My Recent Works, Interviews etc on India’s Money, Public Finance, Banking, Trade, BoP, Land, etc (an incomplete list)

255360_10150856082957285_243609311_n185918_10150095999572285_91626_n

My “Critique of Monetary Ideas of Manmohan & Modi: the Roy Model explaining to Bimal Jalan, Nirmala Sitharaman, RBI etc what it is they are doing” of 2019 is here.

 

 

My critical assessment dated 23 August 2013 of Professors Jagdish Bhagwati & Amartya Sen and Dr Manmohan Singh is here

 

 

My critique of PM Modi’s 8 November 2016 statement began on Twitter immediately, and is  summarized here “Modi & Monetary Theory: Economic Consequences of the Prime Minister of India”

 3dec

My critical assessment dated 19 August 2013 of Professor Raghuram Rajan is here and here.

My 3 Dec 2012 Delhi talk on India’s Money is now available at You-Tube in an audio version here

My July 2012 article “India’s Money” in the Caymans Financial Review is here and here https://independentindian.com/2012/07/21/my-article-indias-money-in-the-cayman-financial-review-july-2012/

My 5 December 2012 interview by Mr Paranjoy Guha Thakurta, on Lok Sabha TV, the channel of India’s Lower House of Parliament, broadcast for the first time on 9 December 2012 on Lok Sabha TV, is here and here  in two parts.

My interview by GDI Impuls banking quarterly of  Zürich  published on 6 Dec 2012 is here.

My interview by Ragini Bhuyan of Delhi’s Sunday Guardian published on 16 Dec 2012  is here.

 “Monetary Integrity and the Rupee” (2008)

https://independentindian.com/2008/09/28/monetary-integrity-and-the-rupee/

  “India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

 “Fallacious Finance” (2007)

https://independentindian.com/2007/03/05/fallacious-finance-the-congress-bjp-cpi-m-et-al-may-be-leading-india-to-hyperinflation/

 “Growth and Government Delusion” (2008)

https://independentindian.com/2008/02/22/growth-government-delusion/

 “Distribution of Govt of India Expenditure (Net of Operational Income) 1995”
https://independentindian.com/2008/07/27/distribution-of-govt-of-india-expenditure-net-of-operational-income-1995/

“India in World Trade & Payments” (2007)

https://independentindian.com/2007/02/12/india-in-world-trade-payments/

“Path of the Indian Rupee 1947-1993″ (1993)

https://independentindian.com/1993/06/01/path-of-the-indian-rupee-1947-1993/

“Our Policy Process” (2007)

https://independentindian.com/2007/02/20/our-policy-process-self-styled-planners-have-controlled-indias-paper-money-for-decades/

“Indian Money and Credit” (2006)

https://independentindian.com/2006/08/06/indian-money-and-credit/

“Indian Money and Banking” (2006)

https://independentindian.com/2006/04/23/indian-money-and-banking/

“Indian Inflation” (2008)

https://independentindian.com/2008/04/16/indian-inflation-upside-down-economics-from-new-delhis-establishment/

 How the Liabilities/Assets Ratio of Indian Banks Changed from 84% in 1970 to 108% in 1998 https://independentindian.com/2008/10/20/how-the-liabilitiesassets-ratio-of-indian-banks-changed-from-84-in-1970-to-108-in-1998/

indiasbanks1

“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

https://independentindian.com/2008/07/28/growth-of-real-income-money-prices-in-india-1869-2004/

“How to Budget” (2008)

https://independentindian.com/2008/02/26/how-to-budget-thrift-not-theft-should-guide-our-public-finances/

“Waffle but No Models of Monetary Policy: The RBI and Financial Repression (2005)”

https://independentindian.com/2005/10/27/waffle-but-no-models-of-monetary-policy-the-rbi-and-financial-repression/

“The Dream Team: A Critique” (2006)

https://independentindian.com/2006/01/08/the-dream-team-a-critique/

 

“Against Quackery” (2007)

https://independentindian.com/2007/09/24/against-quackery/

“Mistaken Macroeconomics” (2009)

https://independentindian.com/2009/06/12/mistaken-macroeconomics-an-open-letter-to-prime-minister-dr-manmohan-singh/

Towards a Highly Transparent Fiscal & Monetary Framework for India’s Union & State Governments (RBI lecture 29 April 2000)

https://independentindian.com/2000/04/29/towards-a-highly-transparent-fiscal-monetary-framework-for-india%E2%80%99s-union-state-governments/

“The Indian Revolution (2008)”

https://independentindian.com/2008/12/08/the-indian-revolution/

Can India Become an Economic Superpower or Will There Be a Monetary Meltdown? (2005)

https://independentindian.com/2005/05/05/can-india-become-an-economic-superpower-or-will-there-be-a-monetary-meltdown-2005/

Memo to Kaushik Basu, 2010

Land, Liberty, & Value, 2006

https://independentindian.com/2006/12/31/land-liberty-value/

On Land-Grabbing, 2007

https://independentindian.com/2007/01/14/on-land-grabbing/

No Marxist MBAs? An amicus curiae brief for the Honourable High Court

https://independentindian.com/2007/08/29/no-marxist-mbasan-amicus-curae-brief-for-the-honourable-high-court/

Coverage in The *Asian Age*/*Deccan Herald* of 4 Dec 2012.

IICtophalf IICtalkbottom,half

.

sundayguardiantp sgmiddle sgmid2 sgmid3 sgmid4 sgmid5 3Dec

Posted in Academic research, Amartya Sen, Arvind Panagariya, Bhagwati-Sen spat, Britain in India, China's macroeconomics, China's savings rate, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of exchange controls, Economics of Public Finance, GDI Impuls Zurich, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's credit markets, India's Government economists, India's 1991 Economic Reform, India's balance of payments, India's Banking, India's Budget, India's Capital Markets, India's corporate governance, India's corruption, India's currency history, India's Economic History, India's Economy, India's Exports, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Macroeconomics, India's Military Defence, India's Monetary & Fiscal Policy, India's Money, India's nomenclatura, India's political lobbyists, India's Politics, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, Inflation, Institute of Economic Affairs, International economics, Jagdish Bhagwati, Jean Drèze, Lok Sabha TV, Macroeconomics, Manmohan Singh, Microeconomic foundations of macroeconomics, Milton Friedman, Raghuram Govind Rajan, Raghuram Rajan, Rajiv Gandhi, Reverse-Euro Model for India, Sen-Bhagwati spat, Sonia Gandhi. 1 Comment »

Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform? Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington? Judge the evidence for yourself. And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture!

Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform?  Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington?  Judge the evidence for yourself.  And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture!

 

Contents

 

Part I:  Facts vs Fiction, Flattery, Falsification, etc

 

1. Problem

2.    Rajiv Gandhi, Siddhartha Shankar Ray, Milton Friedman & Myself

3.     Jagdish Bhagwati & Manmohan Singh?  That just don’t fly!

 4.    Amartya Sen’s Half-Baked Communism:  “To each according to his need”?

 

  Part II:    India’s Right Road Forward Now: Some Thoughtful Analysis for Grown Ups

5.   Transcending a Left-Right/Congress-BJP Divide in Indian Politics

6.   Budgeting Military & Foreign Policy

7.    Solving the Kashmir Problem & Relations with Pakistan

8.  Dealing with Communist China

9.   Towards Coherence in Public Accounting, Public Finance & Public Decision-Making

10.   India’s Money: Towards Currency Integrity at Home & Abroad

 

 

Part I:  Facts vs Fiction, Flattery, Falsification, etc

 

1. Problem


Arvind Panagariya says in the Times of India of 27 July 2013

 

 “…if in 1991 India embraced many of the Track-I reforms, writings by Sen played no role in it… The intellectual origins of the reforms are to be found instead in the writings of Bhagwati, both solely and jointly with Padma Desai and T N Srinivasan….”

 

Now Amartya Sen has not claimed involvement in the 1991 economic reforms so we are left with Panagariya claiming

 

“The intellectual origins of the reforms are to be found instead in the writings of Bhagwati…”

 

Should we suppose Professor Panagariya’s master and co-author Jagdish Bhagwati himself substantially believes and claims the same?  Three recent statements from Professor Bhagwati suffice by way of evidence:

 

(A)  Bhagwati said to parliamentarians in the Lok Sabha on 2 December 2010 about the pre-1991 situation:

 

“This policy framework had been questioned, and its total overhaul advocated, by me and Padma Desai in writings through the late 1960s which culminated in our book, India: Planning for Industrialization (Oxford University Press: 1970) with a huge blowback at the time from virtually all the other leading economists and policymakers who were unable to think outside the box. In the end, our views prevailed and the changes which would transform the economy began, after an external payments crisis in 1991, under the forceful leadership of Prime Minister Manmohan Singh who was the Finance Minister at the time….”

 

(B)  Bhagwati said to Economic Times on 28 July 2013:

 

“When finance minister Manmohan Singh was in New York in 1992, he had a lunch for many big CEOs whom he was trying to seduce to come to India. He also invited me and my wife, Padma Desai, to the lunch. As we came in, the FM introduced us to the invitees and said: ‘These friends of mine wrote almost a quarter century ago [India: Planning for Industrialisation was published in 1970 by Oxford] recommending all the reforms we are now undertaking. If we had accepted the advice then, we would not be having this lunch as you would already be in India’.”

 

(C)  And Bhagwati said in Business Standard of 9 August 2013:

 

“… I was among the intellectual pioneers of the Track I reforms that transformed our economy and reduced poverty, and witness to that is provided by the Prime Minister’s many pronouncements and by noted economists like Deena Khatkhate.. I believe no one has accused Mr. Sen of being the intellectual father of these reforms. So, the fact is that this huge event in the economic life of India passed him by…”

 

From these pronouncements it seems fair to conclude Professors Bhagwati and Panagariya are claiming Bhagwati has been the principal author of “the intellectual origins” of India’s 1991 reforms, has been their “intellectual father” or at the very least has been “among the intellectual pioneers” of the reform (“among” his own collaborators and friends, since none else is mentioned).  Bhagwati has said too his friend Manmohan Singh as Finance Minister participated in the process while quoting Manmohan as having said Bhagwati was the principal author. 

 

Bhagwati’s opponent in current debate,  Amartya Sen, has been in agreement with him that Manmohan, their common friend during college days at Cambridge in the 1950s, was a principal originating the 1991 reforms, saying to Forbes in 2006:

 

“When Manmohan Singh came to office in the early 1990s as the newly appointed finance minister, in a government led by the Congress Party, he knew these problems well enough, as someone who had been strongly involved in government administration for a long time.”

 

In my experience, such sorts of claims, even in their weakest form, have been, at best, scientifically sloppy and unscholarly,  at worst mendacious suppressio veri/suggestio falsi, and in between these best and worst interpretations, examples of academic self-delusion and mutual flattery.  We shall see Bhagwati’s opponent, Amartya Sen, has denied academic paternity of recent policies he has spawned while appearing to claim academic paternity of things he has not!  Everyone may have reasonably expected greater self-knowledge, wisdom and scholarly values of such eminent academics.  Their current spat has instead seemed to reveal something rather dismal and self-serving. 

 

You can decide for yourself where the truth, ever such an elusive and fragile thing, happens to be and what is best done about it.   Here is some evidence.

 

 

2.  Rajiv Gandhi, Siddhartha Shankar Ray,  Milton Friedman & Myself

 

Professor Arvind Panagariya is evidently an American economics professor of Indian national origin who holds the Jagdish Bhagwati Chair of Indian Political Economy at Columbia University.   I am afraid I had not known his name until he mentioned my name in Economic Times of  24 October 2001.   He said

 

panagariya

 

In mentioning the volume “edited by Subroto Roy and William E  James”,  Professor Panagariya did not appear to find the normal scientific civility to identify our work by name, date or publisher.  So here that is now:

 

 

indvol

 

This was a book published in 1992 by the late Tejeshwar Singh for Sage.  It resulted from the University of Hawaii Manoa perestroika-for-India project, that I and Ted James created and led between 1986 and 1992/93.   (Yes, Hawaii — not Stanford, Harvard, Yale, Columbia or even Penn, whose India-policy programs were Johnny-come-latelies a decade or more later…)   There is a sister-volume too on Pakistan, created by a parallel project Ted and I had led at the same time:

 

 

pakvol

 

In 2004 from Britain, I wrote to the 9/11 Commission saying if our plan to study Afghanistan after India and Pakistan had not been thwarted by malign local forces among our sponsors themselves, we, a decade before the September 11 2001 attacks on the USA, may  just have come up with a pre-emptive academic analysis.   It was not to be.

 

Milton Friedman’s chapter that we published for the first time was a memorandum he wrote in November 1955 for the Government of India which the GoI had effectively suppressed.  I came to know of it while a doctoral student at Cambridge under Frank Hahn, when at a conference at Oxford about 1979-1980, Peter Tamas Bauer sat me down beside him and told me the story.  Later in Blacksburg about 1981, N. Georgescu-Roegen on a visit from Vanderbilt University told me the same thing.  Specifically, Georgescu-Roegen told me that leading Indian academics had almost insulted Milton in public which Milton had borne gamely; that after Milton had given a talk in Delhi to VKRV Rao’s graduate-students,  a talk Georgescu-Roegen had been present at, VKRV Rao had addressed the students and told them in all seriousness “You have heard what Professor Friedman has to say, if you repeat what he has said in your exams, you will fail”.

 

In 1981-1982 my doctoral thesis emerged, titled “On liberty & economic growth: preface to a philosophy for India”,

 

phd

 

My late great master in economic theory, Frank Hahn (1925-2013), found what I had written to be a “good thesis” bringing “a good knowledge of economics and of philosophy to bear on the literature on economic planning”, saying I had  shown “a good knowledge of economic theory” and my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds”.  

 

I myself said about it decades later “My original doctoral topic in 1976  ‘A monetary theory for India’ had to be altered not only due to paucity of monetary data at the time but because the problems of India’s political economy and allocation of resources in the real economy were far more pressing. The thesis that emerged in 1982 … was a full frontal assault from the point of view of microeconomic theory on the “development planning” to which everyone routinely declared their fidelity, from New Delhi’s bureaucrats and Oxford’s “development” school to McNamara’s World Bank with its Indian staffers.  Frank Hahn protected my inchoate liberal arguments for India; and when no internal examiner could be found, Cambridge showed its greatness by appointing two externals, Bliss at Oxford and Hutchison at Birmingham, both Cambridge men. “Economic Theory and Development Economics” was presented to the American Economic Association in December 1982 in company of Solow, Chenery, Streeten, and other eminences…” How I landed on that eminent AEA panel in December 1982 was because its convener Professor George Rosen of the University of Illinois recruited me overnight — as a replacement for Jagdish Bhagwati, who had had to return to India suddenly because of a parental death.  The results were published in 1983 in World Development.

 

Soon afterwards, London’s Institute of Economic Affairs published Pricing, Planning and Politics: A Study of Economic Distortions in India.  This slim work was the first classical liberal critique of post-Mahalonobis Indian economic thought since BR Shenoy’s original criticism decades earlier.  It became the subject of The Times’ lead editorial on its day of publication 29 May 1984 — provoking the Indian High Commission in London to send copies to the Finance Ministry in Delhi where it apparently caused a stir, or so I was told years later by Amaresh Bagchi who was a recipient of it at the Ministry.

 

ppp19842
londonti

The Times had said

 

“When Mr. Dennis Healey in the Commons recently stated that Hongkong, with one per cent of the population of India has twice India’s trade, he was making an important point about Hongkong but an equally important point about India. If Hongkong with one per cent of its population and less than 0.03 per cert of India’s land area (without even water as a natural resource) can so outpace India, there must be something terribly wrong with the way Indian governments have managed their affairs, and there is. A paper by an Indian economist published today (Pricing, Planning and Politics: A Study of Economic Distortions in India by Subroto Roy, IEA £1.80) shows how Asia’s largest democracy is gradually being stifled by the imposition of economic policies whose woeful effect and rhetorical unreality find their echo all over the Third World. As with many of Britain’s former imperial possessions, the rot set in long before independence. But as with most of the other former dependencies, the instrument of economic regulation and bureaucratic control set up by the British has been used decisively and expansively to consolidate a statist regime which inhibits free enterprise, minimizes economic success and consolidates the power of government in all spheres of the economy. We hear little of this side of things when India rattles the borrowing bowl or denigrates her creditors for want of further munificence. How could Indian officials explain their poor performance relative to Hongkong? Dr Roy has the answers for them. He lists the causes as a large and heavily subsidized public sector, labyrinthine control over private enterprise, forcibly depressed agricultural prices, massive import substitution, government monopoly of foreign exchange transactions, artificially overvalued currency and the extensive politicization of the labour market, not to mention the corruption which is an inevitable side effect of an economy which depends on the arbitrament of bureaucrats. The first Indian government under Nehru took its cue from Nehru’s admiration of the Soviet economy, which led him to believe that the only policy for India was socialism in which there would be “no private property except in a restricted sense and the replacement of the private profit system by a higher ideal of cooperative service.” Consequently, the Indian government has now either a full monopoly or is one of a few oligipolists in banking, insurance, railways, airlines, cement, steel, chemicals, fertilizers, ship-building, breweries, telephones and wrist-watches. No businessman can expand his operation while there is any surplus capacity anywhere in that sector. He needs government approval to modernize, alter his price-structure, or change his labour shift. It is not surprising that a recent study of those developing countries which account for most manufactured exports from the Third World shows that India’s share fell from 65 percent in 1953 to 10 per cent in 1973; nor, with the numerous restrictions on inter-state movement of grains, that India has over the years suffered more from an inability to cope with famine than during the Raj when famine drill was centrally organized and skillfully executed without restriction. Nehru’s attraction for the Soviet model has been inherited by his daughter, Mrs. Gandhi. Her policies have clearly positioned India more towards the Soviet Union than the West. The consequences of this, as Dr Roy states, is that a bias can be seen in “the antipathy and pessimism towards market institutions found among the urban public, and sympathy and optimism to be found for collectivist or statist ones.” All that India has to show for it is the delivery of thousands of tanks in exchange for bartered goods, and the erection of steel mills and other heavy industry which help to perpetuate the unfortunate obsession with industrial performance at the expense of agricultural growth and the relief of rural poverty.”…..

 

I felt there were inaccuracies in this and so replied  dated 4 June which The Times published on 16 June 1984:

 

timesletter-11

Milton and I met for the first time in the Fall of 1984 at the Mont Pelerin Society meetings at Cambridge when I gave him a copy of the IEA monograph, which he came to think extremely well of.   I told him I had heard of his 1955 document and asked him for it; he sent me the original blue/purple version of this soon thereafter.

 

[That original document was, incidentally,  in my professorial office among all my books, papers, theses and other academic items including my gown when I was attacked in 2003 by a corrupt gang at IIT Kharagpur —  all yet to be returned to me by IIT despite a High Court order during my present ongoing battle against corruption there over a USD 1.9 million scam !… Without having ever wished to, I have had to battle India’s notorious corruption first hand for a decade!]

 

I published Milton’s document for the first time on 21 May 1989 at the conference of the Hawaii project over the loud objection of assorted leftists… 

friedman-et-al-at-uh-india-conf-19891

Amartya Sen, Jagdish Bhagwati, Manmohan Singh or any of their acolytes will not be seen in this group photograph dated 21 May 1989 at the UH President’s House, because they were not there.  The Government of India was represented by the Ambassador to Washington, PK Kaul, as well as the Consul General in San Francisco, KS Rana (later Ambassador to Germany), besides the founding head of ICRIER who had invited himself.  

 

Manmohan Singh was not there as he precisely represented the Indian economic policy establishment I had been determined to reform!   In any case, he had left India about 1987 on his last assignment before retirement, with Julius Nyerere of Tanzania relating to the “South-South Commission”.  

 

I have said over more than a half dozen years now that there is no evidence whatsoever of Manmohan Singh having been a liberal economist in any sense of that word at any time before 1991, and scant evidence that he originated any liberal economic ideas since.  The widespread worldwide notion that he is to be credited for originating a sudden transformation of India from a path of pseudo-socialism to one of pseudo-liberalism has been without basis in evidence — almost entirely a political fiction, though an explicable one and one which has served, as such political fictions do, the purposes of those who invent them.

 

Jagdish Bhagwati and Amartya Sen were in their mid 50s and were two of the three senior-most Indians in US academic economics at the time.  I and Ted James, both in our 30s, decided to invite both Bhagwati and Sen to the Hawaii project-conference as distinguished guests but to do so somewhat insincerely late in the day, predicting they would decline, which is what they did, yet they had come to be formally informed of what we were doing.  We had a very serious attitude that was inspired a bit, I might say, by Oppenheimer’s secret “Manhattan project” and we wanted neither press-publicity nor anyone to become the star who ended up hogging the microphone or the limelight.

 

Besides, and most important of all, neither Bhagwati nor Sen had done work in the areas we were centrally interested in, namely, India’s macroeconomic and foreign trade framework and fiscal and monetary policies.   

 

Bhagwati, after his excellent 1970 work with Padma Desai for the OECD on Indian industry and trade, also co-authored with TN Srinivasan a fine 1975 volume for the NBER  Foreign Trade Regimes and Economic Development: India. 

 

TN Srinivasan was the third of the three senior-most Indian economists at the time in US academia; his work made us want to invite him as one of our main economic authors, and we charged him with writing the excellent chapter in Foundations that he came to do titled “Planning and Foreign Trade Reconsidered”.

 

The other main economist author we had hoped for was Sukhamoy Chakravarty from Delhi University and the Government of India’s Planning Commission, whom I had known since 1977 when I had been given his office at the Delhi School of Economics as a Visiting Assistant Professor while he was on sabbatical; despite my pleading he would not come due to ill health; he strongly recommended C Rangarajan, telling me Rangarajan had been the main author with him of the crucial 1985 RBI report on monetary policy; and he signed and gave me his last personal copy of that report dating it 14 July 1987.  Rangarajan said he could not come and recommended the head of the NIPFP, Amaresh Bagchi, promising to write jointly with him the chapter on monetary policy and public finance. 

 

Along with Milton Friedman’s suppressed 1955 memorandum which I was publishing for the first time in 1989, TN Srinivasan and Amaresh Bagchi authored the three main economic policy chapters that we felt we wanted. 

 

Other chapters we commissioned had to do with the state of governance (James Manor), federalism (Bhagwan Dua), Punjab and similar problems (PR Brass), agriculture (K Subbarao, as proposed by CH Hanumantha Rao), health (Anil Deolalikar, through open advertisement), and a historical assessment of the roots of economic policy (BR Tomlinson, as proposed by Anil Seal).  On the vital subject of education we failed to agree with the expert we wanted very much  (JBG Tilak, as proposed by George Psacharopolous) and so we had to cover the subject cursorily in our introduction mentioning his work.  And decades later, I apologised to Professor Dietmar Rothermund of Heidelberg University for having been so blinkered in the Anglo-American tradition at the time as to not having obtained his participation in the project.  

 

[The sister-volume we commissioned in parallel on Pakistan’s political economy had among its authors Francis Robinson, Akbar Ahmed, Shirin Tahir-Kehli, Robert La Porte, Shahid Javed Burki, Mohsin Khan, Mahmood Hasan Khan,  Naved Hamid, John Adams and Shahrukh Khan; this book came to be published in Pakistan in 1993 to good reviews but apparently was then lost by its publisher and is yet to be found; the military and religious clergy had been deliberately not invited by us though the name of Pervez Musharraf had I think arisen, and the military and religious clergy in fact came to rule the roost through the 1990s in Pakistan; the volume, two decades old, takes on fresh relevance with the new civilian governments of recent years.] [Postscript  27 November 2015: See my strident critique at Twitter of KM Kasuri, P Musharraf et al  e.g. at https://independentindian.com/2011/11/22/pakistans-point-of-view-or-points-of-view-on-kashmir-my-as-yet-undelivered-lahore-lecture-part-i/ passing off ideas they have taken from this volume without acknowledgement, ideas which have in any case become defunct  to their author, myself.]

 

Milton himself said this about his experience with me in his memoirs:

 

tlp

miltononmefinal

And Milton wrote on my behalf when I came to be attacked, being Indian, at the very University that had sponsored us:

 

m-friedman-on-roys-work

My obituary notice at his passing in 2006 said: “My association with Milton has been the zenith of my engagement with academic economics…. I was a doctoral student of his bitter enemy yet for over two decades he not only treated me with unfailing courtesy and affection, he supported me in lonely righteous battles: doing for me what he said he had never done before, which was to stand as an expert witness in a United States Federal Court. I will miss him much though I know that he, as a man of reason, would not have wished me to….”

