portugal could produce both the commodities, wine and cloth, was wrong. England could certainly not produce wine, even though Portugal could produce both wine and cloth. Likewise the tropical colonies could produce both types of goods, the range of primary commodities mentioned above, as well as a whole range of manufactured goods, while the metropolis could produce only manufactures. The motives for trade and the implications for trade under these circumstances involving an asymmetry between the trading partners are vastly different from what Trade Theory suggests.

If trade allows a country to get hold of goods that it otherwise could not have access to, then surely the motive for engaging in trade must be very different from what "mainstream" theory suggests. Likewise, once we recognize that certain lands, certain conditions can produce only certain things, and thereby jettison the production functions approach which assumes substitutability in the production of goods, it follows that trade, in any period, would not only necessarily reduce the availability of the exported good in the metropolis, but may also reduce the availability of the exported good in the tropical economy, which completely destroys the conclusions of "mainstream" Trade theory, regarding the beneficial effects of trade for all the economies. This naive (one may even call it ideological) view of trade as being beneficial for all, is sustained once again by a view of the capitalist metropolis as a self-sufficient, self-contained entity, for which engagement in trade is not essential, though it is beneficial.

To sum up, as the three examples cited above show, the view of capitalism as a self-contained entity, makes for poor theory as much as for poor development economics: indeed each of the three examples constitutes a case where ignoring the interactions between the capitalist and pre-capitalist segments impoverishes not only our theoretical understanding of capitalism but also our understanding of the role of, and hence the problems of, the underdeveloped world, the fact that it constitutes a source of labour reserves for the capitalist metropolis, the fact that it is necessary for providing stability to the capitalist system, and the fact that it is the source of otherwise unobtainable raw materials for capitalism (this is by no means an exhaustive list of its uses).

7. Under these conditions, it follows, the dichotomy which lies at the core of the economics discipline, between "economics" and "development economics" must be rejected. The underdeveloped economies are not mere laggards waiting to catch up with the developed countries. Their present predicament is a result not of their pristine pre-capitalist state of being, but of their interaction (no doubt on the basis of their pre-existing structures) with metropolitan capitalism. The developed and the underdeveloped countries, in other words, together constitute the totality of capitalism (which is not the same as saying, as Frank (1975) and others do, that the underdeveloped countries are ipso facto capitalist). This totality must be the domain of analysis of economic theory, in which case there would be no separate "development economics". We could of course still study the specific pre-capitalist institutions existing in these societies, but then this study would only be a part of the analytical totality, integrated into it, rather than constituting a separate domain. Putting it differently, we may study a set of topics which we may still conveniently refer to as "development economics", but we can do this properly only when the current distinction between "economics" and "development economics" has got obliterated by a study of the totality of the capitalist system. The topics we would be studying in such a situation under the rubric "development economics" would then constitute mediations in the analysis of this totality.

Let me give an example. We cannot of course study the Indian economy without studying the prevailing agrarian relations, and in that sense a study of agrarian relations remains an integral part of "development economics". But the precise agrarian relations prevailing have been shaped by the economy's integration into the capitalist system, though these relations differ from country to country, are not reducible merely to some predetermined outcome of this integration, and must in turn throw up contradictions for this process of integration. We may, for the sake of convenience, look at these country differences, these historical specificities, and these contradictions under a separate rubric called "development economics" but this is still, theoretically, an integral part of the totality of "economics", not a separate domain. What I am suggesting in other words is an epistemological integration of the two domains which are currently dichotomized, though functional demarcations may still continue for the sake of convenience.

8. Indeed not resorting to such an epistemological integration would give rise to a highly flawed understanding of important issues. Consider for example the issue of rural poverty. The Bretton Woods institutions would have us believe that the rural poverty ratio has gone down in India in the nineties; and to the extent that it has not, they would attribute the failure to what they call "bad governance". This explanation is in line with the dichotomy we have been discussing, which postulates that the problems of the underdeveloped countries are specific to their own conditions and are in no way caused by integration with metropolitan capitalism.

But even without going into the question of what has happened to the rural poverty ratio in the nineties (which by now has become an ideologically-charged issue), we can safely say that "rural distress" has increased at least in the sense that per capita foodgrain availability in the nineties has declined drastically. Indeed, per capita foodgrain availability which had gone down from around 200 kg. per annum at the beginning of the twentieth century to around 150 kg. by the time of independence, had recovered to around 180 kg. by the end of the eighties (177 kg. in the triennium centred on 1990-91). By 2000-01 however it had gone down to around 150 kg. (After a slight recovery in 2001-02 it again came down in 2002-03 to 150 kg. and even this figure was attained because of a host of drought relief operations)^[6].

The reason for this decline lies not in the decline in per capita foodgrain output during the decade, though that too has happened, but in an even more drastic decline in the purchasing power in the hands of the rural poor. This is confirmed by the burgeoning foodgrain stocks with the government, which, prior to the drought of 2002-03 (that has led to some decumulation of inventories) and the massive food exports (at subsidized prices), had amounted to over 60 million tonnes. Even today the level of stocks with the government is around 30 million tonnes which is at least 10 million tonnes more than the total buffer and operational stocks which are considered necessary^[6].

