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.
REFERENCES