 

In August 1990 in Delhi I came to tell Siddhartha Shankar Ray about the unpublished India-manuscript resulting from the Hawaii project that was in my possession as it headed to its publisher. 

 

Ray was a family-friend whose maternal grandfather CR Das led the Congress Party before MK Gandhi and had been a friend and colleague of my great grandfather SN Roy in Bengal’s politics in the 1920s;  Ray had also consented to stand on my behalf as Senior Counsel in a matter in the Supreme Court of India. 

 

Ray was involved in daily political parlays at his Delhi home with other Congress Party personages led by PV Narasimha Rao.  These senior regional figures seemed to me to be keeping their national leader, Rajiv Gandhi, aloof in splendid isolation at 10 Jan Path. 

 

Ray told me he and his wife had been in London in May 1984 on the day The Times had written its lead editorial on my work and they had seen it with excitement.  Upon hearing of the Hawaii project and the manuscript I had with me, Ray immediately insisted of his own accord that I must meet Rajiv Gandhi, and that he would be arranging a meeting. 

 

Hence it came to be a month later that a copy of the manuscript of the completed Hawaii project was be given by my hand on 18 September 1990 to Rajiv Gandhi, then Leader of the Opposition and Congress President, an encounter I have quite fully described elsewhere.  I offered to get a copy to the PM, VP Singh, too but a key aide of his showed no interest in receiving it.

 

Rajiv made me a senior adviser, and I have claimed principal authorship of the 22 March 1991 draft of the Congress manifesto that actually shook and changed the political thinking of the Congress on economic matters in the direction Rajiv had desired and as I had advised him at our initial 18 September 1990 meeting. 

 

“… He began by talking about how important he felt panchayati raj was, and said he had been on the verge of passing major legislation on it but then lost the election. He asked me if I could spend some time thinking about it, and that he would get the papers sent to me. I said I would and remarked panchayati raj might be seen as decentralized provision of public goods, and gave the economist’s definition of public goods as those essential for the functioning of the market economy, like the Rule of Law, roads, fresh water, and sanitation, but which were unlikely to appear through competitive forces.

 

I distinguished between federal, state and local levels and said many of the most significant public goods were best provided locally. Rajiv had not heard the term “public goods” before, and he beamed a smile and his eyes lit up as he voiced the words slowly, seeming to like the concept immensely. It occurred to me he had been by choice a pilot of commercial aircraft. Now he seemed intrigued to find there could be systematic ways of thinking about navigating a country’s governance by common pursuit of reasonable judgement. I said the public sector’s wastefulness had drained scarce resources that should have gone instead to provide public goods. Since the public sector was owned by the public, it could be privatised by giving away its shares to the public, preferably to panchayats of the poorest villages. The shares would become tradable, drawing out black money, and inducing a historic redistribution of wealth while at the same time achieving greater efficiency by transferring the public sector to private hands. Rajiv seemed to like that idea too, and said he tried to follow a maxim of Indira Gandhi’s that every policy should be seen in terms of how it affected the common man. I wryly said the common man often spent away his money on alcohol, to which he said at once it might be better to think of the common woman instead. (This remark of Rajiv’s may have influenced the “aam admi” slogan of the 2004 election, as all Congress Lok Sabha MPs of the previous Parliament came to receive a previous version of the present narrative.)

 

Our project had identified the Congress’s lack of internal elections as a problem; when I raised it, Rajiv spoke of how he, as Congress President, had been trying to tackle the issue of bogus electoral rolls. I said the judiciary seemed to be in a mess due to the backlog of cases; many of which seemed related to land or rent control, and it may be risky to move towards a free economy without a properly functioning judicial system or at least a viable system of contractual enforcement. I said a lot of problems which should be handled by the law in the courts in India were instead getting politicised and decided on the streets. Rajiv had seen the problems of the judiciary and said he had good relations with the Chief Justice’s office, which could be put to use to improve the working of the judiciary.

 

The project had worked on Pakistan as well, and I went on to say we should solve the problem with Pakistan in a definitive manner. Rajiv spoke of how close his government had been in 1988 to a mutual withdrawal from Siachen. But Zia-ul-Haq was then killed and it became more difficult to implement the same thing with Benazir Bhutto, because, he said, as a democrat, she was playing to anti-Indian sentiments while he had found it somewhat easier to deal with the military. I pressed him on the long-term future relationship between the countries and he agreed a common market was the only real long-term solution. I wondered if he could find himself in a position to make a bold move like offering to go to Pakistan and addressing their Parliament to break the impasse. He did not say anything but seemed to think about the idea. Rajiv mentioned a recent Time magazine cover of Indian naval potential, which had caused an excessive stir in Delhi. He then talked about his visit to China, which seemed to him an important step towards normalization. He said he had not seen (or been shown) any absolute poverty in China of the sort we have in India. He talked about the Gulf situation, saying he did not disagree with the embargo of Iraq except he wished the ships enforcing the embargo had been under the U.N. flag. The meeting seemed to go on and on, and I was embarrassed at perhaps having taken too much time and that he was being too polite to get me to go. V. George had interrupted with news that Sheila Dixit (as I recall) had just been arrested by the U. P. Government, and there were evidently people waiting. Just before we finally stood up I expressed a hope that he was looking to the future of India with an eye to a modern political and economic agenda for the next election, rather than getting bogged down with domestic political events of the moment. That was the kind of hopefulness that had attracted many of my generation in 1985. I said I would happily work in any way to help define a long-term agenda. His eyes lit up and as we shook hands to say goodbye, he said he would be in touch with me again…. The next day I was called and asked to stay in Delhi for a few days, as Mr. Gandhi wanted me to meet some people…..

 

… That night Krishna Rao dropped me at Tughlak Road where I used to stay with friends. In the car I told him, as he was a military man with heavy security cover for himself as a former Governor of J&K, that it seemed to me Rajiv’s security was being unprofessionally handled, that he was vulnerable to a professional assassin. Krishna Rao asked me if I had seen anything specific by way of vulnerability. With John Kennedy and De Gaulle in mind, I said I feared Rajiv was open to a long-distance sniper, especially when he was on his campaign trips around the country.  This was one of several attempts I made since October 1990 to convey my clear impression to whomever I thought might have an effect that Rajiv seemed to me extremely vulnerable. Rajiv had been on sadhbhavana journeys, back and forth into and out of Delhi. I had heard he was fed up with his security apparatus, and I was not surprised given it seemed at the time rather bureaucratized. It would not have been appropriate for me to tell him directly that he seemed to me to be vulnerable, since I was a newcomer and a complete amateur about security issues, and besides if he agreed he might seem to himself to be cowardly or have to get even closer to his security apparatus. Instead I pressed the subject relentlessly with whomever I could. I suggested specifically two things: (a) that the system in place at Rajiv’s residence and on his itineraries be tested, preferably by some internationally recognized specialists in counter-terrorism; (b) that Rajiv be encouraged to announce a shadow-cabinet. The first would increase the cost of terrorism, the second would reduce the potential political benefit expected by terrorists out to kill him. On the former, it was pleaded that security was a matter being run by the V. P. Singh and then Chandrashekhar Governments at the time. On the latter, it was said that appointing a shadow cabinet might give the appointees the wrong idea, and lead to a challenge to Rajiv’s leadership. This seemed to me wrong, as there was nothing to fear from healthy internal contests for power so long as they were conducted in a structured democratic framework. I pressed to know how public Rajiv’s itinerary was when he travelled. I was told it was known to everyone and that was the only way it could be since Rajiv wanted to be close to the people waiting to see him and had been criticized for being too aloof. This seemed to me totally wrong and I suggested that if Rajiv wanted to be seen as meeting the crowds waiting for him then that should be done by planning to make random stops on the road that his entourage would take. This would at least add some confusion to the planning of potential terrorists out to kill him. When I pressed relentlessly, it was said I should probably speak to “Madame”, i.e. to Mrs. Rajiv Gandhi. That seemed to me highly inappropriate, as I could not be said to be known to her and I should not want to unduly concern her in the event it was I who was completely wrong in my assessment of the danger. The response that it was not in Congress’s hands, that it was the responsibility of the VP Singh and later the Chandrashekhar Governments, seemed to me completely irrelevant since Congress in its own interests had a grave responsibility to protect Rajiv Gandhi irrespective of what the Government’s security people were doing or not doing. Rajiv was at the apex of the power structure of the party, and a key symbol of secularism and progress for the entire country. Losing him would be quite irreparable to the party and the country. It shocked me that the assumption was not being made that there were almost certainly professional killers actively out to kill Rajiv Gandhi — this loving family man and hapless pilot of India’s ship of state who did not seem to have wished to make enemies among India’s terrorists but whom the fates had conspired to make a target. The most bizarre and frustrating response I got from several respondents was that I should not mention the matter at all as otherwise the threat would become enlarged and the prospect made more likely! This I later realized was a primitive superstitious response of the same sort as wearing amulets and believing in Ptolemaic astrological charts that assume the Sun goes around the Earth — centuries after Kepler and Copernicus. Perhaps the entry of scientific causality and rationality is where we must begin in the reform of India’s governance and economy. What was especially repugnant after Rajiv’s assassination was to hear it said by his enemies that it marked an end to “dynastic” politics in India. This struck me as being devoid of all sense because the unanswerable reason for protecting Rajiv Gandhi was that we in India, if we are to have any pretensions at all to being a civilized and open democratic society, cannot tolerate terrorism and assassination as means of political change. Either we are constitutional democrats willing to fight for the privileges of a liberal social order, or ours is truly a primitive and savage anarchy concealed beneath a veneer of fake Westernization….. Proceedings began when Rajiv arrived. This elite audience mobbed him just as the farmers had mobbed him earlier. He saw me and beamed a smile in recognition, and I smiled back but made no attempt to draw near him in the crush. He gave a short very apt speech on the role the United Nations might have in the new post-Gulf War world. Then he launched the book, and left for an investiture at Rashtrapati Bhavan. We waited for our meeting with him, which finally happened in the afternoon. Rajiv was plainly at the point of exhaustion and still hard-pressed for time. He seemed pleased to see me and apologized for not talking in the morning. Regarding the March 22 draft, he said he had not read it but that he would be doing so. He said he expected the central focus of the manifesto to be on economic reform, and an economic point of view in foreign policy, and in addition an emphasis on justice and the law courts. I remembered our September 18 conversation and had tried to put in justice and the courts into our draft but had been over-ruled by others. I now said the social returns of investment in the judiciary were high but was drowned out again. Rajiv was clearly agitated that day by the BJP and blurted out he did not really feel he understood what on earth they were on about. He said about his own family, “We’re not religious or anything like that, we don’t pray every day.” I felt again what I had felt before, that here was a tragic hero of India who had not really wished to be more than a happy family man until he reluctantly was made into a national leader against his will. We were with him for an hour or so. As we were leaving, he said quickly at the end of the meeting he wished to see me on my own and would be arranging a meeting. One of our group was staying back to ask him a favour. Just before we left, I managed to say to him what I felt was imperative: “The Iraq situation isn’t as it seems, it’s a lot deeper than it’s been made out to be.” He looked at me with a serious look and said “Yes I know, I know.” It was decided Pitroda would be in touch with each of us in the next 24 hours. During this time Narasimha Rao’s manifesto committee would read the draft and any questions they had would be sent to us. We were supposed to be on call for 24 hours. The call never came. Given the near total lack of system and organization I had seen over the months, I was not surprised. Krishna Rao and I waited another 48 hours, and then each of us left Delhi. Before going I dropped by to see Krishnamurty, and we talked at length. He talked especially about the lack of the idea of teamwork in India. Krishnamurty said he had read everything I had written for the group and learned a lot. I said that managing the economic reform would be a critical job and the difference between success and failure was thin….”

 

543068_10151152270882285_835660216_n

28060_10151152260232285_1198018897_n

530942_10151152258747285_1492496235_n 382134_10151152256102285_1650952662_n

“… I got the afternoon train to Calcutta and before long left for America to bring my son home for his summer holidays with me. In Singapore, the news suddenly said Rajiv Gandhi had been killed. All India wept. What killed him was not merely a singular act of criminal terrorism, but the system of humbug, incompetence and sycophancy that surrounds politics in India and elsewhere. I was numbed by rage and sorrow, and did not return to Delhi….”

 

In December 1991, I visited Rajiv’s widow at 10 Jan Path to express my condolences, the only time I have met her, and I gave her for her records a taped copy of Rajiv’s long-distance telephone conversations with me during the Gulf War earlier that year.   She seemed an extremely shy taciturn figure in deep mourning, and I do not think the little I said to her about her late husband’s relationship with me was comprehended.  Nor was it the time or place for more to be said.

 

In September 1993, at a special luncheon at the Indian Ambassador’s Residence in Washington, Siddhartha Shankar Ray, then the Ambassador to Washington, pointed at me and declared to Manmohan Singh, then Finance Minister, in presence of Manmohan’s key aides accompanying him including MS Ahluwalia, NK Singh, C Rangarajan and others,

 

“Congress manifesto was written on his computer”.

 

This was accurate enough to the extent that the 22 March 1991 draft as asked for by Rajiv and that came to explicitly affect policy had been and remains on my then-new NEC laptop.

 

At the Ambassador’s luncheon, I gave Manmohan Singh a copy of the Foundations book as a gift.  My father who knew him in the early 1970s through MG Kaul, ICS, had sent him a copy of my 1984 IEA monograph which Manmohan had acknowledged.  And back in 1973, he had visited our then-home at 14 Rue Eugene Manuel in Paris to advise me about economics at my father’s request, and he and I had ended up in a fierce private debate for about forty minutes over the demerits (as I saw them) and merits (as he saw them) of the Soviet influence on Indian economic policy-making.  But in 1993 we had both forgotten the 1973 meeting.  

 

In May 2002, the Congress passed an official party resolution moved by Digvijay Singh in presence of PV Narasimha Rao and Manmohan Singh that the 1991 reforms had originated with Rajiv Gandhi and not with either Narasimha Rao or Manmohan; no one dissented.  It was intended to flatter Sonia Gandhi as the Congress President,  but there was truth in it too which all Congress MPs of the 13th Lok Sabha had come to know in a publication of mine they had received from me at IIT Kharagpur where since 1996 I had become Professor.  

 

Manmohan Singh himself, to his credit, has not at any point, except once during his failed Lok Sabha bid, claimed the reforms as his own invention and has said always he had followed what his Prime Minister had told him. However, he has not been averse to being attributed with all the credit by his flatterers, by the media, by businessmen and many many others around the world, and certainly he did not respond to Ambassador Siddhartha Shankar Ray telling him and his key aides how the Congress-led reform had come about through my work except to tell me at the 1993 luncheon that when Arjun Singh criticised the reforms in Cabinet, he, Manmohan, would mention the manifesto. 

 

On 28 December 2009, Rajiv’s widow in an official Congress Party statement finally declared her late husband

 

left his personal imprint on the (Congress) party’s manifesto of 1991.″ 

 

How Sonia Gandhi, who has never had pretensions to knowledge of economics or political economy or political science or governance or history, came to place Manmohan Singh as her prime ministerial candidate and the font of economic and political wisdom along with Pranab Mukherjee, when both men hardly had been favourites of her late husband, would be a story in its own right.  And how Amartya Sen’s European-origin naturalised Indian co-author Jean Drèze later came to have policy influence from a different direction upon Sonia Gandhi, also a naturalised Indian of European origin, may be yet another story in its own right,  perhaps best told by themselves.

 

I would surmise the same elderly behind-the-scenes figure, now in his late 80s, had a hand in setting up both sets of influences — directly in the first case (from back in 1990-1991),  and indirectly in the second case (starting in 2004) .  This was a man who in a November 2007 newspaper article literally erased my name and inserted that of Manmohan Singh as part of the group that Rajiv created on 25 September following his 18 September meeting with me!   Reluctantly, I had to call this very elderly man a liar; he has not denied it and knows he has not been libeled.

 

One should never forget the two traditional powers interested in the subcontinent, Russia and Britain, have been never far from influence in Delhi.  In 1990-1991 what worried vested bureaucratic and business interests and foreign powers through their friends and agents was that they could see change was coming to India but they wanted to be able to control it themselves to their advantage, which they then broadly proceeded to do over the next two decades.  The foreign weapons’ contracts had to be preserved, as did other big-ticket imports that India ends up buying needlessly on credit it hardly has in world markets.  There are similarities to what happened in Russia and Eastern Europe where many apparatchiks and fellow-travellers became freedom-loving liberals overnight;  in the Indian case more than one badly compromised pro-USSR senior bureaucrat promptly exported his children and savings to America and wrapped themselves in the American flag.

 

The stubborn unalterable fact remains that Manmohan Singh was not physically present in India and was still with the Nyerere project on 18 September 1990 when I met Rajiv for the first time and gave him the unpublished results of the UH-Manoa project.  This simple straightforward fact is something the Congress Party, given its own myths and self-deception and disinformation, has not been able to cope with in its recently published history.   For myself, I have remained loyal to my memory of my encounter with Rajiv Gandhi, and my understanding of him.  The Rajiv Gandhi I knew had been enthused by me in 1990-1991 carrying the UH-Manoa perestroika-for-India project that I had led since 1986, and he had loved my advice to him on 18 September 1990 that he needed to modernise the party by preparing a coherent agenda (as other successful reformers had done) while still in Opposition waiting for elections, and to base that agenda on commitments to improving the judiciary and rule of law, stopping the debauching of money, and focusing on the provision of public goods instead.    Rajiv I am sure wanted a modern and modern-minded Congress — not one which depended on him let aside his family, but one which reduced that dependence and let him and his family alone.

 

As for Manmohan Singh being a liberal or liberalising economist, there is no evidence publicly available of that being so from his years before or during the Nyerere project, or after he returned and joined the Chandrashekhar PMO and the UGC  until becoming,  to his own surprise as he told Mark Tully,  PV Narasimha Rao’s Finance Minister.  Some of his actions qua Finance Minister were liberalising in nature but he did not originate any basic idea of a change in a liberal direction of economic policy, and he has, with utmost honesty honestly, not claimed otherwise.  Innumerable flatterers and other self-interested parties have made out differently, creating what they have found to be a politically useful fiction; he has yet to deny them.

 

Siddhartha Shankar Ray and I met last in July 2009, when I gave him a copy of this 2005 volume I had created, which pleased him much. 

 

180651_497147822284_519449_n

 

I said to him Bengal’s public finances were in abysmal condition, calling for emergency measures financially, and that Mamata Banerjee seemed to me to be someone who knew how to and would dislodge the Communists from their entrenched misgovernance of decades but she did not seem quite aware that dislodging a bad government politically was not the same thing as knowing how to govern properly oneself.  He,  again of his own accord, said immediately, 

 

“I will call her and her people to a meeting here so you can meet them and tell them that directly”. 

 

It never transpired.  In our last phone conversation I mentioned to him my plans of creating a Public Policy Institute — an idea he immediately and fully endorsed as being essential though adding “I can’t be part of it,  I’m on my way out”.

 

“I’m on my way out”.   That was Siddhartha Shankar Ray — always intelligent, always good-humoured, always public-spirited, always a great Indian, my only friend among politicians other than the late Rajiv Gandhi himself.

 

18slide1

In March February 2010, my father and I called upon the new Bengal Governor, MK Narayanan and gave him a copy of the Thatcher volume for the Raj Bhavan Library; I told him the story about my encounter with Rajiv Gandhi thanks to Siddhartha Shankar Ray and its result;  Narayanan within a few days made a visit to Ray’s hospital-bed, and when he emerged after several hours he made a statement, which in substance he repeated again when Ray died in November 2010:

 

“There are few people in post-Independence India who could equal his magnificent contribution to India’s growth and progress”.

 

To what facts did MK Narayanan, a former Intelligence Bureau chief, mean to refer with this extravagant praise of Ray?  Was Narayanan referring to Ray’s politics for Indira Gandhi?  To Ray’s Chief Ministership of Bengal?  To Ray’s Governorship of Punjab?  You will have to ask him but I doubt that was what he meant:  I surmise Narayanan’s eulogy could only have resulted after he confirmed with Ray on his hospital-bed the story I had told him, and that he was referring to the economic and political results that followed for the country once Ray had introduced me in September 1990 to Rajiv Gandhi. But I say again, you will have to ask MK Narayanan himself what he and Ray talked about in hospital and what was the factual basis of Narayanan’s precise words of praise. To what facts exactly was MK Narayanan, former intelligence chief, meaning to refer when he stated Siddhartha Shankar Ray had made a “magnificent contribution to India’s growth and progress”?

 

 

3.   Jagdish Bhagwati & Manmohan Singh?  That just don’t fly!

 

Now returning to the apparent desire of Professor Panagariya, the Jagdish Bhagwati Professor of Indian Political Economy at Columbia, to attribute to Jagdish Bhagwati momentous change for the better in India as of 1991, even if Panagariya had not the scientific curiosity to look into our 1992 book titled Foundations of India’s Political Economy: Towards an Agenda for the 1990s or into Milton Friedman’s own 1998 memoirs, we may have expected him to at least turn to his co-author and Columbia colleague, Jagdish Bhagwati himself, and ask, “Master, have you heard of this fellow Subroto Roy by any chance?”

 

Jagdish would have had to say yes, since not only had he received a copy of the proofs of my 1984 IEA work Pricing, Planning and Politics: A Study of Economic Distortions in India, he was kind enough to write in a letter dated 15 May 1984 that I had

 

“done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems!” 

 

1013586_10151543024792285_1764498590_n

Also Jagdish may or may not have remembered our only meeting, when he and I had had a long conversation on the sofas in the foyer of the IMF in Washington when I was a consultant there in 1993 and he had come to meet someone; he was surprisingly knowledgeable about my personal 1990 matter in the Supreme Court of India which astonished me until he told me his brother the Supreme Court judge had mentioned the case to him!

 

Now my 1984 work was amply scientific and scholarly in fully crediting a large number of works in the necessary bibliography, including Bhagwati’s important work with his co-authors.  Specifically, Footnote 1 listed the literature saying:

 

“The early studies notably include: B. R. Shenoy, `A note of dissent’, Papers relating to the formulation of the Second Five-Year Plan, Government of India Planning Commission, Delhi, 1955; Indian Planning and Economic Development, Asia Publishing, Bombay, 1963, especially pp. 17-53; P. T. Bauer, Indian Economic Policy and Development, George Allen & Unwin, London, 1961; M. Friedman, unpublished memorandum to the Government of India, November 1955 (referred to in Bauer, op. cit., p. 59 ff.); and, some years later, Sudha Shenoy, India : Progress or Poverty?, Research Monograph 27, Institute of Economic Affairs, London, 1971. Some of the most relevant contemporary studies are: B. Balassa, `Reforming the system of incentives in World Development, 3 (1975), pp. 365-82; `Export incentives and export performance in developing countries: a comparative analysis’, Weltwirtschaftliches Archiv, 114 (1978), pp. 24-61; The process of industrial development and alternative development strategies, Essays in International Finance No. 141, Princeton University, 1980; J. N. Bhagwati & P. Desai, India: Planning for Industrialisation, OECD, Paris : Oxford University Press, 1970; `Socialism and Indian Economic Policy’, World Development, 3 (1975), pp. 213-21; J. N. Bhagwati & T. N. Srinivasan, Foreign-trade Regimes and Economic Development: India, National Bureau of Economic Research, New York, 1975; Anne O. Krueger, `Indian planning experience’, in T. Morgan et al. (eds.), Readings in Economic Development, Wadsworth, California, 1963, pp. 403-20; `The political economy of the rent-seeking society, American Economic Review, 64 (June 1974); The Benefits and Costs of Import-Substitution in India: a Microeconomic Study, University of Minnesota Press, Minneapolis, 1975; Growth, distortions and patterns of trade among many countries, Studies in International Finance, Princeton University, 1977; Uma Lele, Food grain marketing in India : private performance and public policy, Cornell University Press, Ithaca, 1971; T. W. Schultz (ed.), Distortions in agricultural incentives, Indiana University Press, Bloomington, 1978; V. Sukhatme, “The utilization of high-yielding rice and wheat varieties in India: an economic assessment”, University of Chicago PhD thesis, 1977….”

 

There were two specific references to Bhagwati’s work with Srinivasan:

 

“Jagdish Bhagwati and T. N. Srinivasan put it as follows : `The allocation of foreign exchange among alternative claimants and users in a direct control system . . .would presumably be with reference to a well-defined set of principles and criteria based on a system of priorities. In point of fact, however, there seem to have been few such criteria, if any, followed in practice.’”