The reason for this drastic squeeze in rural purchasing power inter alia lies in the sharp fall in the rural development expenditure undertaken by the government, as a proportion of GDP. And the latter in turn is part of the deflationary policy which is forced upon governments all over the world by the emergence of a new form of globally-mobile international finance capital. (The only government that enjoys a degree of immunity from this pressure to deflate the economy is the U.S. whose currency, because it is considered "as good as gold" by wealth-holders in the entire capitalist world, enjoys a special status). In short, India's progressive (though by no means, as yet, total) integration into the vortex of globalized finance has exposed the government to pressures to deflate the economy. (Deflation is the favourite recipe of international finance capital and it is no accident that even in the midst of massive unused foodstocks, unutilized industrial capacity, and burgeoning foreign exchange reserves, all of which characterize the Indian economy today, the most commonly-heard refrain at present is for a curtailment of the fiscal deficit, which would only succeed in exacerbating the demand constraint).

The increase in rural distress of course is more general than the decline in per capita foodgrain availability (the growing incidence of farmers' suicides for instance, though another fall-out of the process of "globalization", has little to do with foodgrain availability). But this decline is one important factor contributing to the growth in rural distress in recent years; and it is the direct outcome of the economy's integration into the sphere of globalized finance. This integration in turn has been forced upon it by the emergence of a new and powerful actor in contemporary capitalism, international finance capital in a new form, whose interests are assiduously promoted by the Bretton Woods institutions^[7]. Thus, an issue, viz. rural distress, that is pervasively considered "internal" to the country, turns out on closer examination, to be an outcome of developments in world capitalism. Unless we are sensitive to these developments, and alter our understanding and teaching of "development economics" to overcome the dichotomy between "economics" and "development economics", we would be unable to make any intervention for the betterment of our people, which after all is the objective behind the study of economics.

October 6, 2003.

REFERENCES

1. Frank A.G. (1975) Capitalism and Underdevelopment in Latin America , Penguin.
   Goodwin R.M. (1967) "The Growth Cycle" in C.H.Feinstein ed. Socialism, Capitalism,and Economic Growth , Essays Presented to Maurice Dobb, Cambridge.
2. Kaldor N. (1978) Further Essays on Economic Theory , Duckworth, London .
3. Lewis W.A. (1978) The Evolution of the International Economic Order , Princeton.
4. Marx K. (1977) Capital , Volume I, Vintage Books (Paperback), New York .Patnaik P. (1977) Accumulation and Stability Under Capitalism , Clarendon Press, Oxford .
5. Patnaik P. (2003) The Retreat to Unfreedom , Tulika Books, Delhi .
6. Patnaik U. (2003) "On the Inverse Relation Between Primary Exports and Food Absorption in Developing Countries Under Liberalized Trade Regimes" in Jayati Ghosh and C.P.Chandrasekhar ed. Work and Well-being in the Age of Finance , Tulika, Delhi.
7. Patnaik U. (2003a) "Foodstocks and Hunger", Social Scientist , July-August.
8. Samuelson P.A. (1950) "The Evaluation of Real National Income", Oxford Economic Papers, January.
9. Solow R.M. (1956) "A Contribution to the Theory of Economic Growth", Quarterly Journal of Economics.

[1]This is true of all "endogenous" growth theories in which the attainment of an equilibrium is not dependent on a specific rate of labour force growth. In these models the larger the rate of labour force growth the higher is the rate of growth of capital stock and output in steady state. There are however some theories in which equilibrium can be attained only with a stagnant population (any positive rate of population growth makes the economy explode). In the case of these, the assertion in the text that the rate of accumulation would be higher for a higher growth rate of the exogenous component (viz. labour force) would not be justified. But these models, no matter what one thinks of their insights, must be considered structurally flawed in this respect.

[2]W.Arthur lewis (1978, p.14) writes: "The development of the agricultural countries in the second half of the nineteenth century was promoted by two vast streams of international migration. About fifty million people left Europe for the temperate settlements...About the same number- fifty million people- left India and China to work mainly as indentured labourers in the tropics on plantations, in mines, or in construction projects...".

[3]The argument of this section has been developed at length in Patnaik (1978).

[4]The argument given in this paragraph is taken from U.Patnaik (2003).

[5]These figures are taken from U.Patnaik (2003a).

[6]It is sometimes argued that the reason for the decline in per capita foodgrain consumption is a change in tastes that is occurring all over India with the increase in per capita income. This claim however is without any merit for two reasons: first, evidence from all over the world shows that as incomes increase, while the direct consumption of foodgrains does not increase (and may even decline) the direct-plus-indirect consumption (the latter via animal feed and processed foods) increases as a result of dietary diversification, and there is no reason why India should be an exception to this general rule. Secondly, the decline in per capita foodgrain availability (and hence by implication in per capita foodgrain consumption) has also been accompanied by a decline in per capita calorie intake in rural India during this same period which is as high as 13 percent, and which only confirms the hypothesis of growing rural distress. See U.Patnaik (2003a).

[7]Different aspects of this new form of international finance capital, as well as the implications of its emergence, are discussed in a number of essays of mine collected together in Patnaik (2003).