 

and

 

“But as Bhagwati and Srinivasan report, `. . . the sheer weight of numbers made any meaningful listing of priorities extremely difficult. The problem was Orwellian: all industries had priority and how was each sponsoring authority to argue that some industries had more priority than others? It is not surprising, therefore, that the agencies involved in determining allocations by industry fell back on vague notions of “fairness”, implying pro rata allocations with reference to capacity installed or employment, or shares defined by past import allocations or similar rules of thumb’”

 

and one to Bhagwati and Desai:

 

“The best descriptions of Indian industrial policy are still to be found in Bhagwati and Desai (1970)…”

 

Professors Bhagwati and Panagriya have not apparently referred to anything beyond these joint works of Bhagwati’s dated 1970 with Padma Desai and 1975 with TN Srinivasan.  They have not claimed Bhagwati did anything by way of either publication or political activity in relation to India’s economic policy between May 1984, when he read my soon-to-be-published-work and found I had

 

done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems”,

 

and September 1990 when I gave Rajiv the University of Hawaii perestroika-for-India project results developed since 1986, which came to politically spark the 1991 reform in the Congress’s highest echelons from months before Rajiv’s assassination.   

 

There may have been no such claim made by Bhagwati and Panagariya because there may be no such evidence.  Between 1984 and 1990,  Professor Bhagwati’s research interests were away from Indian economic policy while his work on India through 1970 and 1975 had been fully and reasonably accounted for as of 1984 by myself.

 

What is left remaining is Bhagwati’s statement :

 

“When finance minister Manmohan Singh was in New York in 1992, he had a lunch for many big CEOs whom he was trying to seduce to come to India. He also invited me and my wife, Padma Desai, to the lunch. As we came in, the FM introduced us to the invitees and said: ‘These friends of mine wrote almost a quarter century ago [India: Planning for Industrialisation was published in 1970 by Oxford] recommending all the reforms we are now undertaking. If we had accepted the advice then, we would not be having this lunch as you would already be in India’

 

Now this light self-deprecating reference by Manmohan at an investors’ lunch in New York “for many big CEOs” was an evident attempt at political humour written by his speech-writer.   It was clearly, on its face, not serious history.   If we test it as serious history, it falls flat so we may only hope Manmohan Singh, unlike Jagdish Bhagwati, has not himself come to believe his own reported joke as anything more than that.  

 

The Bhagwati-Desai volume being referred to was developed from 1966-1970.  India saw critical economic and political events  in 1969, in 1970, in 1971, in 1972, in 1975, in 1977, etc.

 

Those were precisely years during which Manmohan Singh himself moved from being an academic to becoming a Government of India official, working first for MG Kaul, ICS, and then in 1971 coming to the attention of  PN Haksar, Indira Gandhi’s most powerful bureaucrat between 1967 and 1974: Haksar himself was Manmohan Singh’s acknowledged mentor in the Government, as Manmohan told Mark Tully in an interview.  

 

After Manmohan visited our Paris home in 1973 to talk to me about economics, my father — who had been himself sent to the Paris Embassy by Haksar in preparation for Indira Gandhi’s visit in November 1971 before the Bangladesh war —

 

scan0024

had told me Manmohan was very highly regarded in government circles with economics degrees from both Cambridge and Oxford, and my father had added, to my surprise, what was probably a Haksarian governmental view that Manmohan was expected to be India’s Prime Minister some day.  That was 1973.

 

PN Haksar had been the archetypal Nehruvian Delhi intellectual of a certain era, being both a fierce nationalist and a fierce pro-USSR leftist from long before Independence.  I met him once on 23 March 1991, on the lawns of 10 Jan Path at the launch of General V Krishna Rao’s book on Indian defence which Rajiv was releasing, and Haksar gave a speech to introduce Rajiv (as if Rajiv needed introduction on the lawns of his own residence);  Haksar was in poor health but he seemed completely delighted to be back in favour with Rajiv,  after years of having been treated badly by Indira and her younger son.  

 

 Had Manmohan Singh in the early 1970s gone to Haksar — the architect of the nationalisation of India’s banking going on right then — and said “Sir, this OECD study by my friend Bhagwati and his wife says we should be liberalising foreign trade and domestic industry”, Haksar would have been astonished and sent him packing.  

 

There was a war on, plus a massive problem of 10 million refugees, a new country to support called Bangladesh, a railway strike, a bad crop, repressed inflation, shortages, and heaven knows what more, besides Nixon having backed Yahya Khan, Tikka Khan et al. 

 

 

nixon-note

Then after Bangladesh and the railway strike etc, came the rise of the politically odious younger son of Indira Gandhi and his friends (at least one of whom is today Sonia Gandhi’s gatekeeper) followed by the internal political Emergency, the grave foreign-fueled problem of Sikh separatism and its control, the assassination of Indira Gandhi by her own Sikh bodyguards, and the Rajiv Gandhi years as Prime Minister. 

 

Certainly it was Rajiv’s arrival in office and Benazir’s initial return to Pakistan, along with the rise of Michael Gorbachev in the changing USSR, that inspired me in far away Hawaii in 1986 to design with Ted James the perestroika-projects for India and Pakistan which led to our two volumes, and which, thanks to Siddhartha Shankar Ray, came to reach Rajiv Gandhi in Opposition in September 1990 as he sat somewhat forlornly at 10 Jan Path after losing office. “There is a tide in the affairs of men, Which taken at the flood, leads on to fortune….

 

My friend and collaborator Ted James died of cancer in Manila in May 2010; earlier that year he came to say publicly

 

“Seldom are significant reforms imposed successfully by international bureaucracies. Most often they are the result of indigenous actors motivated by domestic imperatives. I believe this was the case in India in 1991. It may have been fortuitous that Dr. Roy gained an audience with a receptive Rajiv Gandhi in 1990 but it was not luck that he was prepared with a well-thought out program; this arose from years of careful thought and debate on the matter.”

 

Changing the direction of a ship of state is very hard, knowing in which direction it should change and to what degree is even harder; it has rarely been something that can be done without random shocks arising let aside the power of vested interests. Had Rajiv Gandhi lived to form a new Government, I have little doubt I would have led the reform that I had chalked out for him and that he had approved of;  Sonia Gandhi would have remained the housewife, mother and grandmother that she had preferred to be and not been made into the Queen of India by the Congress Party; Manmohan Singh had left India in 1987 for the Nyerere project and it had been rumoured at the time that had been slightly to do with him protesting, to the extent that he ever has protested anything, the anti-Sikh pogrom that some of Rajiv’s friends had apparently unleashed after Indira’s killing; he returned in November 1990, joined Chandrashekhar in December 1990, left Chandrashekhar in March 1991 when elections were announced and was biding his time as head of the UGC; had Rajiv Gandhi lived, Manmohan Singh would have had a governor’s career path, becoming the governor of one state after another; he would not have been brought into the economic reform process which he had had nothing to do with originating; and finally Pranab Mukherjee, who left the Congress Party and formed his own when Rajiv took over, would have been likely rehabilitated slowly but would not have come to control the working of the party as he did. I said in my Lok Sabha TV interview on 5 9 December 2012 that there have been many microeconomic improvements arising from technological progress in the last 22 years but the macroeconomic and monetary situation is grim, because at root the fiscal situation remains incoherent and confused. I do not see anyone in Manmohan Singh’s entourage among all his many acolytes and flatterers and apologists who is able to get to these root problems.  We shall address these issues in Part II.

 

What Manmohan Singh said in self-deprecating humour at an investors’ lunch in New York in 1992 is hardly serious history as Jagdish Bhagwati has seemed to wish it to be.  Besides, it would have been unlike Manmohan,  being the devoted student of Joan Robinson and Nicholas Kaldor as he told Mark Tully,  to have taken such a liberalising initiative at all.  Furthermore, the 1969 American Economic Review published asurvey of Indian economic policy authored by his Delhi University colleagues Jagdish Bhagwati and Sukhamoy Chakravarty which made little mention of his work, and it would have been unreasonable to expect him to have been won over greatly by theirs. Perhaps there is a generous review from the 1970s by Manmohan Singh of the Bhagwati-Desai volume hidden somewhere but if so we should be told where it is.  A list of Manmohan Singh’s publications as an economist do not seem easily available anywhere.  

 

Lastly and perhaps most decisively, the 1970 Bhagwati-Desai volume, excellent study that it was, was hardly the first of its genre by way of liberal criticism of modern Indian economic policy!   Bhagwati declared in his 2010 speech to the Lok Sabha

 

“This policy framework had been questioned, and its total overhaul advocated, by me and Padma Desai in writings through the late 1960s…”

 

But why has Bhagwati been forever silent about the equally if not more forceful and fundamental criticism of “the policy framework”, and advocacy of its “total overhaul”, by scholars in the 1950s, a decade and more earlier than him, when he and Manmohan and Amartya were still students?  Specifically, by BR Shenoy, Milton Friedman, and Peter Bauer?   The relevant bibliography from the mid 1950s is given in Footnote 1 of my 1984 work. 

 

 


topimg_15242_br_shenoy_300x400

baueronshenoy

Peter Tamas Bauer (1915-2002) played a vital role in all this as had he himself not brought the Friedman 1955 document to my attention I would not have known of it.

 

 

1902FN2

As undergraduates at the LSE, we had been petrified of him and I never spoke to him while there, having believed the propaganda that floated around about him; then while a Research Student at Cambridge, I happened to be a speaker with him at a conference at Oxford; he made me sit next to him at a meal and told me for the first time about Milton Friedman’s 1955 memorandum to the Government of India which had been suppressed.  I am privileged to say Peter from then on became a friend, and wrote, at my request, what became I am sure the kiss of death for me at the World Bank of 1982:

 

226258_10150168598862285_2325402_n

Later he may have been responsible for the London Times writing its lead editorial of 29 May 1984 on my work.

 

Now Milton had sent me in 1984, besides the original of his November 1955 memorandum to the Government of India, a confidential 1956 document also which seemed to have been written for US Government consumption.  I did not publish this in Hawaii in 1989 as I was having difficulty enough publishing the 1955 memorandum.  I gave it to be published on the Internet some years ago, and after Milton’s passing, I had it published in The Statesman  on the same day as my obituary of him. 

 

It makes fascinating reading, especially about Mahalanobis and Shenoy, of how what Bhagwati wishes to call “the policy framework” that, he claims, he and Desai called for a “total overhaul” of, came to be what it was in the decade earlier when he and Amartya and Manmohan were still students. 

 

Friedman’s 1956 document said

 

“I met PC Mahalanobis in 1946 and again at a meeting of the International Statistical Institute in September 1947, and I know him well by reputation. He was absent during most of my stay in New Delhi, but I met him at a meeting of the Indian Planning Commission, of which he is one of the strongest and most able members.   Mahalanobis began as a mathematician and is a very able one. Able mathematicians are usually recognized for their ability at a relatively early age. Realizing their own ability as they do and working in a field of absolutes, tends, in my opinion, to make them dangerous when they apply themselves to economic planning. They produce specific and detailed plans in which they have confidence, without perhaps realizing that economic planning is not the absolute science that mathematics is. This general characteristic of mathematicians is true of Mahalanobis but in spite of the tendency he is willing to discuss a problem and listen to a different point of view. Once his decision is reached, however, he has great confidence in it. Mahalanobis was unquestionably extremely influential in drafting the Indian five-year plan. There were four key steps in the plan. The first was the so-called “Plan Frame” drafted by Mahalanobis himself. The second was a tentative plan based on the “Plan Frame”. The third step was a report by a committee of economists on the first two steps, and the fourth was a minority report by BR Shenoy on the economists’ report. The economists had no intention of drafting a definitive proposal but merely meant to comment on certain aspects of the first two steps. Shenoy’s minority report, however, had the effect of making the economists’ report official. The scheme of the Five Year Plan attributed to Mahalanobis faces two problems; one, that India needs heavy industry for economic development; and two, that development of heavy industry uses up large amounts of capital while providing only small employment.  Based on these facts, Mahalanobis proposed to concentrate on heavy industry development on the one hand and to subsidize the hand production cottage industries on the other. The latter course would discriminate against the smaller manufacturers. In my opinion, the plan wastes both capital and labour and the Indians get only the worst of both efforts. If left to their own devices under a free enterprise system I believe the Indians would gravitate naturally towards the production of such items as bicycles, sewing machines, and radios. This trend is already apparent without any subsidy. The Indian cottage industry is already cloaked in the same popular sort of mist as is rural life in the US. There is an idea in both places that this life is typical and the backbone of their respective countries. Politically, the Indian cottage industry problem is akin to the American farm problem. Mohandas Gandhi was a proponent of strengthening the cottage industry as a weapon against the British. This reason is now gone but the emotions engendered by Gandhi remain. Any move to strengthen the cottage industry has great political appeal and thus, Mahalanobis’ plan and its pseudo-scientific support for the industry also has great political appeal.  I found many supporters for the heavy industry phase of the Plan but almost no one (among the technical Civil Servants) who really believes in the cottage industry aspects, aside from their political appeal. In its initial form, the plan was very large and ambitious with optimistic estimates. My impression is that there is a substantial trend away from this approach, however, and an attempt to cut down. The development of heavy industry has slowed except for steel and iron. I believe that the proposed development of a synthetic petroleum plant has been dropped and probably wisely so. In addition, I believe that the proposed five year plan may be extended to six years. Other than his work on the plan, I am uncertain of Mahalanobis’ influence. The gossip is that he has Nehru’s ear and potentially he could be very influential, simply because of his intellectual ability and powers of persuasion. The question that occurs to me is how much difference Mahalanobis’ plan makes. The plan does not seem the important thing to me. I believe that the new drive and enthusiasm of the Indian nation will surmount any plan, good or bad. Then too, I feel a wide diversity in what is said and what is done. I believe that much of Nehru’s socialistic talk is simply that, just talk. Nehru has been trying to undermine the Socialist Party by this means and apparently the Congress Party’s adoption of a socialistic idea for industry has been successful in this respect.  One gets the impression, depending on whom one talks with, either that the Government runs business, or that two or three large businesses run the government. All that appears publicly indicates that the first is true, but a case can also be made for the latter interpretation. Favour and harassment are counterparts in the Indian economic scheme. There is no significant impairment of the willingness of Indian capitalists to invest in their industries, except in the specific industries where nationalization has been announced, but they are not always willing to invest and take the risks inherent in the free enterprise system. They want the Government to support their investment and when it refuses they back out and cry “Socialism”..”

 

I look forward to seeing a fundamental classical liberal critique from India’s distinguished American friends at Columbia University, Professors Jagdish Bhagwati and Padma Desai and Arvind Panagariya, if and when such a critique arises,  of the  “policy framework” in India as that evolved from the mid 1950s to become what exists across India in 2013 today.  Specifically:  Where is the criticism from Bhagwati of Mahalanobis and friends?  And where is Bhagwati’s defence of Shenoy, leave aside of Milton Friedman or Peter Bauer?   They seem not to exist. The most we get is a footnote again without the civility of any references, in the otherwise cogent 1975 Desai-Bhagwati paper “Socialism and Indian Economic Policy” alleging 

 

” Of these three types of impact of the Soviet example, the Plan-formulation approach was to be enthusiastically received by most commentators and, indeed, to lead to demands on the part of aid agencies for similar efforts by other developing countries. However, the shift to heavy industry was seen as a definite mistake by economic opinion of the Chicago school variety, reflecting their basic unfamiliarity with the structural models of growth and development planning of the Feldman-Mahalanobis variety-an ignorance which probably still persists. The detailed regulation was not quite noticed at the time, except by conservative commentators whose position however was extreme and precluded governmental planning of industrial investments on any scale.”

 

Desai and Bhagwati naturally found no apparent desire to locate any possible scientific truth or reasonableness among

 

“conservative commentators”

 

nor among the unnamed and undescribed

 

“economic opinion of the Chicago school variety”.   

 

Could Desai and Bhagwati have done anything different after all, even when talking about India to an American audience, without being at risk of losing their East Coast Limousine Liberal credentials?  Bhagwati used to routinely declare his “socialist” credentials, and even the other day on Indian TV emphatically declared he was not a “conservative” and scornfully dismissed “Thatcher and Reagan” for their “trickle down economics”…

 

Jagdish Bhagwati has evidently wanted to have his cake and eat it too…

 


 

4.    Amartya Sen’s Half-Baked Communism: “To each according to his need”? 

 

If I have been candid or harsh in my assessments of Jagdish Bhagwati and Manmohan Singh as they relate to my personal experience with the change of direction in Indian economic policy originating in 1990-1991, I am afraid I must be equally so with Bhagwati’s current opponent in debate, Amartya Sen. Certainly I have found the current spat between Bhagwati and Sen over India’s political economy to be dismal, unscholarly, unscientific and misleading (or off-base) except for it having allowed a burst of domestic policy-discussion in circumstances when India needs it especially much.  

 

None of this criticism is personal but based on objective experience and the record.  My criticism of Professor Bhagwati and Dr Manmohan Singh does not diminish in the slightest my high personal regard for both of them.

 

Similarly, Amartya Sen and I go back, momentarily, to Hindustan Park in 1964 when there was a faint connection as family friends from World War II  (as Naren Deb and Manindranath Roy were friends and neighbours, and we still have the signed copy of a book gifted by the former to the latter), and then he later knew me cursorily when I was an undergraduate at LSE and he was already a famous professor, and I greatly enjoyed his excellent lectures at the LSE on his fine book On Economic Inequality, and a few years later he wrote in tangential support of me at Cambridge for which he was thanked in the preface to my 1989 Philosophy of Economics — even though that book of mine also contained in its Chapter 10 the decisive criticism of his main contribution until that time to what used to be called “social choice theory”. Amartya Sen had also written some splendid handwritten letters, a few pages of which remain with me, which puzzled me at the time due to his expressing his aversion to what is normally called ‘price theory’, namely the Marshallian and/or Walrasian theory of value. 

 

Professor Sen and I met briefly in 1978, and then again in 2006 when I was asked to talk to him in our philosophical conversation which came to be published nicely.  In 2006 I told him of my experience with Rajiv Gandhi in initiating what became the 1991 reform on the basis of my giving Rajiv the results of the Hawaii project,  and Amartya was kind enough to say that he knew I had been arguing all this “very early on”, referring presumably to the 1984 London Times editorial which he would have seen in his Oxford days before coming to Harvard.

 

This personal regard on my part or personal affection on his part aside, I have been appalled to find Professor Sen not taking moral and intellectual responsibility for and instead disclaiming paternity of the whole so-called “Food Security” policy which Sonia Gandhi has been prevailed upon over the years by him and his acolytes and friends and admirers to adopt, and she in her ignorance of all political economy and governance has now wished to impose upon the Congress Party and India as a whole:

 

“Questioner: You are being called the creator of the Food Security Bill.

Amartya Sen: Yes, I don’t know why. That is indeed a paternity suit I’m currently fighting. People are accusing me of being the father”.

 

Amartya Sen has repeatedly over the years gone on Indian prime-time television and declared things like

 

If you don’t agree there’s hunger in the world, there’s something morally wrong with you”

 

besides over the decades publishing titles like Poverty and Famines: An Essay on Entitlement and Deprivation, Hunger and Public Action, The Political Economy of Hunger etc and ceaselessly using his immense power with the media, with book publishing houses, with US academic departments and the world development economics business,  to promote his own and his acolytes’ opinions around the world, no matter how ill-considered or incoherent these may be.   A passage from his latest book with Jean Drèze reportedly reads

 

“If development is about the expansion of freedom, it has to embrace the removal of poverty as well as paying attention to ecology as integral parts of a unified concern, aimed ultimately at the security and advancement of human freedom. Indeed, important components of human freedoms — and crucial ingredients of our quality of life — are thoroughly dependent on the integrity of the environment, involving the air we breathe, the water we drink, and the epidemiological surroundings in which we live….”

 

Had such a passage reached me in an undergraduate essay, I would have considered it incoherent waffle, and I am afraid I cannot see why merely because it is authored  by an eminence at Harvard and his co-author, the evaluation should be any different.   I am reminded of my encounter in 1976 with Joan Robinson, the great tutor in 1950s Cambridge of Amartya and Manmohan:  “Joan Robinson cornered me once and took me into the office she shared with EAG… She came at me for an hour or so wishing to supervise me, I kept declining politely… saying I was with Frank Hahn and wished to work on money… “What does Frankie know about India?” she said… I said I did not know but he did know about monetary theory and that was what I needed for India;  I also said I did not think much about the Indian Marxists she had supervised… and mentioned a prominent name… she said about him, “Yes most of what he does can go straight into the dustbin”…”  The Indian Marxist whom I had referred to in this conversation with Joan was not Amartya but someone else much younger, yet her candid “can go straight into the dustbin” still applies to all incoherent waffle, whomsoever may produce it.

 

Indeed, Amartya Sen, if anyone, really should get down to writing his memoirs, and candidly so in order to explain his own thinking and deeds over the decades to himself and to the world in order that needless confusions do not arise.  

 

Else it becomes impossible to explain how someone who was said to be proud to have been a Communist student on the run from the police in West Bengal, who was Joan Robinson’s star pupil at a time she was extolling Maoist China and who has seemingly nurtured a deep lifelong fascination and affection for Communist China despite all its misdeeds, who was feted by the Communist regime of West Bengal after winning the Bank of Sweden Prize (on the same day that same regime had tossed into jail one unfortunate young Mr Khemkha merely for having been rude to its leaders on the Internet), and who seemed to share some of those winnings on social causes like primary education at the behest of the Communist regime’s ministers, etc, how someone with that noble comradely leftist personal history as an economist allows a flattering interviewer with a Harvard connection to describe him in Business Standard of 25 July 2013  as having been all along really a

 

“neoclassical economist”

 

who also happens to be

 

“the greatest living scholar of the original philosopher of the free market, Adam Smith”

 

Amartya Sen a neoclassical economist and a great scholar of Adam Smith?  It is hilarious to suppose so. The question arises, Does Sen, having published about Adam Smith recently in a few newspapers and leftist periodicals, agree with such a description by his flattering admirer from Harvard at Business Standard?  “Neoclassical” economics originated with men like Jevons, Menger, Walras, Pareto, Marshall, Wicksell, and was marked by the theory of value being explained by a demand-side too, and not, like classical economics, merely by the cost of production alone on the supply side.  Indeed a striking thing about the list below published by the Scandinavian Journal of Economics of Amartya’s books following his 1998 Bank of Sweden Prize

 

1467-9442.00152_p1is how consistently these works display his avoidance of all neoclassical economics, and the absence of all of what is normally called ‘price theory’, namely the Marshallian and/or Walrasian theory of value.   No “neoclassical economics” anywhere here  for sure!  

 

It would be fair enough if Professor Sen says he is hardly responsible for an admirer’s ignorant misdescription of his work — except the question still arises why he has himself also evidently misdescribed his own work!  For example, in his 13 July 2013 letter to The Economist in response to the criticism of Jagdish Bhagwati and Arvind Panagariya, he says he had always been keenly interested in

 

“the importance of economic growth as a means— not an end”

 

and that this

 

“has been one of the themes even in my earliest writings (including “Choice of Techniques” in 1960 and “Growth Economics” in 1970)”.

 

This is a very peculiar opinion indeed to have been expressed by Professor Sen about his own work because the 1970 volume Growth Economics listed above among his books hardly can be said at all to be one of his own “earliest writings” as he now describes it to have been!

 

What had happened back then was that Sen, as someone considered a brilliant or promising young Indian economist at the time, had been asked by the editors of the famous Penguin Modern Economics Readings series to edit the specific issue  devoted to growth-theory — a compendium of classic already-published essays including those of Roy Harrod, Evsey Domar, Robert Solow and many others, to which young Amartya was given a chance to write an editorial Introduction.   Every economist familiar with that literature knows too that the growth-theory contained in that volume and others was considered highly abstract and notoriously divorced from actual historical processes of economic growth in different countries.  Everyone also knew that the individual editors in that famous Penguin Modern Economics Series were of relative unimportance as they did not commission new papers but merely collected classics already published and wrote an introduction.

 

This is significant presently because neither Professor Sen nor Professor Bhagwati may be objectively considered on the evidence of his life’s work as an economist to have been a major scholar of economic growth, either in theory or in historical practice.  As of December 1989,  Amartya Sen himself described his own interests to the American Economic Association as

 

“social choice theory, welfare economics, economic development”

 

and Jagdish Bhagwati described his interests as

 

“theory of international trade and policy, economic development”. 

 

Neither Sen nor Bhagwati mentioned growth economics or economic history or even general economic theory, microeconomics, macroeconomics, monetary economics, public finance, etc.  Furthermore, Sen saying in his letter to The Economist  that he has been always interested in economic growth seems to be baseless in light of the list of his books above, other than the Penguin compendium already discussed.

 

Incidentally in the same American Economic Association volume of 1989, Padma Desai had described her interests as

 

“Soviet economy and comparative economic systems”; 

 

Arvind Panagariya had described his interests as

 

“economies of scale and trade; smuggling; parallel markets in planned economies”;

 

and one Suby Roy described his interests as

 

“foundations of monetary economics”.

 

Reflecting on Amartya Sen’s works over the 40 year period that I have known them

 

[and again, my personal copies of his books and those of Bhagwati and Desai, were all in my professorial office at IIT Kharagpur when I was attacked by a corrupt gang there in 2003; and IIT have been under a High Court order to return them but have not done so],

 

I wonder in fact if it might be fairly said that Sen has been on his own subjective journey over the decades around the world seeking to reinvent economics and political economy from scratch, and inventing his own terminology like “capabilities”, “functionings” and yes “entitlements” etc. to help him do so, while trying to assiduously avoid mention of canonical works of  modern world economics like Marshall’s Principles, Hicks’s Value and Capital, Debreu’s Theory of Value, or Arrow and Hahn’s General Competitive Analysis, all defining the central neoclassical tradition of the modern theory of value.  

 

But no contemporary science, economics and political economy included, is open to be re-invented from scratch, and what Amartya Sen has ended up doing instead is seeming to be continually trying to reinvent the wheel, possibly without having had the self-knowledge to realise this.  Wittgenstein once made a paradoxical statement that one may know another’s mind better than one knows one’s own…  

Here is a current example.  Professor Sen says

 

“First, unlike the process of development in Japan, China, Korea and other countries, which pursued what Jean Drèze and I have called “Asian economic development” in our book, India has not had enough focus on public spending on school education and basic healthcare, which these other countries have had….”

 

Does Sen really believes believe he and Drèze  have now in 2013 discovered and christened an economic phenomenon named “Asian economic development”?  Everyone, from Japan and Bangkok and Manila, to Hawaii and Stanford to the World Bank’s East Asia department, including  especially my Hawaii colleague Ted James, and many many others including especially Gerald M Meier at Stanford, were was publishing about all that every month — in the mid 1980s!  In fact, our project on India and Pakistan arose in the 1980s from precisely such a Hawaiian wave!  Everyone knows all that from back then or even earlier when the Japanese were talking about the “flying geese” model.  (And, incidentally,  Communist China did not at the time belong in the list.)  Where was Amartya Sen in the mid 1980s when all that was happening?  Jean Drèze was still a student perhaps. Is Professor Sen seeking to reinvent the wheel again with “Asian Economic Development” being claimed to be invented in 2013 by him and Drèze now? Oh please!  That just won’t fly either!

 

A second example may be taken from the year before Professor Sen was awarded the Bank of Sweden Prize when he gave a lecture on “human capital” theory which was published as a survey titled “Human Capital and Human Capability” in World Development 1997 Vol. 25, No. 12, 

 

Can you see any reference in this 1997 survey to TW Schultz’s 1960 American Economic Association Presidential Address or to Schultz’s classic 1964 book Transforming Traditional Agriculture or to his 1979 Bank of Sweden Prize address?  I could not.   If one did not know better, one might have thought from Professor Sen’s 1997 survey that there was nothing done worth talking about on the subject of “human capital” from the time of Adam Smith and David Hume until Amartya Sen finally came to the subject himself. 

 

Thirdly,  one is told by Sen’s admirer and collaborator, Professor James Foster of George Washington University, that what  Sen means by his notion of

 

“effective freedom”

 

is that this is something

 

“enhanced when a marginally nourished family now has the capability to be sufficiently nourished due to public action”…

 

Are Amartya and his acolytes claiming he has invented or reinvented welfare economics ab initio?   That before Amartya Sen, we did not know the importance of the able-bodied members of a community assisting those who are not able-bodied? 

 

Where have they been? Amartya needed merely to have read Marshall’s Principles evenslightly to find Marshall himself, the master of Maynard Keynes and all of Cambridge and modern world economics, declaring without any equivocation at the very start 

 

“….the study of the causes of poverty is the study of the causes of the degradation of a large part of mankind…”

 

But Marshall was interested in study, serious study, of poverty and its causes and amelioration, which is not something as easy or trivial as pontification on modern television.  My 1984 article “Considerations on Utility, Benevolence and Taxation” which also became a chapter of my 1989 Philosophy of Economics surveyed some of Marshall’s opinion.

 

“From each according to his ability, to each according to his need” was a utopian slogan around 1875 from Karl Marx, which generations of passionate undergraduates have found impressive. Amartya Sen deserves to tell us squarely about his engagement with Marx or Marxist thought from his earliest days until now.  His commitment in recent decades to democracy and the open and free society is clear;  but has he also at the same time all along been committed to a kind of half-baked communist utopia as represented by Marx’s 1875 slogan? 

 

“To each according to his need” sounds to be the underlying premise that is seeing practical manifestation in the Sonia Congress’s imposition of a so-called “right to food”; “from each according to his ability” is its flip side in the so-called “rural employment guarantee”.  Leave aside the limitless resource-allocation and incentive and public finance problems created by such naive ideas being made into government policy, there is a grave and fundamental issue that Amartya and other leftists have been too blinkered to see:

 

Do they suppose the organised business classes have been weakly cooperative and will just allow such massive redistribution to occur without getting the Indian political system to pay them off as well?   And how do the organised business classes get paid off?  By their getting to take the land of the inhabitants of rural India.   And land in an environment of a debauching of money and other paper assets is as good as gold.

 

So the peasants will lose their land to the government’s businessman friends on the one hand while purportedly getting “guaranteed” employment and food from the government’s bureaucrats on the other!  A landless, asset-less slave population, free to join the industrial proletariat! Is that what Amartya wants to see in India?  It may become what results within a few decades from his and his acolytes’ words and deeds. 

 

Rajiv Gandhi once gave me his private phone numbers at 10 Jan Path.  I used them back in January 1991 during the Gulf war.  But I cannot do so now as Rajiv is gone.  Amartya can.  Let him phone Sonia and prevail upon her to put the brakes on the wild food and employment schemes he and his friends have persuaded her about until he reads and reflects upon what I said in January 2007 in “On Land-Grabbing” and in my July 2007 open letter to him, reproduced below:

 

“At a business meet on 12 January 2005, Dr Manmohan Singh showered fulsome praise on Buddhadeb Bhattacharjee as “dynamic”, “the Nation’s Best Chief Minister”, whose “wit and wisdom”, “qualities of head and heart”, “courage of conviction and passionate commitment to the cause of the working people of India” he admired, saying “with Buddhadeb Babu at the helm of affairs it appears Bengal is once again forging ahead… If today there is a meeting of minds between Delhi and Kolkata, it is because the ideas that I and Buddhadebji represent have captured the minds of the people of India. This is the idea of growth with equity and social justice, the idea that economic liberalization and modernization have to be mindful of the needs of the poor and the marginalized.”…. Dr Singh returned to the “needs of the poor and the marginalized” at another business meet on 8 January 2007 promising to “unveil a new Rehabilitation Policy in three months to increase the pace of industrialisation” which would be “more progressive, humane and conducive to the long-term welfare of all stakeholders”, while his businessman host pointedly stated about Singur “land for industry must be made available to move the Indian manufacturing sector ahead”. The “meeting of minds between Delhi and Kolkata” seems to be that agriculture allegedly has become a relatively backward slow-growing sector deserving to yield in the purported larger national interest to industry and services: what the PM means by “long-term welfare of all stakeholders” is the same as the new CPI-M party-line that the sons of farmers should not remain farmers (but become automobile technicians or IT workers or restaurant waiters instead).   It is a political viewpoint coinciding with interests of organised capital and industrial labour in India today, as represented by business lobbies like CII, FICCI and Assocham on one hand, and unions like CITU and INTUC on the other. Business Standard succinctly (and ominously) advocated this point of view in its lead editorial of 9 January as follows: “it has to be recognised that the world over capitalism has progressed only with the landed becoming landless and getting absorbed in the industrial/service sector labour force ~ indeed it is obvious that if people don’t get off the land, their incomes will rise only slowly”.  Land is the first and ultimate means of production, and the attack of the powerful on land-holdings or land-rights of the unorganised or powerless has been a worldwide phenomenon ~ across both capitalism and communism.  In the mid-19th Century, white North America decimated hundreds of thousands of natives in the most gargantuan land-grab of history. Defeated, Chief Red Cloud of the Sioux spoke in 1868 for the Apache, Navajo, Comanche, Cheyenne, Iroquois and hundreds of other tribes: “They made us many promises, more than I can remember, but they never kept any except one: they promised to take our land, and they took it.”  Half a century later, while the collapse of grain prices contributed to the Great Depression and pauperisation of thousands of small farmers in capitalist America in the same lands that had been taken from the native tribes, Stalin’s Russia embarked on the most infamous state-sponsored land-grab in modern history: “The mass collectivisation of Soviet agriculture (was) probably the most warlike operation ever conducted by a state against its own citizens…. Hundreds of thousands and finally millions of peasants… were deported… desperate revolts in the villages were bloodily suppressed by the army and police, and the country sank into chaos, starvation and misery… The object of destroying the peasants’ independence…was to create a population of slaves, the benefit of whose labour would accrue to industry. The immediate effect was to reduce Soviet agriculture to a state of decline from which it has not yet recovered… The destruction of the Soviet peasantry, who formed three quarters of the population, was not only an economic but a moral disaster for the entire country. Tens of millions were driven into semi-servitude, and millions more were employed as executants…” (Kolakowski, Main Currents of Marxism).   Why did Stalin destroy the peasants? Lenin’s wishful “alliance between the proletariat and the peasantry” in reality could lead only to the peasants being pauperised into proletarians. At least five million peasants died and (Stalin told Churchill at Yalta) another ten million in the resultant famine of 1932-1933. “Certainly it involved a struggle ~ but chiefly one between urban Communists and villagers… it enabled the regime to obtain much of the capital desired for industrialization from the defeated village… it was the decisive step in the building of Soviet totalitarianism, for it imposed on the majority of the people a subjection which only force could maintain” (Treadgold, 20th Century Russia).  Mr Bhattacharjee’s CPI-M is fond of extolling Chinese communism, and the current New Delhi establishment have made Beijing and Shanghai holiday destinations of choice. Dr Singh’s Government has been eager to create hundreds of “Special Economic Zones” run by organised capital and unionised labour, and economically privileged by the State. In fact, the Singur and Nandigram experiences of police sealing off villages where protests occur are modelled on creation of “Special Economic Zones” in China in recent years.  For example, Chinese police on 6 December 2005 cracked down on farmers and fishermen in the seaside village of Dongzhou, 125 miles North East of Hong Kong. Thousands of Dongzhou villagers clashed with troops and armed police protesting confiscation of their lands and corruption among officials. The police immediately sealed off the village and arrested protesters. China’s Public Security Ministry admitted the number of riots over land had risen sharply, reaching more than seventy thousand across China in 2004; police usually suppressed peasant riots without resort to firing but in Dongzhou, police firing killed 20 protesters. Such is the reality of the “emergence” of China, a totalitarian police-state since the Communist takeover in 1949, from its period of mad tyranny until Mao’s death in 1976, followed by its ideological confusion ever since.  Modern India’s political economy today remains in the tight grip of metropolitan “Big Business” and “Big Labour”. Ordinary anonymous individual citizens ~ whether housewife, consumer, student, peasant, non-union worker or small businessman ~ have no real voice or representation in Indian politics. We have no normal conservative, liberal or social democratic party in this country, as found in West European democracies where the era of land-grabbing has long-ceased. If our polity had been normal, it would have known that economic development does not require business or government to pauperise the peasantry but instead to define and secure individual property rights and the Rule of Law, and establish proper conditions for the market economy. The Congress and BJP in Delhi and CPI-M in Kolkata would not have been able to distract attention from their macroeconomic misdeeds over the decades ~ indicated, for example, by increasing interest-expenditure paid annually on Government debt as a fraction of tax revenues… This macroeconomic rot originated with the Indira Gandhi-PN Haksar capriciousness and mismanagement, which coincided with the start of Dr Singh’s career as India’s best known economic bureaucrat….”

 

“Professor Amartya Sen, Harvard University,  Dear Professor Sen,  Everyone will be delighted that someone of your worldwide stature has joined the debate on Singur and Nandigram; The Telegraph deserves congratulations for having made it possible on July 23.  I was sorry to find though that you may have missed the wood for the trees and also some of the trees themselves. Perhaps you have relied on Government statements for the facts. But the Government party in West Bengal represents official Indian communism and has been in power for 30 years at a stretch. It may be unwise to take at face-value what they say about their own deeds on this very grave issue! Power corrupts and absolute power corrupts absolutely, and there are many candid communists who privately recognise this dismal truth about themselves. To say this is not to be praising those whom you call the “Opposition” ~ after all, Bengal’s politics has seen emasculation of the Congress as an opposition because the Congress and communists are allies in Delhi. It is the Government party that must reform itself from within sua sponte for the good of everyone in the State.  The comparisons and mentions of history you have made seem to me surprising. Bengal’s economy now or in the past has little or nothing similar to the economy of Northern England or the whole of England or Britain itself, and certainly Indian agriculture has little to do with agriculture in the new lands of Australia or North America. British economic history was marked by rapid technological innovations in manufacturing and rapid development of social and political institutions in context of being a major naval, maritime and mercantile power for centuries. Britain’s geography and history hardly ever permitted it to be an agricultural country of any importance whereas Bengal, to the contrary, has been among the most agriculturally fertile and hence densely populated regions of the world for millennia.  Om Prakash’s brilliant pioneering book The Dutch East India Company and the Economy of Bengal 1630-1720 (Princeton 1985) records all this clearly. He reports the French traveller François Bernier saying in the 1660s “Bengal abounds with every necessary of life”, and a century before him the Italian traveller Verthema saying Bengal “abounds more in grain, flesh of every kind, in great quantity of sugar, also of ginger, and of great abundance of cotton, than any country in the world”. Om Prakash says “The premier industry in the region was the textile industry comprising manufacture from cotton, silk and mixed yarns”. Bengal’s major exports were foodstuffs, textiles, raw silk, opium, sugar and saltpetre; imports notably included metals (as Montesquieu had said would always be the case).  Bengal did, as you say, have industries at the time the Europeans came but you have failed to mention these were mostly “agro-based” and, if anything, a clear indicator of our agricultural fecundity and comparative advantage. If “deindustrialization” occurred in 19th Century India, that had nothing to do with the “deindustrialization” in West Bengal from the 1960s onwards due to the influence of official communism.  You remind us Fa Hiaen left from Tamralipta which is modern day Tamluk, though he went not to China but to Ceylon. You suggest that because he did so Tamluk effectively “was greater Calcutta”. I cannot see how this can be said of the 5th Century AD when no notion of Calcutta existed. Besides, modern Tamluk at 22º18’N, 87º56’E is more than 50 miles inland from the ancient port due to land-making that has occurred at the mouth of the Hooghly. I am afraid the relevance of the mention of Fa Hiaen to today’s Singur and Nandigram has thus escaped me.  You say “In countries like Australia, the US or Canada where agriculture has prospered, only a very tiny population is involved in agriculture. Most people move out to industry. Industry has to be convenient, has to be absorbing”. Last January, a national daily published a similar view: “For India to become a developed country, the area under agriculture has to shrink, urban and industrial land development has to take place, and about 100 million workers have to move out from agriculture into industry and services. This is the only way forward for bringing prosperity to the rural population”.   Rice is indeed grown in Arkansas or Texas as it is in Bengal but there is a world of difference between the technological and geographical situation here and that in the vast, sparsely populated New World areas with mechanized farming! Like shoe-making or a hundred other crafts, agriculture can be capital-intensive or labour-intensive ~ ours is relatively labour-intensive, theirs is relatively capital-intensive. Our economy is relatively labour-abundant and capital-scarce; their economies are relatively labour-scarce and capital-abundant (and also land-abundant). Indeed, if anything, the apt comparison is with China, and you doubtless know of the horror stories and civil war conditions erupting across China in recent years as the Communist Party and their businessman friends forcibly take over the land of peasants and agricultural workers, e.g. in Dongzhou. All plans of long-distance social engineering to “move out” 40 per cent of India’s population (at 4 persons per “worker”) from the rural hinterlands must also face FA Hayek’s fundamental question in The Road to Serfdom: “Who plans whom, who directs whom, who assigns to other people their station in life, and who is to have his due allotted by others?”  Your late Harvard colleague, Robert Nozick, opened his brilliant 1974 book Anarchy, State and Utopia saying: “Individuals have rights, and there are things no person or group may do to them (without violating their rights)”. You have rightly deplored the violence seen at Singur and Nandigram. But you will agree it is a gross error to equate violence perpetrated by the Government which is supposed to be protecting all people regardless of political affiliation, and the self-defence of poor unorganised peasants seeking to protect their meagre lands and livelihoods from state-sponsored pogroms. Kitchen utensils, pitchforks or rural implements and flintlock guns can hardly match the organised firepower controlled by a modern Government.   Fortunately, India is not China and the press, media and civil institutions are not totally in the hands of the ruling party alone. In China, no amount of hue and cry among the peasants could save them from the power of organised big business and the Communist Party. In India, a handful of brave women have managed to single-handedly organise mass movements of protest which the press and media have then broadcast that has shocked the whole nation to its senses.  You rightly say the land pricing process has been faulty. Irrelevant historical prices have been averaged when the sum of discounted expected future values in an inflationary economy should have been used. Matters are even worse. “The fear of famine can itself cause famine. The people of Bengal are afraid of a famine. It was repeatedly charged that the famine (of 1943) was man-made.” That is what T. W. Schultz said in 1946 in the India Famine Emergency Committee led by Pearl Buck, concerned that the 1943 Bengal famine should not be repeated following dislocations after World War II. Of course since that time our agriculture has undergone a Green Revolution, at least in wheat if not in rice, and a White Revolution in milk and many other agricultural products. But catastrophic collapses in agricultural incentives may still occur as functioning farmland comes to be taken by government and industry from India’s peasantry using force, fraud or even means nominally sanctioned by law. If new famines come to be provoked because farmers’ incentives collapse, let future historians know where responsibility lay.  West Bengal’s real economic problems have to do with its dismal macroeconomic and fiscal position which is what Government economists should be addressing candidly. As for land, the Government’s first task remains improving grossly inadequate systems of land-description and definition, as well as the implementation and recording of property rights.  With my most respectful personal regards, I remain, Yours ever, Suby”

 

How does India, as a state, treat its weakest and most vulnerable citizens? Not very well at all.  It is often only because families and society have not collapsed completely, as they have elsewhere, that the weakest survive.  Can we solve in the 21st Century, in a practical manner appropriate to our times, the problem Buddha raised before he became the Buddha some twenty six centuries ago?  Says Eliot,

 

“The legend represents him as carefully secluded from all disquieting sights and as learning the existence of old age, sickness and death only by chance encounters which left a profound impression”

 

It is to this list we add “the poor” too, especially if we want to include a slightly later and equally great reformer some miles west of the Terai in the Levant.  I said some years ago “As we as infants and children need to be helped to find courage to face the start of life, we when very elderly can need to be helped to find courage to face life’s end”.   Old age carries with it the fear of death, fear of the end of life and what that means, which raises the meaning of life itself, or at least of the individual life, because we can hardly grasp what the end of life is if we haven’t what it is supposed to be the end of in the first place. What the very elderly need, as do the dying and terminally ill, is to find courage within themselves to comprehend all this with as much equanimity as possible. Companionship and camaraderie — or perhaps let us call it love — go towards that courage coming to be found; something similar goes for the sick, whether a sick child missing school or the elderly infirm, courage that they are not alone and that they can and will recover and not have to face death quite yet, that life will indeed resume.  

 

As for the poor, I said in 2009 about the bizarre Indian scheme of “interrogating, measuring, photographing and fingerprinting them against their will” that “the poor have their privacy and their dignity. They are going to refuse to waste their valuable time at the margins of survival volunteering for such gimmickry.”

 

“What New Delhi’s governing class fails to see is that the masses of India’s poor are not themselves a mass waiting for New Delhi’s handouts: they are individuals, free, rational, thinking individuals who know their own lives and resources and capacities and opportunities, and how to go about living their lives best. What they need is security, absence of state or other tyranny, roads, fresh water, electricity, functioning schools for their children, market opportunities for work, etc, not handouts from a monarch or aristocrats or businessmen….” Or, to put it differently in Kant’s terms, the poor need to be treated as ends in themselves, and not as the means towards the ends of others…

 

 

Part II India’s Right Road Forward Now: Some Thoughtful Analysis for Grown Ups

 

5.   Transcending a Left-Right/Congress-BJP Divide in Indian Politics

6.   Budgeting Military & Foreign Policy

 

7.    Solving the Kashmir Problem & Relations with Pakistan

 

8.  Dealing with Communist China

 

9.   Towards Coherence in Public Accounting, Public Finance & Public Decision-Making

 

10.   India’s Money: Towards Currency Integrity at Home & Abroad

Posted in Academic research, Amartya Sen, Arvind Panagariya, Asia and the West, Bengal's Public Finances, Bhagwati-Sen spat, BJP, Britain in India, Cambridge Univ Economics, Cambridge University, Columbia University, Congress Party, Congress Party History, Credit markets, Economic inequality, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of Public Finance, Financial Repression, Governance, Government accounting, Government of India, India's Big Business, India's Cabinet Government, India's Government economists, India's 1991 Economic Reform, India's balance of payments, India's Budget, India's bureaucracy, India's Capital Markets, India's constitutional politics, India's corruption, India's currency history, India's Economic History, India's Economy, India's Exports, India's Foreign Exchange Reserves, India's Government Budget Constraint, India's Industry, India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's Polity, India's Public Finance, India's Reserve Bank, India's State Finances, Institute of Economic Affairs, Jagdish Bhagwati, Jean Drèze, LK Advani, Manmohan Singh, Margaret Thatcher's Revolution, Mihir Kumar Roy (MKRoy), Milton Friedman, Money and banking, Padma Desai, Paper money and deposits, Political Economy, Public Choice/Public Finance, Public property waste fraud, Rajiv Gandhi, Rajiv Gandhi's assassination, Reverse-Euro Model for India, Sen-Bhagwati spat, Siddhartha Shankar Ray, Sonia Gandhi, Subroto Roy, Sukhamoy Chakravarty, The Times (London), University of Hawaii, William E (Ted) James (1951-2010). Leave a Comment »

No magic wand, Professor Rajan? Oh but there is…2013 (Plus: 7 Jan 2016 “Professor Rajan stays or goes? My answer to a query”)

7 January 2016
rajan

3 June 2014

from World Economy & Central Banking Seminar at Facebook

Professor Rajan’s statement “I determine the monetary policy. I say what it is….ultimately the interest rate that is set is set by me” equates Indian monetary policy with the money interest rate; but monetary policy in India has always involved far more than that, namely, the bulk of Indian banking and insurance has been in government hands for decades, all these institutions have been willy-nilly compelled to hold vast stocks of government debt, both Union and State, on their asset-sides…and unlimited unending deficit finance has led to vast expansion of money supply, making it all rather fragile. My “India’s Money” in 2012 might be found useful. http://tinyurl.com/o9dhe8d

11 April 2014

from World Economy & Central Banking Seminar at Facebook

I have to wonder, What is Professor Rajan on about? Growth in an individual country is affected by the world monetary system? Everyone for almost a century has seen it being a real phenomenon affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress… A “source country” needs to consult “recipient” countries before it starts or stops Quantitative Easing? Since when? The latter can always match policy such as to be more or less unaffected… unless of course it wants to ride along for free when the going is good and complain loudly when it is not…. Monetary policy may affect the real economy but as a general rule we may expect growth (a real phenomenon) to be affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress..

22 September 2013

“Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike…”

I will say the statement above is the first sensible thing I have heard Dr Rajan utter anywhere, cutting through all the hype…I should also think he may be underestimating the task at hand, so here’s some help as to what needs to be done from my 19 Aug 2013 Mint article “A wand for Raghuram Rajan” and my 3 Dec 2012 Delhi lecture:

“Rajan has apparently said, “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.” Of course there are no magic wands but there is a scientific path forward. It involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity. It also involves institutional changes in public decision-making like separating banking and central banking from the treasury while making the planning function serve the treasury function rather than pretend to be above it. It is a road long and arduous but at its end both corruption and inflation will have been reduced to minimal levels. The rupee will have acquired sufficient integrity to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases. India signed the treaty of Versailles as a victor and was an original member of the League of Nations, the United Nations and the IMF. Yet sovereign India has failed to develop a currency universally acceptable as freely convertible world money. It is necessary and possible for India to aim to do so because without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. An RBI governor’s single overriding goal should be to try to bring a semblance of integrity to India’s money both domestically and worldwide.”

 

 

19 August 2013

A wand for Raghuram Rajan

9 August 2013

No magic wand, Professor Rajan? Oh but there is… read up all this over some hours and you will find it… (Of course it’s not from magic really,  just hard economic science & politics)

Professor Raghuram Govind Rajan of the University of Chicago Business School deserves everyone’s congratulations on his elevation to the Reserve Bank of India’s Governorship.  But I am afraid I cannot share the wild optimism in India’s business media over this.  Of course there are several positives to the appointment.  First, having a genuine PhD and that too from a top school is a rarity among India’s policy-makers; Rajan earned a 1991 PhD in finance at MIT’s management school for a thesis titled “Essays on banking” (having to do we are told “with the downside to cozy bank-firm relationships”).   Secondly, and related,  he has not been a career bureaucrat as almost all RBI Governors have been in recent decades.  Thirdly, he has been President of the American Finance Association, he won the first Fischer Black prize in finance of that Association, and during Anne Krueger’s 2001-2006 reign as First Deputy MD at the IMF, he was given the research role made well-known by the late Michael Mussa, that of “Economic Counselor” of the IMF.

Hence, altogether, Professor Rajan has come to be well-known over the last decade in the West’s financial media. Given the dismal state of India’s credit in world capital markets, that is an asset for a new RBI Governor to have.

On the negatives, first and foremost, if Professor Rajan has renounced at any time his Indian nationality, surrendered his Indian passport and sworn the naturalization oath of the USA, then he is a US citizen with a US passport and loyalty owed to that country, and by US law he will have to enter the USA using that and no other nationality.  If that happens to be the factual case, it will be something that comes out in India’s political cauldron for sure, and there will arise legal issues and court orders  barring him from heading the RBI or representing India officially, e.g. when standing in for India’s Finance Minister at the IMF in Washington or the BIS in Basle etc.   Was he an Indian national as Economic Counselor at the IMF?   The IMF has a tradition of only European MDs and at least one American First Deputy MD.   The Economic Counselor was always American too; did Rajan break that by having remained Indian, or conform to it by having become American?  It is a simple question of fact which needs to come out clearly.   Even if Rajan is an American, he and the Government of India could perhaps try to cite to the Indian courts the new precedent set by the venerable Bank of England which recently appointed a Canadian as Governor.

Secondly, does Professor Rajan know enough (or “have enough domain knowledge” in the modern term) to comprehend let aside confront India’s myriad monetary and public finance problems?  Much of his academic experience in the USA and his approach to Western financial markets may be quite simply divorced from the reality of Indian credit markets and India’s peculiar monetary and banking system as these have evolved over decades and centuries.  Mathematical finance is a relatively new, small specialised American sub-field of economic theory, and not a part of general economics. Rajan’s academic path of engineering and management in India followed by a finance thesis in the management department of a US engineering school may have exposed him to relatively little formal textbook micro- and macroeconomics, monetary economics, public finance, international economics, economic development etc, especially as these relate to Indian circumstances  “Growing up in India, I had seen poverty all around me. I had read about John Maynard Keynes and thought, wow, here’s a guy who managed to have an enormous influence on the world. Economics must be very important.”… He ran across Robert Merton’s paper on rational option pricing, and something clicked that set him on his own intellectual path. “It all came together. You didn’t have these touchy-feely ways of describing human behavior; there were neat arbitrage ways of pricing things. It just seemed so clever and sophisticated,” he said. “And I could use the math skills that I fancied I had, so I decided to get my PhD.”

Let me take two examples.  Does Rajan realise how the important Bottomley-Chandavarkar debates of the 1960s about India’s rural credit markets influenced George Akerlof’s “Market for Lemons” theory and prompted much work on “asymmetric information”, 325.extract signalling etc in credit-markets, insurance-markets, labour-markets and markets in general, as acknowledged in the awards of several Bank of Sweden prizes?  Or will he need a tutorial on the facts of rural India’s financial and credit markets, and their relationship with the formal sector?  What the Bottomley-Chandavarkar debate referred to half a century ago still continues in rural India insofar as large arbitrage profits are still made by trading across the artificially low rates of money interest caused by financial repression of India’s “formal” monetised sector with its soft inconvertible currency against the very high real rates of return on capital in the “informal” sector.   It is obvious to the naked eye that India is a relatively labour-abundant country.  It follows the relative price of labour will be low and relative price of capital high compared to, e.g. the Western or Middle Eastern economies, with mobile factors of production like labour and capital expected to flow accordingly across national boundaries.   Indian nominal interest-rates in organized credit markets have been for decades tightly controlled, making it necessary to go back to Irving Fisher’s data to obtain benchmark interest-rates, which, as expected, are at least 2%-3% higher in India than in Western capital markets. Joan Robinson once explained “the difference between 30% in an Indian village and 3% in London” saying “side by side with the industrial revolution went great technical progress in the provision of credit and the reduction of lender’s risk.”

What is logically certain is no country can have both relatively low world prices for labour and relatively low world prices for capital!  Yet that impossibility seems to have been what India’s purported economic “planners” have planned to engineer!  The effect of financial repression over decades may have been to artificially “reverse” or “switch” the risk-premium — making it lucrative for there to be capital flight out of India, with real rates of return on capital within India being made artificially lower than those in world markets!   Just as enough export subsidies and tariffs can make a country artificially “reverse” its comparative advantage with its structure of exports and imports becoming inverted, so a labour-rich capital-scarce country may, with enough financial repression, end up causing a capital flight.  The Indian elite’s capital flight out of India exporting their adult children and savings overseas may be explained as having been induced by government policy itself.

431314_10150617690307285_69226771_n

Secondly, Professor Rajan as a finance and banking specialist, will see at once the import of this graph above that has never been produced let aside comprehended by the RBI, yet which uses the purest RBI data.  It shows India’s mostly nationalised banks have decade after decade gotten weaker and weaker financially, being kept afloat by continually pumping in of new “capital” via “recapitalisation” from the government that owns them, using more and more of the soft inconvertible currency that has been debauched merrily by government planners.  The nationalised banks with their powerful pampered employee unions, like other powerful pampered employee unions in the government sector, have been the bane of India, where a mere 30 million privileged people in a vast population work with either the government or the organised private sector.  The RBI’s own workforce at last count was perhaps 75,000… the largest central bank staff in the world by far!

Will Rajan know how to bring some system out of the institutional chaos that prevails in Indian banking and central banking?  If not, he should start with the work of James Hanson “Indian Banking: Market Liberalization and the Pressures for Institutional and Market Framework Reform”, contained in the book created by Anne Krueger who brought him into the IMF, and mentioned in my 2012 article “India’s Money” linked below.

The central question for any 21st century RBI Governor worth the name really becomes whether he or she can stand up to the Finance Ministry and insist that the RBI stop being a mere department of it — even perhaps insisting on constitutional status for its head to fulfill the one over-riding aim of trying to bring a semblance of integrity to India’s currency both domestically and worldwide.  Instead it is the so-called “Planning Commission” which has been dominating the Treasury that needs to be made a mere department of the Finance Ministry, while the RBI comes to be hived off to independence!  

Professor Rajan has apparently said “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.”  Of course there are no magic wands but my 3 December 2012 talk in Delhi  has described the right path forward, complex and difficult as this may be.

The path forward involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity, plus institutional changes in public decision-making like separating banking and central banking from the Treasury while making the planning function serve the Treasury function rather than pretend to be above it.  The road described is long and arduous but at its end both corruption and inflation will have been reduced to minimal levels, and the rupee would have acquired integrity enough to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases.

3dec

India signed the Treaty of Versailles as a victor and was an original member of the League of Nations, UN and IMF.  Yet sovereign India has failed to develop a currency universally acceptable as a freely convertible world money. It is necessary and possible for India to do so. Without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. 

Professor Rajan will not want to be merely an adornment for the GoI in world capital markets for a few  years, waiting to get back to his American career and life and perhaps to the IMF again.  As RBI Governor, he can find his magic wand if he reads and reflects hard enough using his undoubted academic acumen, and then acts to lead India accordingly.  Here is the basic reading list:

“India’s Money” (2012)

“Monetary Integrity and the Rupee” (2008)

“India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

“Fallacious Finance” (2007)

“Growth and Government Delusion” (2008)

“India in World Trade & Payments” (2007)

“Path of the Indian Rupee 1947-1993” (1993)

“Our Policy Process” (2007)

“Indian Money and Credit” (2006)

“Indian Money and Banking” (2006)

Indian Inflation

“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

“How to Budget” (2008)

“Waffle but No Models of Monetary Policy: The RBI and Financial Repression (2005)”

“The Dream Team: A Critique” (2006)

“Against Quackery” (2007)

“Mistaken Macroeconomics” (2009)

“The Indian Revolution (2008)”

https://independentindian.com/2013/11/23/coverage-of-my-delhi-talk-on-3-dec-2012/

Enjoy!

Posted in Academic economics, Academic research, Asia and the West, asymmetric information, Banking, Big Business and Big Labour, Bretton Woods institutions, Britain in India, Capital and labour, Deposit multiplication, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of exchange controls, Economics of Exchange Rates, Economics of Public Finance, Financial Management, Financial markets, Financial Repression, Foreign exchange controls, Governance, Government accounting, Government Budget Constraint, India's Big Business, India's credit markets, India's Government economists, India's interest rates, India's savings rate, India's stock and debt markets, India's 1991 Economic Reform, India's agriculture, India's balance of payments, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's currency history, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's Polity, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, India's Union-State relations, Inflation, Inflation targeting, Interest group politics, Interest rates, International economics, International monetary economics, International Monetary Fund IMF, Land and political economy, Microeconomic foundations of macroeconomics, Monetary Theory, Money and banking, Paper money and deposits, Power-elites and nomenclatura, Public Choice/Public Finance, Public property waste fraud, Raghuram Govind Rajan, Raghuram Rajan, Rajiv Gandhi, Rajiv Gandhi's assassination, Statesmanship, Unorganised capital markets. Leave a Comment »

“I have a student called Suby Roy…”: Reflections on Frank Hahn (1925-2013), my master in economic theory

hahn

1. “What was relatively weak at LSE was general economic theory. We were good at deriving the Best Linear Unbiased Estimator but left unsatisfied with our grasp of the theory of value that constituted the roots of our discipline. I managed a First and was admitted to Cambridge as a Research Student in 1976, where fortune had Frank Hahn choose me as a student. That at the outset was protection from the communist cabal that ran “development economics” with whom almost all the Indians ended up. I was wholly impecunious in my first year as a Research Student, and had to, for example, proof-read Arrow and Hahn’s General Competitive Analysis for its second edition to receive 50 pounds sterling from Hahn which kept me going for a short time. My exposure to Hahn’s subtle, refined and depthless thought as an economist of the first rank led to fascination and wonderment, and I read and re-read his “On the notion of equilibrium in economics”, “On the foundations of monetary theory”, “Keynesian economics and general equilibrium theory” and other clear-headed attempts to integrate the theory of value with the theory of money — a project Wicksell and Marshall had (perhaps wisely) not attempted and Keynes, Hicks and Patinkin had failed at.

 

 

Hahn insisted a central question was to ask how money, which is intrinsically worthless, can have any value, why anyone should want to hold it. The practical relevance of this question is manifest. India today in 2007 has an inconvertible currency, vast and growing public debt financed by money-creation, and more than two dozen fiscally irresponsible State governments without money-creating powers. While pondering, over the last decade, whether India’s governance could be made more responsible if States were given money-creating powers, I have constantly had Hahn’s seemingly abstruse question from decades ago in mind, as to why anyone will want to hold State currencies in India, as to whether the equilibrium price of those monies would be positive. (Lerner in fact gave an answer in 1945 when he suggested that any money would have value if its issuer agreed to collect liabilities in it — as a State collects taxes – and that may be the simplest road that bridges the real/monetary divide.)

 

 

Though we were never personal friends and I did not ingratiate myself with Hahn as did many others, my respect for him only grew when I saw how he had protected my inchoate classical liberal arguments for India from the most vicious attacks that they were open to from the communists. My doctoral thesis, initially titled “A monetary theory for India”, had to be altered due to paucity of monetary data at the time, as well as the fact India’s problems of political economy and allocation of real resources were more pressing, and so the thesis became “On liberty and economic growth: preface to a philosophy for India”. When no internal examiner could be found, the University of Cambridge, at Hahn’s insistence, showed its greatness by appointing two externals: C. J. Bliss at Oxford and T. W. Hutchison at Birmingham, former students of Hahn and Joan Robinson respectively. My thesis received the most rigorous and fairest imaginable evaluation from them…”

 

 

2. “Frank Hahn believed in throwing students in at the deep end — or so it seemed to me when, within weeks of my arrival at Cambridge as a 21 year old Research Student, he insisted I present my initial ideas on the foundations of monetary theory at his weekly seminar.

 

 

untitled4

I was petrified but somehow managed to give a half-decent lecture before a standing-room only audience in what used to be called the “Keynes Room” in the Cambridge Economics Department. (It helped that a few months earlier, as a final year undergraduate at the LSE, I had been required to give a lecture at ACL Day’s Seminar on international monetary economics. It is a practice I came to follow with my students in due course, as there may be no substitute in learning how to think while standing up.) I shall try to publish exactly what I said at my Hahn-seminar when I find the document; broadly, it had to do with the crucial problem Hahn had identified a dozen years earlier in Patinkin’s work by asking what was required for the price of money to be positive in a general equilibrium, i.e. why do people everywhere hold and use money when it is intrinsically worthless. Patinkin’s utility function had real money balances appearing along with other goods; Hahn’s “On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy” in Theory of Interest Rates (1965), was the decisive criticism of this, where he showed that Patinkin’s formulation could not ensure a non-zero price for money in equilibrium. Hence Patinkin’s was a model in which money might not be held and therefore failed a vital requirement of a monetary economy. The announcement of my seminar was scribbled by a young Cambridge lecturer named Oliver Hart, later a distinguished member of MIT and Harvard University.”

 

 

3.   Then there was Sraffa…I saw him many a time, in the Marshall Library… He would smile very broadly at me and without saying anything  indicate with his hand to invite me to his office.. I fled in some fear… It was very stupid of me of course… Joan Robinson cornered me once and took me into the office she shared with EAG… She came at me for an hour or so wishing to supervise me, I kept declining politely… saying I was with Frank Hahn and wished to work on money… “What does Frankie know about India?” she said… I said I did not know but he did know about monetary theory and that was what I needed for India;  I also said I did not think much about the Indian Marxists she had supervised… and mentioned a prominent name… she said about him, “Yes most of what he does can go straight into the dustbin”…

 

 

4.   “I had been attracted to Cambridge partly by its old reputation for philosophy, especially that of Wittgenstein. But I met no worthwhile philosophers there until a few months before I was to leave for the United States in 1980, when I chanced upon the work of Renford Bambrough. Hahn had challenged me with the question, “how are you so sure your value judgements promoting liberty blah-blah are better than those of Chenery and the development economists?” It was a question that led inevitably to ethics and its epistemology — when I chanced upon Bambrough’s work, and that of his philosophical master, John Wisdom, the immense expanse of metaphysics (or ontology) opened up as well. “Then felt I like some watcher of the skies, When a new planet swims into his ken; Or like stout Cortez when with eagle eyes, He star’d at the Pacific…””

 

 

5. “I went to Virginia because James M. Buchanan was there, and he, along with FA Hayek, were whom Hahn decided to write on my behalf. Hayek said he was too old to accept me but wrote me kind and generous letters praising and hence encouraging my inchoate liberal thoughts and arguments. Buchanan was welcoming and I learnt much from him and his colleagues about the realities of public finance and democratic politics, which I quickly applied in my work on India…” Hahn told me he did not know Buchanan but he did know Hayek well and that his wife Dorothy had been an original member of the Mont Pelerin Society in 1947 or 1948. Hence I am amused reading a prominent NYU “American Austrian” say about Frank’s passing “I do think economics would have been better off if the Arrow-Debreu-Hahn approach had not been taken so seriously by the profession. I think it turned out to be an intellectual straight-jacket that prevented the discussion of valuable outside-the-box ideas”, and am tempted to paraphrase the closing lines of Tractatus — “Whereof one cannot speak, thereof one must be silent/About what one can not speak, one must remain silent” — to read “Of that of which we are ignorant, we should at least try not to gas about…” Hahn and Hayek were friends, from when Hayek taught at the London School of Economics in Robbins’ seminar, and Hahn was Robbins’ doctoral student.

 

 

6. “The Hawaii project manuscript contained inter alia a memorandum by Milton Friedman done at the request of the Government of India in November 1955, which had been suppressed for 34 years until I published it in May 1989. Milton and Rose Friedman refer to this in their memoirs Two Lucky People (Chicago 1998). Peter Bauer had told me of the existence of Friedman’s document during my doctoral work at Cambridge under Frank Hahn in the late 1970s, as did N. Georgescu-Roegen in America. Those were years in which Brezhnev still ruled in the Kremlin, Gorbachev was yet to emerge, Indira Gandhi and her pro-Moscow advisers were ensconced in New Delhi, and not even the CIA had imagined the Berlin Wall would fall and the Cold War would be over within a decade. It was academic suicide at the time to argue in favour of classical liberal economics even in the West. As a 22-year-old Visiting Assistant Professor at the Delhi School of Economics in 1977, I was greeted with uproarious laughter of senior professors when I spoke of a possible free market in foreign exchange. Cambridge was a place where Indian economists went to study the exploitation of peasants in Indian agriculture before returning to their friends in the well-known bastions of such matters in Delhi and Calcutta. It was not a place where Indian (let alone Bengali) doctoral students in economics mentioned the unmentionable names of Hayek or Friedman or Buchanan, and insisted upon giving their works a hearing. My original doctoral topic in 1976 “A monetary theory for India” had to be altered not only due to paucity of monetary data at the time but because the problems of India’s political economy and allocation of resources in the real economy were far more pressing. The thesis that emerged in 1982 “On liberty and economic growth: preface to a philosophy for India” was a full frontal assault from the point of view of microeconomic theory on the “development planning” to which everyone routinely declared their fidelity, from New Delhi’s bureaucrats and Oxford’s “development” school to McNamara’s World Bank with its Indian staffers. Frank Hahn protected my inchoate liberal arguments for India; and when no internal examiner could be found, Cambridge showed its greatness by appointing two externals, Bliss at Oxford and Hutchison at Birmingham, both Cambridge men.”

 

 

7. “I have a student called Suby Roy…”  Frank sends me to America in 1980 to work with Jim Buchanan… One letter from him was all it took…

 

 

269343_10151251945912285_471582801_n

 

 

And then five years later in 1985 he calls me “probably the outstanding young Hayekian”, says I had brought “a good knowledge of economics and of philosophy to bear on the literature on economic planning”, had “a good knowledge of economic theory” and that my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds” — all that to me has been a special source of delight.

 

 

65240_10151251948807285_1328788833_n

We did not meet often after I left Cambridge but he wrote very kindly always, and finally said, hearing of my travails and troubles and adventures, “well you are having an interesting life…”…

 

 

In America, I once met Robert M Solow in a hotel elevator as we were on a  panel at a conference together; I  introduced myself as Hahn’s student… “Aren’t you lucky?” said Solow with a smile…and he was right… I was lucky…

 

 

I said of Milton Friedman that he had been “the greatest economist after John Maynard Keynes”;  Milton’s critic, Frank Hahn, may have been the greatest economic theorist of modern times.

 

 

447px-Frank_Hahn

                                                                      Frank Hahn (1925-2013)

“Sidney Alexander & I are really the only ones who showed the basic logical contradictions caused by positivism having penetrated economics in the middle of the 20th Century”

from Is “Cambridge Philosophy” dead, in Cambridge? Can it be resurrected, there? Case Study: Renford Bambrough (& Subroto Roy) preceded by decades Cheryl Misak’s thesis on Wittgenstein being linked with Peirce via Ramsey… 

“3.  Now before its publication my book manuscript had been mostly under contract with University of Chicago Press, not Routledge.  About 1984 one of Chicago’s half a dozen reviewers hit me with a large surprise: my argument had been anticipated decades earlier in America by MIT’s Sidney Stuart Alexander!   I had no idea of this though I knew Alexander’s publications on other subjects the balance of payments.

Alexander, who was Paul Samuelson’s contemporary and Robert Solow’s teacher, was extremely gracious, read my manuscript and immediately declared with great generosity it was clear to him my arguments had been developed independently of his own.  Alexander had come at the problem from an American tradition of John Dewey, Peirce’s pupil, I had done so from Wittgenstein through John Wisdom and Renford Bambrough.  Alexander and I had arrived at similar conclusions but had done so completely independently!

Before we had met, Alexander wrote in support of my work:

“(This) is a very ambitious work directed at the foundations of normative judgments in economics. The author arrives at some conclusions very closely matching those I arrived at some years ago. It is clear, however, that Dr. Roy arrived at his conclusions completely independently. That is all the more piquant to me in that the philosophical underpinning of his work is the development of philosophy in England  from the later Wittgenstein, while mine derives principally from earlier work in the United States by the pragmatists and those who may loosely be called neo-pragmatists. A prominent Cambridge ethical philosopher of the early thirties referred to the United States as the place where moribund English philosophies were to be hailed as the latest thing. Now the most characteristically American philosophy seems to have arrived first by a wide margin at a position gaining wider acceptance in England as well as America.

Dr. Roy reveals a clear understanding of the methodological positivism that invaded economic policy analysis in the thirties and still dominates the literature of economics…. Following Renford Bambrough (Moral Scepticism and Moral Knowledge) he arrives at a position equivalent to that of the American pragmatists, especially Dewey, who insist that the problematic situation provides the starting point for the analysis of a problem even though there are no ultimate starting points. The methodological implication is the support of inquiry as fundamental, avoiding both scepticism and dogmatism. Roy develops his position with a great deal of attention to the ramifications of the problem both in philosophy and in economics….”

When we did meet, as he drove me around MIT in his car, Alexander joked how it used to be bad form in his time to make comparisons about a trio of pairs: Cambridge vs Cambridge, baseball vs cricket, and “American English” vs (what is now called) “British English”!

I asked whom he had referred to as the “prominent Cambridge ethical philosopher”, he said C D Broad and decades later I found Broad’s condescending passage

“… all good fallacies go to America when they die, and rise again as the latest discoveries of the local professors…” Five Types of Ethical Theory 1930, p. 55.

No wonder Alexander found “piquant” that I had reached via Wittgenstein and Bambrough an equivalent position to his own decades earlier via American pragmatism. [Besides by Alexander, a most perspicacious review of my book is by Karl Georg Zinn.]  

Within economics, Alexander and I were pirate ships blowing holes and permanently sinking the positivist Armada of “social choice theory” etc.  Amartya Sen arrived at Cambridge in 1953, the year Philosophical Investigations was published, two years after Wittgenstein’s death the year after Wittgenstein died. Professor Sen told me, in 2006, John Wisdom and C D Broad both knew him at the time, all at Trinity College; if anyone, Amartya Sen should have conveyed to Kenneth Arrow in America in the 1960s and 1970s the implications for economic theory of Wittgenstein’s later work. Instead I had to do so in 1989, Arrow graciously admitting when he read my book:

“I shall have to ponder your rejection of the Humean position which has, I suppose, been central in not only my thought but that of most economists. Candidly, I have never understood what late Wittgenstein was saying, but I have not worked very hard at his work, and perhaps your book will give guidance.””

Originally from 2011:

I heard from Mr Scott Peterson of Oregon,

“Dear Professor Roy, I have been reading your book *Philosophy of Economics* and happened to stumble on the following paper:’Public Finance Texts Cannot Justify Government Taxation’ Walter E. Block (Loyola University New Orleans, Joseph A. Butt, S.J. College of Business) has posted Public Finance Texts Cannot Justify Government Taxation: A Critique on SSRN. Here is the abstract: ‘In virtually all economic sub-disciplines, practitioners of the dismal science are exceedingly desirous of avoiding normative concerns, at least in principle. These are seen, and rightly so, as extremely treacherous. Being only human, they do sometimes stray off the path of positive analysis; but when they fall off the wagon in this manner, if at all, it is done relatively cautiously, and infrequently. There is one blatant exception to this general rule, however, and that is the field of public finance. Here, in sharp contrast to the usual practice, not only is normative economics embraced, it is done so with alacrity, and without apology. That is, most textbooks on the subject start off with one or several chapters which attempt to justify taxation on moral, efficiency, and other grounds. This occurs in no other field.’

When I read this I immediately thought of your discussion of the normative vs positive approaches in economics. Perhaps the exception economists make regarding public finance is that most economists’ paychecks come from the public sector.

Regards,

Scott Peterson

Dear Mr Peterson, Yes indeed. Thanks for the observation. Sidney Alexander and I are really the only ones who showed the basic logical contradictions caused by positivism having penetrated economics in the middle of the 20th Century. Are you at Facebook? Feel free to join me. Cordial regards, Suby Roy

“….Meanwhile, my main work within economic theory, the “Principia Economica” manuscript, was being read by the University of Chicago Press’s five or six anonymous referees. One of them pointed out my argument had been anticipated years earlier in the work of MIT’s Sidney Stuart Alexander. I had no idea of this and was surprised; of course I knew Professor Alexander’s work in balance of payments theory but not in this field. I went to visit Professor Alexander in Boston…. Professor Alexander was extremely gracious, and immediately declared with great generosity that it was clear to him my arguments in “Principia Economica” had been developed entirely independently of his work. He had come at the problem from an American philosophical tradition of Dewey, I had done so from a British tradition of Wittgenstein. (CS Peirce was probably the bridge between the two.) He and I had arrived at some similar conclusions but we had done so completely independently.”

Professor Alexander, contemporary of PA Samuelson, tutor of RM Solow and many others, deserves far greater attention, and I will do what I can towards that.  He introduced me briefly to his MIT colleague Lester Thurow and I sent an email some time ago to Professor Thurow suggesting MIT should try to remember him better.

Furthermore…. (12 August 2013)… as Karl Georg Zinn observed in his perspicacious review:

“Either all of positive economics is attacked with just as much scepticism as anything in normative economics, or we accept one and reject the other when instead there are reasons to think they share the same ultimate grounds and must be accepted or rejected together”(p.47).

Silver Jubilee of “Pricing, Planning & Politics: A Study of Economic Distortions in India”

May 29 2009:

It is a quarter century precisely today since my monograph Pricing, Planning and Politics: A Study of Economic Distortions in India was first published in London by the Institute of Economic Affairs.

ppp1984

Its text is now available (in slightly rough form) at this site here.

Now in May 1984, Indira Gandhi ruled in Delhi, and the ghost of Brezhnev was still fresh in Moscow.   The era of Margaret Thatcher in Britain and Ronald Reagan in America was at its height.   Pricing, Planning & Politics emerged from my 1976-1982 doctoral thesis at Cambridge though it came to be written in Blacksburg and Ithaca in 1982-1983.   It was the first critique after BR Shenoy of India’s Sovietesque economics since Jawaharlal Nehru’s time.

The Times, London’s most eminent paper at the time, wrote its lead editorial comment about it on the day it was published, May 29 1984.

londonti

It used to take several days for the library at Virginia Tech in Blacksburg to receive its copy of The Times of London and other British newspapers.    I had not been told of the date of publication and did not know of what had happened in London on May 29 until perhaps June 2 — when a friend, Vasant Dave of a children’s charity, who was on campus, phoned me and congratulated me for being featured in The Times which he had just read in the University Library.  “You mean they’ve reviewed it?”  I asked him, “No, it’s the lead editorial.” “What?” I exclaimed.  There was worse.  Vasant was very soft-spoken and said “Yes, it’s titled ‘India’s Bad Example'” — which I misheard on the phone as “India’s Mad Example”  😀

Drat! I thought (or words to that effect), they must have lambasted me, as I rushed down to the Library to take a look.

The Times had said

“When Mr. Dennis Healey in the Commons recently stated that Hongkong, with one per cent of the population of India has twice India’s trade, he was making an important point about Hongkong but an equally important point about India.   If Hongkong with one per cent of its population and less than 0.03 per cert of India’s land area (without even water as a natural resource) can so outpace India, there must be something terribly wrong with the way Indian governments have managed their affairs, and there is.   A paper by an Indian economist published today (Pricing, Planning and Politics: A Study of Economic Distortions in India by Subroto Roy, IEA £1.80) shows how Asia’s largest democracy is gradually being stifled by the imposition of economic policies whose woeful effect and rhetorical unreality find their echo all over the Third World.   As with many of Britain’s former imperial possessions, the rot set in long before independence.  But as with most of the other former dependencies, the instrument of economic regulation and bureaucratic control set up by the British has been used decisively and expansively to consolidate a statist regime which inhibits free enterprise, minimizes economic success and consolidates the power of government in all spheres of the economy.  We hear little of this side of things when India rattles the borrowing bowl or denigrates her creditors for want of further munificence.  How could Indian officials explain their poor performance relative to Hongkong?  Dr Roy has the answers for them.   He lists the causes as a large and heavily subsidized public sector, labyrinthine control over private enterprise, forcibly depressed agricultural prices, massive import substitution, government monopoly of foreign exchange transactions, artificially overvalued currency and the extensive politicization of the labour market, not to mention the corruption which is an inevitable side effect of an economy which depends on the arbitrament of bureaucrats.  The first Indian government under Nehru took its cue from Nehru’s admiration of the Soviet economy, which led him to believe that the only policy for India was socialism in which there would be “no private property except in a restricted sense and the replacement of the private profit system by a higher ideal of cooperative service.”  Consequently, the Indian government has now either a full monopoly or is one of a few oligipolists in banking, insurance, railways, airlines, cement, steel, chemicals, fertilizers, ship-building, breweries, telephones and wrist-watches.   No businessman can expand his operation while there is any surplus capacity anywhere in that sector.  He needs government approval to modernize, alter his price-structure, or change his labour shift.  It is not surprising that a recent study of those developing countries which account for most manufactured exports from the Third World shows that India’s share fell from 65 percent in 1953 to 10 per cent in 1973; nor, with the numerous restrictions on inter-state movement of grains, that India has over the years suffered more from an inability to cope with famine than during the Raj when famine drill was centrally organized and skillfully executed without restriction. Nehru’s attraction for the Soviet model has been inherited by his daughter, Mrs. Gandhi.  Her policies have clearly positioned India more towards the Soviet Union than the West.  The consequences of this, as Dr Roy states, is that a bias can be seen in “the antipathy and pessimism towards market institutions found among the urban public, and sympathy and optimism to be found for collectivist or statist ones.”  All that India has to show for it is the delivery of thousands of tanks in exchange for bartered goods, and the erection of steel mills and other heavy industry which help to perpetuate the unfortunate obsession with industrial performance at the expense of agricultural growth and the relief of rural poverty.”…..

I felt this may have been intended to be laudatory but it was also inaccurate and had to be corrected.  I replied dated June 4 which The Times published in their edition of  June 16 1984:

timesletter-11

I was 29 when Pricing, Planning and Politics was published, I am 54 now. I do not agree with everything I said in it and find the tone a little puffed up as young men tend to be; it was also five years before my main “theoretical” work Philosophy of Economics would be published. My experience of life in the years since has also made me far less sanguine both about human nature and about America than I was then. But I am glad to find I am not embarrassed by what I said then, indeed I am pleased I said what I did in favour of classical liberalism and against statism and totalitarianism well before it became popular to do so after the Berlin Wall fell. (In India as elsewhere, former communist apparatchiks and fellow-travellers became pseudo-liberals overnight.)

The editorial itself may have been due to a conversation between Peter Bauer and William Rees-Mogg, so I later heard. The work sold 700 copies in its first month, a record for the publisher. The wife of one prominent Indian bureaucrat told me in Delhi in December 1988 it had affected her husband’s thinking drastically. A senior public finance economist told me he had been deputed at the Finance Ministry when the editorial appeared, and the Indian High Commission in London had urgently sent a copy of the editorial to the Ministry where it caused a stir. An IMF official told me years later that he saw the editorial on board a flight to India from the USA on the same day, and stopped in London to make a trip to the LSE’s bookshop to purchase a copy. Professor Jagdish Bhagwati of Columbia University had been a critic of aspects of Indian policy; he received a copy  in draft just before it was published and was kind enough to write I had “done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems!”

Siddhartha Shankar Ray told me when  we first met that he had been in London when the editorial appeared and had seen it there; it affected his decision to introduce me to Rajiv Gandhi as warmly as he came to do a half dozen years later.

Within a few months though, by the Fall of 1984, I was under attack by the “gang of inert game theorists”  who had come to  Blacksburg following the departure of James Buchanan.  By mid 1985 I had moved to Provo, Utah, really rather wishing, as I recall,  to have left my India-work behind me.  But by late 1986, I was at the University of Hawaii, Manoa, where the perestroika-for-India and Pakistan projects that I and WE James led, had come to be sponsored by the University and the East West Center.

The unpublished results of the India-project reached Rajiv Gandhi by my hand on September 18 1990 as has been told elsewhere.  A week later, on September 25 1990,  Rajiv appointed a small group that included myself, to advise him.  It was that encounter with Rajiv Gandhi that sparked the origins of the 1991 economic reform.  Yet in 2007 one member of the group, declaring himself close to Sonia Gandhi, brazenly lied in public saying it was Manmohan Singh and not I who had been part of the group — a group of which I had been in fact the first member!  Manmohan Singh himself has never claimed to have been present and in fact was not even in India at the time it was formed.

I have explained elsewhere here why I believe this specific  lie  came to be told by this specific liar who shared membership with me in the group that Rajiv had formed:  because I had also pleaded with  many and especially within this group that Rajiv had seemed, to my layman’s eyes, very vulnerable to assassination, and none of them had lifted a finger to  do anything about it!  Such is how duplicity, envy and greed for power make people mendacious and venal in politics!

As for Pricing, Planning and Politics, Dr Manmohan Singh received a personal copy from my father whom he had long known through the Kaul brothers, Brahma and Madan, both of whom were dear friends of my father since the War and Independence.   From a letter Dr Singh wrote to my father,  he would have received his copy in late 1986 when he was heading the Planning Commission in his penultimate appointment before retirement from the bureaucracy.

Readers of Pricing, Planning and Politics today, 25 years after it was published, may judge for themselves what if any  part of it may be still relevant to the new government that Dr Singh is now prime minister of.   The work was mostly one of applied microeconomics or the theory of value; in recent years I have written much also of applied macroeconomics or the theory of money as it relates to India.  My great professor at Cambridge, Frank Hahn, was kind enough to say in 1985 that he thought my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds”; that to me has been a special source of delight.

Subroto Roy

Two Different Models for India’s Political Economy: Mine & Dr Manmohan Singh’s (Updated 2013)

see

https://independentindian.com/2013/05/19/cambridge-economics-the-disputation-in-indias-economic-policy/

https://independentindian.com/2013/08/23/did-jagdish-bhagwati-originate-pioneer-intellectually-father-indias-1991-economic-reform-did-manmohan-singh-or-did-i-through-my-encounter-with-rajiv-gandhi-just-as-siddhartha-shan/

https://independentindian.com/2009/06/12/mistaken-macroeconomics-an-open-letter-to-prime-minister-dr-manmohan-singh/

From Facebook

February 24 2011

Subroto Roy does not know if he just heard Manmohan Singh say “inflation will soon come down” — excuse me Dr Singh, but how was it you and all your acolytes uniformly said back in July 2010 that inflation would be down to 6% by Dec 2010? 6%?! 16% more likely! I said. Until he explains his previous error, we may suppose he will repeat it.

January 11 2011:

Subroto Roy can stop the Indian inflation and bring integrity to the currency over time, and Manmohan Singh and his advisers cannot (because they have the wrong economic models/theories/data etc and refuse to change), but then they would have to make me a Minister and I keep getting reminded of what Groucho Marx said about clubs that would have him.

Subroto Roy does not think Dr Manmohan Singh or his acolytes and advisers, or his Finance Minister and his acolytes and advisers, understand Indian inflation. If you do not understand something, you are not likely to change it.

March 6 2010:

Subroto Roy  says the central difference between the Subroto Roy Model for India as described in 1990-1991 to Rajiv Gandhi in his last months, and the Manmohan Singh Model for India that has developed since Rajiv’s assassination, is that by my model, India’s money and public finances would have acquired integrity enough for the Indian Rupee to have become a hard currency of the world economy by now, allowing all one billion Indians access to foreign exchange and precious metals freely, whereas by the model of Dr Singh and his countless supporters, India’s money and public finance remain subject to government misuse and abuse, and access to foreign exchange remains available principally to politicians, bureaucrats, big business and its influential lobbyists, the military, as well as perhaps ten or twenty million nomenclatura in the metropolitan cities.

April 8 2010:

Subroto Roy notes a different way of stating his cardinal difference with the economics of Dr Manmohan Singh’s Govt: in their economics, foreign exchange is “made available” by the GoI for “business and personal uses”. That is different from my economics of aiming for all one billion Indians to have a money that has some integrity, i.e., a rupee that becomes a hard currency of the world economy. (Ditto incidentally with the PRC.)

 

Updates:

From Facebook:

Subroto Roy  reads in *Newsweek* today  (Aug 19) Manmohan Singh “engineered the transition from stagnant socialism to a spectacular takeoff”.  This contradicts my experience with Rajiv Gandhi at 10 Janpath in 1990-91. Dr Singh had not returned to India from his years with Julius Nyerere in his final assignment before retiring from the bureaucracy when Rajiv and I first met on 18 September 1990.

“After (Rajiv Gandhi’s) assassination, the comprador business press credited Narasimha Rao and Manmohan Singh with having originated the 1991 economic reform.  In May 2002, however, the Congress Party itself passed a resolution proposed by Digvijay Singh explicitly stating Rajiv and not either of them was to be so credited… There is no evidence Dr Singh or his acolytes were committed to any economic liberalism prior to 1991 and scant evidence they have originated liberal economic ideas for India afterwards. Precisely because they represented the decrepit old intellectual order of statist ”Ma-Bap Sarkari” policy-making, they were not asked in the mid-1980s to be part of a “perestroika-for-India” project done at a foreign university ~ the results of which were received…by Rajiv Gandhi in hand at 10 Janpath on 18 September 1990 and specifically sparked the change in the direction of his economic thinking…”

Subroto Roy notes that current Indian public policy discussion has thus far failed to realise that the rise in money prices of real goods and services is the same as the fall in the real value of money.

Subroto Roy  is interested to hear Mr Jaitley say in Parliament today the credibility of Government economists is at stake. Of course it is. There has been far too much greed and mendacity all around, besides sheer ignorance. (When I taught for a year or so at the Delhi School of Economics as a 22 year old Visiting Assistant Professor in 1977-78, I was told Mr Jaitley was in the law school and a student leader of note. I though was more interested in teaching the usefulness of Roy Radner’s “information structures” in a course on “advanced economic theory”.)

 

 

 

 

July 31 2010

Subroto Roy reads in today’s pink business newspaper the GoI’s debt level at Rs 38 trillion & three large states (WB, MH, UP) is at Rs 6 trillion, add another 18 for all other large states together, another 5 for all small states & 3 for errors and omissions, making my One Minute Estimate of India’s Public Debt Stock Rs 70 trillion (70 lakh crores). Interest payments at, say, 9%, keep the banking system afloat, extracting oxygen from the public finances like a cyanide capsule.

July 28 2010

Subroto Roy observes Parliament to be discussing Indian inflation but expects a solution will not be found until the problem has been comprehended.

July 27 2010:

Subroto Roy continues to weep at New Delhi’s continual debauching of the rupee.

July 25 2010:

Subroto Roy  has no idea why Dr Manmohan Singh has himself (along with all his acolytes and flatterers in the Government and media and big business), gone about predicting Indian inflation will fall to 6% by December. 16% may be a more likely figure given a public debt at Rs 40 trillion perhaps plus money supply growth above 20%! (Of course, the higher the figure the Government admits, the more it has to pay in dearness allowance to those poor unionized unfortunates known as Government employees, so perhaps the official misunderestimation (sic) of Indian inflation is a strategy of public finance!)

July 12 2010:

Subroto Roy is amused to read Dr Manmohan Singh’s Chief Acolyte say in today’s pink business newspaper how important accounting is in project-appraisal — does the sinner repent after almost single-handedly helping to ruin project-appraisal  & government accounting & macroeconomic planning over decades?  I  rather doubt it.   For myself, I am amused to see chastity now being suddenly preached from within you-know-where.

July 4 2010:

Subroto Roy does not think the Rs 90 billion (mostly in foreign exchange) spent by the Manmohan Singh Government on New Delhi’s “Indira Gandhi International Airport Terminal 3” is conducive to the welfare of the common man (“aam admi”) who travels, if at all, mostly within India and by rail.

Subroto Roy hears Dr Manmohan Singh say yesterday “Global economic recession did not have much impact on us as it had on other countries”. Of course it didn’t. I had said India was hardly affected but for a collapse of exports & some fall in foreign investment. Why did he & his acolytes then waste vast public resources claiming they were rescuing India using a purported Keynesian fiscal “stimulus” (aka corporate/lobbyist pork)?

May 26 2010:

Subroto Roy  would like to know how & when Dr Manmohan Singh will assess he has finished the task/assignment he thinks has been assigned to him & finally retire from his post-retirement career: when his Chief Acolyte declares on TV that 10% real GDP growth has been reached? (Excuse me, but is that per capita? And about those inequalities….?)

Memo to Kaushik 

Dr Kaushik Basu, Chief Economic Adviser, Ministry of Finance

Hello Kaushik,

Long time no see.  Happy Holi 2010.

I was glad to see the phrase “the relatively neglected subject of the micro-foundations of macroeconomic policy” mentioned in Chapter 2 of your document for the GoI a few days ago.

But I am unable to see what you could mean by it  because your chapter  seems devoid of any reference  or   allusion to the vast  discussion over decades of the  subject known as the “microeconomic foundations of macroeconomics”. Namely, the attempt to integrate the theory of value (microeconomics) with the theory of money (macroeconomics); or alternatively, the attempt to comprehend aggregate variables like Consumption, Savings, Investment, the Demand for & Supply of Money etc in conceptual terms rooted in theories of constrained optimization by masses of individual people.

It is not an easy task.  Keynes made no explicit attempt at it (recall Joan Robinson’s famous quip) and probably did not have time or patience to try.  Hicks and Patinkin failed, though after valiant efforts.  The modern period on this work began with Clower and Leijonhufvud, followed by the French (like Grandmont), and especially Frank Hahn.   Hahn’s 1976 IMSSS paper “Keynesian Economics and General Equilibrium Theory” is the survey to read, viz., Equilibrium and Macroeconomics and Money, Stability and Growth as well as of course Arrow & Hahn’s General Competitive Analysis.  You may agree that the general theory of value culminated in an important sense in the Arrow-Debreu model of the 1950s — yet that is something in which no money, and hence no macroeconomics, needs to or can really appear.  The hard part is to develop macroeconomic models for policy-discussion which allow for money and public finance while still making some pretence of being rooted in a theory of constrained optimization by individuals, i.e., in microeconomic behaviour.  (E  Roy Weintraub wrote a textbook with “Microfoundations” in its title.)

In the Indian case, I tried to do a little in my Cambridge PhD thesis thirty years ago: “a full frontal assault from the point of view of microeconomic theory on the ‘development planning’ to which everyone routinely declared their fidelity, from New Delhi’s bureaucrats and Oxford’s ‘development’ school to McNamara’s World Bank with its Indian staffers”.    Frank Hahn was very kind to say he thought my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds”.  Some of the results appeared in my December 1982 talk to the AEA’s NYC meetings “Economic Theory & Development Economics” (World Development 1983), and in my 1984 monograph with London’s IEA.  Dr Manmohan Singh received a copy of the latter work in 1986, as well as, in 1993, a published copy of a work presented to Rajiv Gandhi in 1990, Foundations of India’s Political  Economy: Towards an Agenda for the 1990s.

I am glad to see from your Chapter 2 that the GoI now seems to agree with what I had said in 1984 of the need for systems that “locally include direct subsidies to those (whether in rural or urban areas) who are unable to provide any income for themselves…” Your material on the “enabling State” would also find much support in what I said there about the functions of civil government and the need for better, not necessarily more, government. On the other hand, your reliance on the very expensive (Rs.19 billion this year!)  Nandan Nilekani Numbering idea is odd as there seem to me to be insurmountable “incentive-compatibility” problems with that project no matter how much gets spent on it.

Returning to possible “microfoundations of macroeconomics” relevant to the Indian case, you may find of interest

“India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

“Fallacious Finance” (2007)

“Monetary Integrity and the Rupee” (2008)

“Growth and Government Delusion” (2008)

“India in World Trade & Payments” (2007)

“Our Policy Process” (2007)

“Indian Money and Credit” (2006)

“Indian Money and Banking” (2006)

“Indian Inflation” (2008)

“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

“How to Budget” (2008)

“The Dream Team: A Critique” (2006)

“Against Quackery” (2007)

“Mistaken Macroeconomics” (2009)

These together outline an idea that the link between macroeconomic policy in India and  individual microeconomic budgets of our one billion citizens arises via the “Government Budget Constraint”.  More specifically, the continual deficit-finance indulged in by the GoI for decades has been paid for by invisible taxation of nominal assets, causing the general money-price of real goods and services to rise.  I.e., the GoI’s wild deficit spending over the decades has been paid for by debauching money through inflation.

(The  unrecorded untaxed “black economy” needs a separate chapter altogether, and it seems to me possible it provides enough real income and transactions to be absorbing some of the wilder money supply growth into its hoards.)

India cannot be a major economy of the world until and unless the Rupee  some day becomes a hard currency — for the first time in many decades, indeed perhaps for the first time since the start of fiat money.   It is going to take much more than the GoI inventing a trading symbol for the Rupee!   The appalling state of our government accounting, public finance and monetary policy, caused by the GoI over decades, disallows this from happening any time soon as domestic bank assets (mostly GoI debt, and mostly held by government banks) would inevitably be re-evaluated at world prices foreshadowing a monetary crisis.   Perhaps you will help slow the rot — I trust you will not add to it.

Cordially yours

Suby Roy

Postscript  March 1 2010:   I recalled it as Joan Robinson’s quip, had forgotten it was in fact her quoting Gerald Shove’s quip: “Keynes was not interested in the theory of relative prices. Gerald Shove used to say that Maynard had never spent the twenty minutes necessary to understand the theory of value.” (1963)

see also

My Recent Works, Interviews etc on India’s Money, Public Finance, Banking, Trade, BoP, etc (an incomplete list)

Where are the Reserve Bank’s Macroeconomic Models?

“On the blissful innocence of the RBI” (2009) From Facebook:

Subroto Roy  can only sigh at the fact that while he has had to struggle for 35 years trying to grasp and then apply serious monetary economics to India’s circumstances, the RBI Governor & his four Deputy Governors appear blissfully innocent of all Hicks, Tobin, Friedman, Cagan et al yet exude confidence enough to “Waffle Away!”

see also A Small Challenge to the RBI’s Governor Subbarao

A Small Challenge to the RBI’s Governor Subbarao
April 21, 2010

The Hon’ble Gov of the Reserve Bank of India Shri D Subbarao

Dear Governor Subbarao,

You said yesterday, April 20 2010, that the Reserve Bank of India has a macroeconomic model which it uses but which you had personally not seen.

I have given two lectures at your august offices, one by invitation of Governor Jalan and Deputy Governor Reddy on April 29, 2000 to address the Conference of State Finance Secretaries, the other on May 5, 2005 to address the Chief Economist’s Monetary Economics Seminar. On both occasions, I had inquired of the RBI’s own models by which I could contrast my own but came to understand there were none.

If since then the RBI has now constructed a macroeconomic model of India’s economy, it is splendid news.

May I request the model be released publicly on the Internet at once, so its specifications of endogenous and exogenous variables, assumed coefficients, and sources of time-series data all may be seen by everyone in the country and abroad? Scientific scrutiny and replication of results would thus come to be permitted.

I would be especially interested to know the demand for money function that you have used. I well remember my meeting with the late great Sukhamoy Chakravarty on July 14 1987 at his Planning Commission offices, when he signed and gifted me his last personal copy of the famous Reserve Bank report by the committee he had chaired and of which he told me personally Dr Rangarajan had been the key author – that report may have contained the first official discussion of the demand for money function in India.

With cordial regards

Subroto Roy

My One-Semester Microeconomics (Theory of Value) Course for Graduate Engineers Planning to Become MBAs

For a half dozen or so years from about 1996 onwards, I taught graduate engineers  a course on microeconomic theory  as part of an MBA syllabus.   The level would have been that of Varian’s undergraduate text as well as, where possible, Henderson & Quandt’s intermediate text (Postscript: and, I now recall, a little of Arrow & Hahn Chapter 2 if there was time).   It was quite successful as most students were very serious and had a more than adequate mathematical background.

Subroto Roy

Kolkata

Exchange, utility analysis and theory of demand

Rational decisions as constrained optimization

Theory of the firm, technology, profit-maximization, cost-minimization, cost curves

Market equilibrium under competitive conditions

Pricing under Monopoly, Oligopoly

Theory of games

Inter-temporal decision-making

Asset markets : arbitrage and present value

Decision-making under uncertainty

Mean-variance analysis : equilibrium in a market for risky assets

Q: What is common to swine flu, a weak monsoon, climate change, America’s financial crisis and Pakistani terrorism?

A: They are all external or exogenous factors that the Government of India’s leaders, spokesmen and other apologists adduce to explain away endogenous economic outcomes arising from bad fiscal and monetary policies, pork-barrel politics, lobbying by organised Big Business and Big Labour, political and bureaucratic corruption etc.  (And the Parliamentary Opposition is hardly any better, probably worse…)

More to come…

Subroto Roy

Mistaken Macroeconomics: An Open Letter to Prime Minister Dr Manmohan Singh 12 June 2009

 

 

12 June 2009

The Hon’ble Dr Manmohan Singh, MP, Rajya Sabha

Prime Minister of India

 

 

Respected Pradhan Mantriji:

 

In September 1993 at the residence of the Indian Ambassador to Washington, I had the privilege of being introduced to you by our Ambassador the Hon’ble Siddhartha Shankar Ray, Bar-at-Law. Ambassador Ray was kind enough to introduce me saying the 1991 “Congress manifesto had been written on (my laptop) computer” – a reference to my work as adviser on economic and other policy to the late Rajiv Gandhi in his last months. I presented you a book Foundations of India’s Political Economy: Towards an Agenda for the 1990s created and edited by myself and WE James at the University of Hawaii since 1986 — the unpublished manuscript of that book had reached Rajivji by my hand when he and I first met on September 18 1990. Tragically, my pleadings in subsequent months to those around him that he seemed to my layman’s eyes vulnerable to the assassin went unheeded.

 

 

When you and I met in 1993, we had both forgotten another meeting twenty years earlier in Paris. My father had been a long-time friend of the late Brahma Kaul, ICS, and the late MG Kaul, ICS, who knew you in your early days in the Government of India. In the late summer of 1973, you had acceded to my father’s request to advise me about economics before I embarked for the London School of Economics as a freshman undergraduate. You visited our then-home in Paris for about 40 minutes despite your busy schedule as part of an Indian delegation to the Aid-India Consortium. We ended up having a tense debate about the merits (as you saw them) and demerits (as I saw them) of the Soviet influence on Indian economic “planning”. You had not expected such controversy from a lad of 18 but you were kindly disposed and offered when departing to write a letter of introduction to Amartya Sen, then teaching at the LSE, which you later sent me and which I was delighted to carry to Professor Sen.

 

 

I may add my father, back in 1973 in Paris, had predicted to me that you would become Prime Minister of India one day, and he, now in his 90s, is joined by myself in sending our warm congratulations at the start of your second term in that high office.

 

 

The controversy though that you and I had entered that Paris day in 1973 about scientific economics as applied to India, must be renewed afresh!

 

 

This is because of your categorical statement on June 9 2009 to the new 15th Lok Sabha:

 

 

“I am convinced, since our savings rate is as high as 35%, given the collective will, if all of us work together, we can achieve a growth-rate of 8%-9%, even if the world economy does not do well.” (Statement of Dr Manmohan Singh to the Lok Sabha, June 9 2009)

 

 

I am afraid there may be multiple reasons why such a statement is gravely and incorrigibly in error within scientific economics. From your high office as Prime Minister in a second term, faced perhaps with no significant opposition from either within or without your party, it is possible the effects of such an error may spell macroeconomic catastrophe for India.

 

 

As it happens, the British Labour Party politician Dr Meghnad Desai made an analogous statement to yours about India when he claimed in 2006 that China

 

 

“now has 10.4% growth on a 44 % savings rate… ”

 

Indeed the idea that China and India have had extremely high economic growth-rates based on purportedly astronomical savings rates has become a commonplace in recent years, repeated endlessly in international and domestic policy circles though perhaps without adequate basis.

 

 

 

1.   Germany & Japan

 

What, at the outset, is supposed to be measured when we speak of “growth”? Indian businessmen and their media friends seem to think “growth” refers to something like nominal earnings before tax for the organised corporate sector, or any unspecified number that can be sold to visiting foreigners to induce them to park their funds in India: “You will get a 10% return if you invest in India” to which the visitor says “Oh that must mean India has 10% growth going on”. Of such nonsense are expensive international conferences in Davos and Delhi often made.

 

You will doubtless agree the economist at least must define economic growth properly and with care — what is referred to must be annual growth of per capita inflation-adjusted Gross Domestic Product. (Per capita National Income or Net National Product would be even better if available).

 

West Germany and Japan had the highest annual per capita real GDP growth-rates in the world economy starting from devastated post-World War II initial conditions. What were their measured rates?

 

West Germany: 6.6% in 1950-1960, falling to 3.5% by 1960-1970 falling to 2.4% by 1970-1978.

 

Japan: 6.8 % in 1952-1960 rising to 9.4% in 1960-1970 falling to 3.8 % in 1970-1978.

 

Thus in recent decadesonly Japan measured a spike in the 1960s of more than 9% annual growth of real per capita GDP. Now India and China are said to be achieving 8%-10 % and more year after year routinely!

 

Perhaps we are observing an incredible phenomenon of world economic history. Or perhaps it is just something incredible, something false and misleading, like a mirage in the desert.

 

You may agree that processes of measurement of real income in India both at federal and provincial levels, still remain well short of the world standards described by the UN’s System of National Accounts 1993. The actuality of our real GDP growth may be better than what is being measured or it may be worse than what is being measured – from the point of view of public decision-making we at present simply do not know which it is, and to overly rely on such numbers in national decisions may be unwise. In any event, India’s population is growing at near 2% so even if your Government’s measured number of 8% or 9% is taken at face-value, we have to subtract 2% population growth to get per capita figures.

 

 

 

 

 

2.  Growth of the aam admi’s consumption-basket

 

 

The late Professor Milton Friedman had been an invited adviser in 1955 to the Government of India during the Second Five Year Plan’s formulation. The Government of India suppressed what he had to say and I had to publish it 34 years later in May 1989 during the 1986-1992 perestroika-for-India project that I led at the University of Hawaii in the United States. His November 1955 Memorandum to the Government of India is a chapter in the book Foundations of India’s Political Economy: Towards an Agenda for the 1990s that I and WE James created.

 

At the 1989 project-conference itself, Professor Friedman made the following astute observation about all GNP, GDP etc growth-numbers that speaks for itself:

 

 

“I don’t believe the term GNP ought to be used unless it is supplemented by a different statistic: the rate of growth of the average consumption basket consumed by the ordinary individual in the country. I think GNP rates of growth can give very misleading information. For example, you have rapid rates of growth of GNP in the Soviet Union with a declining standard of life for the people. Because GNP includes monuments and includes also other things. I’m not saying that that is the case with India; I’m just saying I would like to see the two figures together.”

 

 

You may perhaps agree upon reflection that not only may our national income growth measurements be less robust than we want, it may be better to be measuring something else instead, or as well, as a measure of the economic welfare of India’s people, namely, “the rate of growth of the average consumption basket consumed by the ordinary individual in the country”, i.e., the rate of growth of the average consumption basket consumed by the aam admi.

 

 

It would be excellent indeed if you were to instruct your Government’s economists and other spokesmen to do so this as it may be something more reliable as an indicator of our economic realities than all the waffle generated by crude aggregate growth-rates.

 

 

 

 

3.  Logic of your model

 

Thirdly, the logic needs to be spelled out of the economic model that underlies such statements as yours or Meghnad Desai’s that seek to operationally relate savings rates to aggregate growth rates in India or China. This seems not to have been done publicly in living memory by the Planning Commission or other Government economists. I have had to refer, therefore, to pages 251-253 of my own Cambridge doctoral thesis under Professor Frank Hahn thirty years ago, titled “On liberty and economic growth: preface to a philosophy for India”, where the logic of such models as yours was spelled out briefly as follows:

 

Let

 

 

Kt be capital stock

 

Yt be national output

 

It be the level of real investment

 

St be the level of real savings

 

By definition

 

It = K t+1 – Kt

 

By assumption

 

Kt = k Yt 0 < k < 1

 

St = sYt 0 < s <1

 

In equilibrium ex ante investment equals ex ante savings

 

It = St

 

Hence in equilibrium

 

sYt = K t+1 – Kt

 

Or

 

s/k = g

 

where g is defined to be the rate of growth (Y t+1-Yt)/Yt  .

 

The left hand side then defines the “warranted rate of growth” which must maintain the famous “knife-edge” with the right hand side “natural rate of growth”.

 

Your June 9 2009 Lok Sabha statement that a 35% rate of savings in India may lead to an 8%-9% rate of economic growth in India, or Meghnad Desai’s statement that a 44% rate of savings in China led to a 10.4% growth there, can only be made meaningful in the context of a logical economic model like the one I have given above.

 

[In the open-economy version of the model, let Mt be imports, Et be exports, Ft net capital inflows.

 

Assume

 

Mt = aIt + bYt 0 < a, b < 1

 

Et = E for all t

 

Balance of payments is

 

Bt = Mt – Et – Ft

 

In equilibrium It = St + Bt

 

Or

 

Ft = (s+b) Yt – (1-a) It – E is a kind of “warranted” level of net capital inflow.]

 

 

 

You may perhaps agree upon reflection that building the entire macroeconomic policy of the Government of India merely upon a piece of economic logic as simplistic as the

 

s/k = g

 

equation above, may spell an unacceptable risk to the future economic well-being of our vast population. An alternative procedural direction for macroeconomic policy, with more obviously positive and profound consequences, may have been that which I sought to persuade Rajiv Gandhi about with some success in 1990-1991. Namely, to systematically seek to improve towards normalcy the budgets, financial positions and decision-making capacities of the Union and all state and local governments as well as all public institutions, organisations, entities, and projects in general, with the aim of making our domestic money a genuine hard currency of the world again after seven decades, so that any ordinary resident of India may hold and trade precious metals and foreign exchange at his/her local bank just like all those glamorous privileged NRIs have been permitted to do. Such an alternative path has been described in “The Indian Revolution”, “Against Quackery”, “The Dream Team: A Critique”, “India’s Macroeconomics”, “Indian Inflation”, etc.

 

 

 

4. Gross exaggeration of real savings rate by misreading deposit multiplication

 

 

Specifically, I am afraid you may have been misled into thinking India’s real savings rate, s, is as high as 35% just as Meghnad Desai may have misled himself into thinking China’s real savings rate is as high as 44%.

 

 

Neither of you may have wanted to make such a claim if you had referred to the fact that over the last 25 years, the average savings rate across all OECD countries has been less than 10%. Economic theory always finds claims of discontinuous behaviour to be questionable. If the average OECD citizen has been trying to save 10% of disposable income at best, it appears prima facie odd that India’s PM claims a savings rate as high as 35% for India or a British politician has claimed a savings rate as high as 44% for China. Something may be wrong in the measurement of the allegedly astronomical savings rates of India and China. The late Professor Nicholas Kaldor himself, after all, suggested it was rich people who saved and poor people who did not for the simple reason the former had something left over to save which the latter did not!

 

 

And indeed something is wrong in the measurements. What has happened, I believe, is that there has been a misreading of the vast nominal expansion of bank deposits via deposit-multiplication in the Indian banking system, an expansion that has been caused by explosive deficit finance over the last four or five decades. That vast nominal expansion of bank-deposits has been misread as indicating growth of real savings behaviour instead. I have written and spoken about and shown this quite extensively in the last half dozen years since I first discovered it in the case of India. E.g., in a lecture titled “Can India become an economic superpower or will there be a monetary meltdown?” at Cardiff University’s Institute of Applied Macroeconomics and at London’s Institute of Economic Affairs in April 2005, as well as in May 2005 at a monetary economics seminar invited at the RBI by Dr Narendra Jadav. The same may be true of China though I have looked at it much less.

 

 

How I described this phenomenon in a 2007 article in The Statesman is this:

 

 

“Savings is indeed normally measured by adding financial and non-financial savings. Financial savings include bank-deposits. But India is not a normal country in this. Nor is China. Both have seen massive exponential growth of bank-deposits in the last few decades. Does this mean Indians and Chinese are saving phenomenally high fractions of their incomes by assiduously putting money away into their shaky nationalized banks? Sadly, it does not. What has happened is government deficit-financing has grown explosively in both countries over decades. In a “fractional reserve” banking system (i.e. a system where your bank does not keep the money you deposited there but lends out almost all of it immediately), government expenditure causes bank-lending, and bank-lending causes bank-deposits to expand. Yes there has been massive expansion of bank-deposits in India but it is a nominal paper phenomenon and does not signify superhuman savings behaviour. Indians keep their assets mostly in metals, land, property, cattle, etc., and as cash, not as bank deposits.”

 

 

An article of mine in 2008 in Business Standard put it like this:

 

 

“India has followed in peacetime over six decades what the US and Britain followed during war. Our vast growth of bank deposits in recent decades has been mostly a paper (or nominal) phenomenon caused by unlimited deficit finance in a fractional reserve banking system. Policy makers have widely misinterpreted it as indicating a real phenomenon of incredibly high savings behaviour. In an inflationary environment, people save their wealth less as paper deposits than as real assets like land, cattle, buildings, machinery, food stocks, jewellery etc.”

 

 

If you asked me “What then is India’s real savings rate?” I have little answer to give except to say I know what it is not – it is not what the Government of India says it is. It is certainly unlikely to be anywhere near the 35% you stated it to be in your June 9 2009 Lok Sabha statement. If the OECD’s real savings rate has been something like 10% out of disposable income, I might accept India’s is, say, 15% at a maximum when properly measured – far from the 35% being claimed. What I believe may have been mismeasured by you and Meghnad Desai and many others as indicating high real savings is actually the nominal or paper expansion of bank-deposits in a fractional reserve banking system induced by runaway government deficit-spending in both India and China over the last several decades.

 

 

 

 

5. Technological progress and the mainsprings of real economic growth

 

 

So much for the g and s variables in the s/k = g equation in your economic model. But the assumed constant k is a big problem too!

 

During the 1989 perestroika-for-India project-conference, Professor Friedman referred to his 1955 experience in India and said this about the assumption of a constant k:

 

“I think there was an enormously important point… That was the almost universal acceptance at that time of the view that there was a sort of technologically fixed capital output ratio. That if you wanted to develop, you just had to figure out how much capital you needed, used as a statistical technological capital output ratio, and by God the next day you could immediately tell what output you were going to achieve. That was a large part of the motivation behind some of the measures that were taken then.”

 

The crucial problem of the sort of growth-model from which your formulation relating savings to growth arises is that, with a constant k, you have necessarily neglected the real source of economic growth, which is technological progress!

 

I said in the 2007 article referred to above:

 

“Economic growth in India as elsewhere arises not because of what politicians and bureaucrats do in capital cities, but because of spontaneous technological progress, improved productivity and learning-by-doing on part of the general population. Technological progress is a very general notion, and applies to any and every production activity or commercial transaction that now can be accomplished more easily or using fewer inputs than before.”

 

In “Growth and Government Delusion” published in The Statesman last year, I described the growth process more fully like this:

 

“The mainsprings of real growth in the wealth of the individual, and so of the nation, are greater practical learning, increases in capital resources and improvements in technology. Deeper skills and improved dexterity cause output produced with fewer inputs than before, i.e. greater productivity. Adam Smith said there is “invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many”. Consider a real life example. A fresh engineering graduate knows dynamometers are needed in testing and performance-certification of diesel engines. He strips open a meter, finds out how it works, asks engine manufacturers what design improvements they want to see, whether they will buy from him if he can make the improvement. He finds out prices and properties of machine tools needed and wages paid currently to skilled labour, calculates expected revenues and costs, and finally tries to persuade a bank of his production plans, promising to repay loans from his returns. Overcoming restrictions of religion or caste, the secular agent is spurred by expectation of future gains to approach various others with offers of contract, and so organize their efforts into one. If all his offers ~ to creditors, labour, suppliers ~ are accepted he is, for the moment, in business. He may not be for long ~ but if he succeeds his actions will have caused an improvement in design of dynamometers and a reduction in the cost of diesel engines, as well as an increase in the economy’s produced means of production (its capital stock) and in the value of contracts made. His creditors are more confident of his ability to repay, his buyers of his product quality, he himself knows more of his workers’ skills, etc. If these people enter a second and then a third and fourth set of contracts, the increase in mutual trust in coming to agreement will quickly decline in relation to the increased output of capital goods. The first source of increasing returns to scale in production, and hence the mainspring of real economic growth, arises from the successful completion of exchange. Transforming inputs into outputs necessarily takes time, and it is for that time the innovator or entrepreneur or “capitalist” or “adventurer” must persuade his creditors to trust him, whether bankers who have lent him capital or workers who have lent him labour. The essence of the enterprise (or “firm”) he tries to get underway consists of no more than the set of contracts he has entered into with the various others, his position being unique because he is the only one to know who all the others happen to be at the same time. In terms introduced by Professor Frank Hahn, the entrepreneur transforms himself from being “anonymous” to being “named” in the eyes of others, while also finding out qualities attaching to the names of those encountered in commerce. Profits earned are partly a measure of the entrepreneur’s success in this simultaneous process of discovery and advertisement. Another potential entrepreneur, fresh from engineering college, may soon pursue the pioneer’s success and start displacing his product in the market ~ eventually chasers become pioneers and then get chased themselves, and a process of dynamic competition would be underway. As it unfolds, anonymous and obscure graduates from engineering colleges become by dint of their efforts and a little luck, named and reputable firms and perhaps founders of industrial families. Multiply this simple story many times, with a few million different entrepreneurs and hundreds of thousands of different goods and services, and we shall be witnessing India’s actual Industrial Revolution, not the fake promise of it from self-seeking politicians and bureaucrats.”

 

 

Technological progress in a myriad of ways and discovery of new resources are important factors contributing to India’s growth today. But while India’s “real” economy does well, the “nominal” paper-money economy controlled by Government does not. Continuous deficit financing for half a century has led to exponential growth of public debt and broad money, and, as noted, the vast growth of nominal bank-deposits has been misinterpreted as indicating unusually high real savings behaviour when it in fact may just signal vast amounts of government debt being held by our nationalised banks. These bank assets may be liquid domestically but are illiquid internationally since our government debt is not held by domestic households as voluntary savings nor has it been a liquid asset held worldwide in foreign portfolios.

 

 

What politicians of all parties, especially your own and the BJP and CPI-M since they are the three largest, have been presiding over is exponential growth of our paper money supply, which has even reached 22% per annum. Parliament and the Government should be taking honest responsibility for this because it may certainly portend double-digit inflation (i.e., decline in the value of paper-money) perhaps as high as 14%-15% per annum, something that is certain to affect the aam admi’s economic welfare adversely.

 

 

 

 

 

 

 

6. Selling Government assets to Big Business is a bad idea in a potentially hyperinflationary economy

 

 

Respected PradhanMantriji, the record would show that I, and really I alone, 25 years ago, may have been the first among Indian economists to advocate  the privatisation of the public sector. (Viz, “Silver Jubilee of Pricing, Planning and Politics: A Study of Economic Distortions in India”.) In spite of this, I have to say clearly now that in present circumstances of a potentially hyperinflationary economy created by your Government and its predecessors, I believe your Government’s present plans to sell Government assets may be an exceptionally unwise and imprudent idea. The reasoning is very simple from within monetary economics.

 

Government every year has produced paper rupees and bank deposits in practically unlimited amounts to pay for its practically unlimited deficit financing, and it has behaved thus over decades. Such has been the nature of the macroeconomic process that all Indian political parties have been part of, whether they are aware of it or not.

 

Indian Big Business has an acute sense of this long-term nominal/paper expansion of India’s economy, and acts towards converting wherever possible its own hoards of paper rupees and rupee-denominated assets into more valuable portfolios for itself of real or durable assets, most conspicuously including hard-currency denominated assets, farm-land and urban real-estate, and, now, the physical assets of the Indian public sector. Such a path of trying to transform local domestic paper assets – produced unlimitedly by Government monetary and fiscal policy and naturally destined to depreciate — into real durable assets, is a privately rational course of action to follow in an inflationary economy. It is not rocket-science to realise the long-term path of rupee-denominated assets is downwards in comparison to the hard-currencies of the world – just compare our money supply growth and inflation rates with those of the rest of the world.

 

The Statesman of November 16 2006 had a lead editorial titled Government’s land-fraud: Cheating peasants in a hyperinflation-prone economy which said:

 

 

“There is something fundamentally dishonourable about the way the Centre, the state of West Bengal and other state governments are treating the issue of expropriating peasants, farm-workers, petty shop-keepers etc of their small plots of land in the interests of promoters, industrialists and other businessmen. Singur may be but one example of a phenomenon being seen all over the country: Hyderabad, Karnataka, Kerala, Haryana, everywhere. So-called “Special Economic Zones” will merely exacerbate the problem many times over. India and its governments do not belong only to business and industrial lobbies, and what is good for private industrialists may or may not be good for India’s people as a whole. Economic development does not necessarily come to be defined by a few factories or high-rise housing complexes being built here or there on land that has been taken over by the Government, paying paper-money compensation to existing stakeholders, and then resold to promoters or industrialists backed by powerful political interest-groups on a promise that a few thousand new jobs will be created. One fundamental problem has to do with inadequate systems of land-description and definition, implementation and recording of property rights. An equally fundamental problem has to do with fair valuation of land owned by peasants etc. in terms of an inconvertible paper-money. Every serious economist knows that “land” is defined as that specific factor of production and real asset whose supply is fixed and does not increase in response to its price. Every serious economist also knows that paper-money is that nominal asset whose price can be made to catastrophically decline by a massive increase in its supply, i.e. by Government printing more of the paper it holds a monopoly to print. For Government to compensate people with paper-money it prints itself by valuing their land on the basis of an average of the price of the last few years, is for Government to cheat them of the fair present-value of the land. That present-value of land must be calculated in the way the present-value of any asset comes to be calculated, namely, by summing the likely discounted cash-flows of future values. And those future values should account for the likelihood of a massive future inflation causing decline in the value of paper-money in view of the fact we in India have a domestic public debt of some Rs. 30 trillion (Rs. 30 lakh crore) and counting, and money supply growth rates averaging 16-17% per annum. In fact, a responsible Government would, given the inconvertible nature of the rupee, have used foreign exchange or gold as the unit of account in calculating future-values of the land. India’s peasants are probably being cheated by their Government of real assets whose value is expected to rise, receiving nominal paper assets in compensation whose value is expected to fall.”

 

Shortly afterwards the Hon’ble MP for Kolkata Dakshin, Km Mamata Banerjee, started her protest fast, riveting the nation’s attention in the winter of 2006-2007. What goes for government buying land on behalf of its businessman friends also goes, mutatis mutandis, for the public sector’s real assets being bought up by the private sector using domestic paper money in a potentially hyperinflationary economy. If your new Government wishes to see real assets of the public sector being sold for paper money, let it seek to value these assets not in inconvertible rupees that Government itself has been producing in unlimited quantities but perhaps in forex or gold-units instead!

 

 

In the 2004-2005 volume Margaret Thatcher’s Revolution: How it Happened and What it Meant, edited by myself and Professor John Clarke, there is a chapter by Professor Patrick Minford on Margaret Thatcher’s fiscal and monetary policy (macroeconomics) that was placed ahead of the chapter by Professor Martin Ricketts on Margaret Thatcher’s privatisation (microeconomics). India’s fiscal and monetary or macroeconomic problems are far worse today than Britain’s were when Margaret Thatcher came to power. We need to get our macroeconomic problems sorted before we attempt the  microeconomic privatisation of public assets.

 

It is wonderful that your young party colleague, the Hon’ble MP from Amethi, Shri Rahul Gandhi, has declined to join the present Government and instead wishes to reflect further on the “common man” and “common woman” about whom I had described his late father talking to me on September 18 1990. Certainly the aam admi is not someone to be found among India’s lobbyists of organised Big Business or organised Big Labour who have tended to control government agendas from the big cities.

 

With my warmest personal regards and respect, I remain,

Cordially yours

Subroto Roy, PhD (Cantab.), BScEcon (London)

 

see also https://independentindian.com/thoughts-words-deeds-my-work-1973-2010/rajiv-gandhi-and-the-origins-of-indias-1991-economic-reform/did-jagdish-bhagwati-originate-pioneer-intellectually-father-indias-1991-economic-reform-did-manmohan-singh-or-did-i-through-my-e/

Posted in 15th Lok Sabha, Academic economics, Academic freedom, Academic research, Adam Smith, Banking, Bengal, Big Business and Big Labour, BJP, Cambridge Univ Economics, Capital and labour, China's macroeconomics, China's savings rate, China's Economy, Congress Party, Deposit multiplication, Economic Policy, Economic Theory, Economic Theory of Growth, Economic Theory of Value, Economics of Public Finance, Enterprise and entrepeneurship, European Community, Financial Management, Financial markets, Foreign exchange controls, General equilbrium theory, Germany, Governance, Government accounting, Government Budget Constraint, Government of India, Growth rates (economic), India's Big Business, India's Government economists, India's savings rate, India's 1991 Economic Reform, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's corporate governance, India's Economy, India's farmers, India's Government Budget Constraint, India's Government Expenditure, India's grassroots activists, India's inflation, India's Land, India's Lok Sabha, India's Macroeconomics, India's Monetary & Fiscal Policy, India's Parliament, India's political lobbyists, India's political parties, India's poverty, India's Public Finance, India's Reserve Bank, India's Revolution, India's State Finances, India's Union-State relations, Inflation, Inflation targeting, Interest group politics, Japan, London School of Economics, Mamata Banerjee, Manmohan Singh, Margaret Thatcher, Margaret Thatcher's Revolution, Martin Ricketts, Milton Friedman, Monetary Theory, Money and banking, Non-Resident Indians, OECD savings rates, Paper money and deposits, Parliamentary Backbenchers, Political Economy, Public Choice/Public Finance, Rahul Gandhi, Rajiv Gandhi, Rajiv Gandhi's assassination, Redeposits, Siddhartha Shankar Ray. 1 Comment »

Letter to the GoI’s seniormost technical economist, May 21

“May 21 2009    It is wonderful to hear from you and I am honoured to find myself, perhaps accidentally, on the same list as so many of your distinguished colleagues among Government economists.

Your essay is most engaging. I am afraid I disagree with your assessment that the current problems “did not originate in the real sector of the economy” but were “triggered by the excesses of the financial system”. I have said to the contrary There is no clear path to solving the great (alleged) economic and financial crisis because no one wants to admit its roots were the overvaluation (over decades) of American real-estate, and hence American assets in general.”

There is no more real sector than real-estate itself and American real-estate has tended to be overvalued as a result of government policy since the Carter Administration; the accumulated dangers along that path came to explode in the sub-prime crisis. Here as elsewhere in economics, the financial tail has not wagged the non-financial dog but vice versa.

I have also said “(i) foreign central banks might have been left holding more bad US debt than might be remembered, and dollar depreciation and an American inflation seem to be inevitable over the next several years; (ii) all those bad mortgages and foreclosures could vanish within a year or two by playing the demographic card and inviting in a few million new immigrants into the United States; restoring a worldwide idea of an American dream fueled by mass immigration may be the surest way for the American economy to restore itself.”

Re the comparison with the Great Depression, I believe

“there are overriding differences. Most important, the American economy and the world economy are both incomparably larger today in the value of their capital stock, and there has also been enormous technological progress over eight decades. Accordingly, it would take a much vaster event than the present turbulence — say, something like an exchange of multiple nuclear warheads with Russia causing Manhattan and the City of London to be destroyed — before there was a return to something comparable to the 1929 Crash and the Great Depression that followed. Besides, the roots of the crises are different. What happened back then? In 1922, the Genoa Currency Conference wanted to correct the main defect of the pre-1914 gold standard, which was freezing the price of gold while failing to stabilise the purchasing power of money. From 1922 until about 1927, Benjamin Strong of the Federal Reserve Bank of New York adopted price-stabilisation as the new American policy-objective. Britain was off the gold standard and the USA remained on it. The USA, as a major creditor nation, saw massive gold inflows which, by traditional gold standard principles, would have caused a massive inflation. Governor Strong invented the process of “sterilisation” of those gold inflows instead and thwarted the rise in domestic dollar prices of goods and services. Strong’s death in 1928 threw the Federal Reserve System into conflict and intellectual confusion. Dollar stabilisation ended as a policy. Surplus bank money was created on the release of gold that had been previously sterilised. The traditional balance between bulls and bears in the stock-market was upset. Normally, every seller of stock is a bear and every buyer a bull. Now, amateur investors appeared as bulls attracted by the sudden stock price rises, while bears, who sold securities, failed to place their money into deposit and were instead lured into lending it as call money to brokerages who then fuelled these speculative bulls. As of October 22, 1929 about $4 billion was the extent of such speculative lending when Chase National Bank’s customers called in their money. Chase National had to follow their instructions, as did other New York banks. New York’s Stock Exchange could hardly respond to a demand for $4 billion at a short notice and collapsed. Within a year, production had fallen by 26 per cent, prices by 14 per cent, personal income by 14 per cent, and the Greatest Depression of recorded history was in progress — involuntary unemployment levels in America reaching 25 per cent. That is not, by any reading, what we have today. Yes, there has been plenty of bad lending, plenty of duping shareholders and workers and plenty of excessive managerial payoffs. It will all take a large toll, and affect markets across the world. But it will be a toll relative to our plush comfortable modern standards, not those of 1929-1933. In fact, modern decision-makers have the obvious advantage that they can look back at history and know what is not to be done. The US and the world economy are resilient enough to ride over even the extra uncertainty arising from the ongoing presidential campaign, and then some.”

These quotes are from recent publications and may be found most easily under “America’s financial crises” at my site http://www.independentindian.com.

What may be of interest to the Government of India’s economists also may be a sample of my recent short articles on India’s monetary and fiscal economics based on my research beginning with my doctoral work under Frank Hahn at Cambridge in the 1970s and followed by my work with James Buchanan and Milton Friedman in America in the 1980s and 1990s and later. One of these is even named “The Rangarajan Effect” which I first defined at a seminar invited by Dr Jadav at the RBI in May 2005!

https://independentindian.com/2008/08/24/rangarajan-effect/

https://independentindian.com/2008/09/28/monetary-integrity-and-the-rupee/

https://independentindian.com/2007/01/20/indias-macroeconomics/

https://independentindian.com/2007/02/04/fiscal-instability/

https://independentindian.com/2008/07/16/india-in-world-trade-payments/

https://independentindian.com/2007/03/05/fallacious-finance-the-congress-bjp-cpi-m-et-al-may-be-leading-india-to-hyperinflation/

https://independentindian.com/2007/02/20/our-policy-process-self-styled-planners-have-controlled-indias-paper-money-for-decades/

https://independentindian.com/2008/07/28/growth-of-real-income-money-prices-in-india-1869-2004/

https://independentindian.com/2008/07/17/growth-government-delusion/

https://independentindian.com/2008/07/09/indian-inflation-upside-down-economics-from-new-delhis-establishment/

https://independentindian.com/2008/02/26/how-to-budget-thrift-not-theft-should-guide-our-public-finances/

https://independentindian.com/2008/02/21/a-note-on-the-indian-policy-process/

With warm regards,

Cordially,

Subroto Roy, PhD (Cantab.), BScEcon(London)

Sometime Adviser to the Late Rajiv Gandhi, 1990-1991

Can President Obama resist the financial zombies (let alone slay them)? His economists need to consult Dr Anna J Schwartz

The wonders of the Internet continue to surprise (and yes Virginia, there was a world before SMS and before the Internet too).  In early January, in context of India’s Satyam fraud (of a size of perhaps 1 or perhaps 2 billion dollars),  I referred here  to what seemed to me the likelihood of Satyam becoming a zombie company and I said “we in India have many such zombies walking around in the organised business sector”.    I drew attention to Andrew Beattie’s astute  definition of zombies and other such ghoulish phenomena in the financial world, and also referred to John Stepek’s excellent if brief November 2008 analysis “How zombie companies suck the life from an economy”.  Today I find Ms Arianna Huffington has made reference to Mr Martin Wolf’s reference a couple of days ago to zombie companies and to his statement that President Obama needs to “Admit reality, restructure banks and, above all, slay zombie institutions at once.”  Ms Huffington has agreed, though of course all this slaying may be easier said than done.  (It is better that zombies not be created in the first place.)

Mr Wolf has pointedly asked a question that many around the world may have half-thought about but not articulated: “Has Barack Obama’s presidency already failed?”   It would be  a grave and appalling  state of affairs if it has, within less than a month of entering office.   I am grateful to find in Ms Huffington’s article a reference to an October 2008  Wall Stret Journal interview of Dr Anna Jacobson Schwartz, perhaps the most respected voice in monetary economics today.  There have been numerous people claiming to have predicted America’s financial crisis but none may have as much credibility as Dr Schwartz.   Six years ago, in a National Bureau of Economic Research study dated November 2002, “Asset Price Inflation and Monetary Policy”,Working Paper 9321 she had said with utmost clarity: “It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders’ portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans….”

Most poignantly too, Dr Schwartz was present when Ben Bernanke said  in  a 2002 speech honouring the late Milton Friedman “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”   Dr Schwartz told the Wall Street Journal ‘”This was [his] claim to be worthy of running the Fed”.  “He was ‘familiar with history. He knew what had been done.’ But perhaps this is actually Mr. Bernanke’s biggest problem. Today’s crisis isn’t a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. ‘I don’t see that they’ve achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job.'”

President Obama’s economists need to urgently consult Anna J Schwartz.

Subroto Roy, Kolkata

Postscript:  My own brief views on the subject are at “October 1929? Not!” dated September 18 2008, and “America’s divided economists” dated October 26 2008.  The latter article suggested that playing the demographic card and inducing a wave of immigration into the United States may be the surest way to move the housing demand-curve firmly upwards.

“A Dialogue in Macroeconomics” 1989 etc: sundry thoughts on US economic policy discourse

I have said here recently that some of the wisest advice President Obama or any leader anywhere can receive is that contained in Oliver Cromwell’s famous words “Think it possible you may be mistaken”.

This seems especially significant in context of new American macroeconomic and financial policies.  Mr Steve Clemons reports today there may be less intellectual diversity in the new President’s economic team than is possible or desirable; if so, conversation may become stifled and a greater propensity towards groupthink may arise, hence a greater likelihood of mistakes.

It is possible the directions that different people might like to see the conversation extended are different, and that would be a good sign of course!  For example, someone might think a Barro or a Mishkin could be the right addition of intellectual diversity, whereas others might suppose that to be the wrong direction towards more “market fundamentalism”.    But it would be a pity if the economic conversation within the new Administration came to be artificially or ideologically circumscribed in any direction.

Certainly I believe macroeconomic policy-discourse in the United States or elsewhere needs to proceed to a recognition of the existence of JM Keynes’s original concept of “involuntary unemployment” as well as to ask whether the actual unemployment happens to be or  not be of this sort.   (It may be “frictional” or “structural” or “voluntary” or “seasonal” etc, not the involuntary unemployment Keynes had meant.)  Furthermore, even if significant involuntary unemployment is identified, it needs to be asked whether government policy can be expected to improve or worsen outcomes.   The argument must be made either way, and, in John Wisdom’s phrase,  “Argument must be heard”.

“A Dialogue in Macroeconomics” which was Chapter 8 of my 1989 book Philosophy of Economics (Routledge,  Library of Congress HB 72.R69)  may provide some useful ballast.  The saga  that followed the  book’s publication left me unable to write about the US economy anymore, except briefly in 1992 and 1994-95 in Washington and New York, read only by a few friends.   Now in late 2008, I have published “October 1929? Not!” and “America’s divided economists” which may be of interest too, and which are republished below as well.

I have also added a couple of sundry points from an international perspective that I pointed to last September-October, namely

(i)  foreign central banks might have been left holding more bad US debt than might be remembered, and dollar depreciation and an American inflation seem to be inevitable over the next several years;

(ii) all those bad mortgages and foreclosures could vanish within a year or two by playing the demographic card and inviting in a few million new immigrants into the United States; restoring a worldwide idea of an American dream fueled by mass immigration may be the surest way for the American economy to restore itself.

Subroto Roy

I.

from Philosophy of Economics Routledge 1989

“Chapter 8.
A Dialogue in Macroeconomics

OUR next example is of quite a different sort, namely, the academic debate which has occurred in macroeconomics and monetary theory since Keynes’s General Theory of Employment, Interest and Money. This has of course received a great amount of attention, with innumerable commentaries having been written by many scores of protagonists and moderators around the world. Only a brief and highly simplified summary of these many conversations can be attempted here, within our limited objective of illustrating once more how it may be possible for critical discussion to be seen to proceed freely and yet objectively in economics. In the previous chapter we were fortunate to have had an actual conversation to consider; here our method shall have to be one of constructing a model of a conversation. In honour of Plato, we might name our conversants Athenian and Stranger.

ATHENIAN Tell me, have you perhaps been following the discussions among macroeconomists? I shall be interested to know what you take their present state to be.

STRANGER Indeed I have, though of course it is not possible or worthwhile to follow all of what has been said. But yes I have followed some of it, and certainly we can make it a topic of conversation.

ATHENIAN Please begin.

STRANGER Very well. Shall we do so in ‘36 with the publication of Keynes’s book? Rightly or wrongly, this must be considered a watershed in the history of modern economics, if only because most economists since have had either to admit its arguments in some measure or define and explain their disagreement. You’ll remember at one time it was said by many that Keynes had fathered a revolution in economic science.

ATHENIAN Except Chicago and the Austrians.

STRANGER Quite so. Now more recently a renewal of neoclassical thought has been under way, and many doubts have been raised about the keynesian consensus, so much so that some of the main questions of the thirties seem in modern form to continue to be at issue today.

ATHENIAN The more things change, the more they stay the same! But when you say Keynes has been a central figure, I take it you mean only that he has been among the most influential and most discussed and nothing more. It is not to preclude judgement on the merits of his book, which is itself of very uneven clarity. Besides there has been too much idolatry and hagiography.

STRANGER Yes, there is so often a rush to belief and worship. There may have been less if Keynes had survived longer. Yet I should say the broad aim of the work is not hard to see. Keynes himself clearly believes that he is starting a revolution — going so far as to suggest a comparison with contemporary physics. The first chapter says the book aims to provide a “general” theory, which will explain the traditional model as a “limiting” case. The second chapter says the theory of value has been hitherto concerned with the allocation of given resources between competing ends; Keynes is going to explain how the actual level of employment comes to be what it is.

ATHENIAN And so begs the question?

STRANGER Or does traditional theory? That seems to be at the heart of it.

ATHENIAN Go on.

STRANGER The theory will be of the short run in Marshall’s sense of taking capital as a fixed factor. Traditional theory is said to postulate about the labour market (i) that the real wage equals the marginal product of labour, so there is an assumption of profit maximization by competitive producers giving rise to a short run demand curve for labour; and (ii) that the utility of the wage at a given level of employment equals the marginal disutility of that amount of employment; i.e., the real wage is just sufficient to induce the volume of labour which is actually forthcoming. So it can account for unemployment due to temporary miscalculations, or intermittent demand, or the refusal or inability of labour to accept a job at a given wage due to legislation or social practices or collective bargaining or obstinacy, or merely a rational choice of leisure — i.e., it can account for frictional and voluntary unemployment but not for what Keynes wants to call involuntary unemployment. What it can suggest is either such things as improvements in foresight, information, organization and productivity, or a lowering of the real wage. But Keynes’s critique will not have to do with such causes of the contemporary unemployment; instead the population is said to be seldom “doing as much work as it would like to do on the basis of the current wage…. More labour would, as a rule, be forthcoming at the existing money wage if it were demanded.” But it is not being demanded, and it is not being demanded because there has been a shortfall of “effective demand”. That is why there is as much unemployment as there is.

ATHENIAN Or so Keynes claims. And he would take it the neoclassical view would be that it must be the real wage is too high; it is only because the real wage has not fallen by enough that unemployment continues.

STRANGER Right. To which there are two observations. The first has to do with the actual attitude of workers towards the money wage and the real wage respectively. The traditional supply function of labour is a function of the latter; Keynes claims that at least within a certain range it must be workers are concerned more with the former.

ATHENIAN How so?

STRANGER By the interesting and perhaps plausible claim that workers are found to withdraw labour if the money wage falls but do not seem to do the same if the price level rises. A real wage reduction caused by a fall in the money wage and the same real wage reduction caused by an increase in prices seem to have different effects on labour supply. “Whether logical or illogical, experience shows that this is how labour in fact behaves.” And he cites U. S. data for ‘32 to say labour did not refuse reductions in the money wage nor did the physical productivity of labour fall yet the real wage fell and unemployment continued. “Labour is not more truculent in the depression than in the boom — far from it.”

ATHENIAN And the second observation?

STRANGER This may be of more interest. “Classical theory assumes that it is always open to labour to reduce its real wage by accepting a reduction in its money wage… [it] presumes that labour itself is in a position to decide the real wage for which it works…” Keynes does not find a traditional explanation why prices tend to follow wages, and suggests it could be because the price level is being supposed to be determined by the money supply according to the quantity theory. Keynes wants to dispute the proposition “that the general level of real wages is directly determined by the character of the wage bargain…. For there may be no method available to labour as a whole whereby…. [it] can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs.” Hence he arrives at his central definition of involuntary unemployment: if the real wage falls marginally as a consequence of the price level rising with the money wage constant, and there is greater employment demanded and supplied in consequence, the initial state was one of involuntary unemployment.

ATHENIAN You are saying then that Keynes’s intent is to establish the existence of involuntary unemployment?

STRANGER At least a major part of the intent yes. To make the concept meaningful, to argue that it refers to a logical possibility, and also that much of the actual unemployment of the time may be falling under it, and is a result of lack of “effective demand”.

ATHENIAN The neoclassicals have been said to be cavalier about fluctuations in economic activity, when in fact Wicksell and Marshall and Thornton, let alone Hawtrey or Hayek as Keynes’s own critics, certainly had profound enough theories of the cycle. Before we go further, I think we should remind ourselves of what they actually said.

STRANGER Very well.

ATHENIAN Would you agree that can be summarized, then as now, as the quantity theory of money married to the theory of general equilibrium?

STRANGER Though it may be better to speak of divorce perhaps rather than marriage, in view of the dichotomy.

ATHENIAN From Smith to Mill, political economists broadly agree the role of government should extend and be restricted to such activities as defence, civil protection, the rule of law, the provision of public goods, education, the encouragement of competition, and so on. The traditional agenda does not as a rule include direct activity to restrain or otherwise change the natural course of trade, production, or consumption, and certainly no theory of what today is called macroeconomic policy. Underlying it is a broad belief that the competitive pursuit of private welfare within the necessary and minimal framework of the institutions of government, will result in tolerable social outcomes, and any further activity may be counterproductive. The State is after all endogenous to the economy, without any resources to its own name.

STRANGER The minimal state, though not so minimal perhaps as we sometimes think.

ATHENIAN The main function of money is seen to be that of facilitating real transactions. Hence the main component of the demand for money is the transactions demand, and the broad objective of monetary policy is the maintenance of the stability of the price of money. But this is recognized to be something elusive in practice, and fluctuations in economic activity are expected to occur in spite of the best intentions of the monetary authorities.

STRANGER How so?

ATHENIAN Well we might imagine two or three distinct but related markets: one for real investment and savings determined by intertemporal preferences, resources, and technologies; one a market for investment and savings defined in terms of money; one a short term credit market. The market for real investment and savings is, as it were, unobservable to the naked eye. Yet it drives the second and third markets for nominal savings and investment in which we actually participate. Monetary equilibrium requires the observable money rates of interest to equal the unobservable real rate of return on the market for physical capital. In particular, the real or natural rate of interest determined in the equilibrium of the first market is not, and perhaps ultimately cannot be, affected by nominal or monetary disturbances in the second or third markets.

STRANGER Why call it “natural”?

ATHENIAN In the sense it is a function of the real data of intertemporal preferences, resources, and technologies being what they are. If these data changed it should be expected to change too. But given these data, it would be the rate at which intertemporal constrained maximizations by individual agents resulted in planned present consumption equaling planned present production at the same time as planned future consumption equaled planned future production.

STRANGER In other words, real planned savings equal real planned investment.

ATHENIAN Exactly. It is the real interest rate, or rather the whole structure of own-rates and cross-rates at various terms, which is the key price signal for macroeconomic equilibrium.

STRANGER “Natural” seems to me to carry a physiocratic connotation. A better nomenclature would replace it with something else — perhaps “equilibrium real rate” or just “walrasian” rate.

ATHENIAN Very well, though I for one do not bias myself against the physiocrats! Now consider how a simple business cycle might occur on wicksellian lines. From a position of full real and monetary equilibrium, an expansion of credit has its first effect on the banks, increasing reserves and inducing more lending for reserve/deposit ratios to be restored, and so lowering the loan rate. But customers are only able to perceive a lowering of this nominal rate of interest and cannot know the equilibrium real rate has not changed. As far as households know, the relative price of present consumption has fallen and there is an incentive for greater consumption and lesser savings. As far as businesses know, the relative price of the future good has risen, and there is an incentive for greater investment. Inventories are run down, and markets for both consumer goods and capital goods are stimulated and show signs of excess demand. But if there was a walrasian equilibrium initially, then the economy will now show signs of inflation; with a gold standard, there would be increased demand for imports and an external drain of reserves, and even perhaps an internal drain if there was a panic and a run on the banks. The loan rate will have to rise once more to reign in reserves, but if the rate is now raised too high relative to the still unchanged real rate, there would be the makings of a recession.

STRANGER Your point being that economists before Keynes had recognized the decentralized economy may be fluctuating continually.

ATHENIAN Surely they had done so quite fully. A first set of causes such as wars, disasters, discoveries and migrations would change the real data of the economy, while a second set would be monetary disturbances like the failure of the authorities to adequately follow the dictates of the real data of the economy, i.e., failure to observe the equilibrium real rate of interest. It may even be intrinsic to the problem that they must fail in the attempt to observe, let aside compute, the equilibrium real rate warranted at a given time by the structure of the real data.

STRANGER Hence the conclusion that they cannot hope to do better than establish a climate of monetary and fiscal stability, such as by declaring a long term policy and staying with it.

ATHENIAN Exactly. Private economic agents already face endemic uncertainty with respect to changes in the real data, and must be assumed to not want more added by government policy. You appear to have seen my point nicely.

STRANGER Very well. But you have jumped ahead as this kind of a conclusion sounds very modern to me. You made me stop all the way back at Keynes’s notion of effective demand!

ATHENIAN As I said, the more things change, the more they stay the same.

STRANGER Let us go back a little. I think we may be able to rejoin our initial route at a point which may bring us close to where we seem to have come by the route you have taken. Specifically suppose we go back to the question of the money wage and the real wage, and of the real wage being “too high”.

ATHENIAN That has been interpreted a number of ways, has it not?

STRANGER Yes it has. One would be to say Keynes was merely simple minded and assumed money illusion on the part of workers. Another would be to say Keynes assumed a short run context of fixed prices, so it would not make a difference whether labour happened to be concerned with changes in the real or the money wage. Yet a third would be to say Keynes, whether he realized it or not, had come upon a recondite truth about the sort of complex monetary economy in which we live — namely, that when transactions are quoted and made in a monetary economy, it may become difficult ipso facto for the walrasian equilibrium to be achieved. Even workers might fully recognize the real wage to be too high and be prepared to work more at a lower wage, but be unable to signal this willingness to potential employers.

ATHENIAN So involuntary unemployment becomes another sort of equilibrium outcome.

STRANGER Exactly. Not only of labour but of machines too, along with the unintended holding of inventories. It is as if firms would have sold what they had planned to if only workers had the income to buy it, which they would have done if only they had been able to sell as much labour they had planned to, which they would have done if only there had been an effective demand for it, which there would have been if firms had not cut back on production because they found themselves unable to sell what they had planned to sell. A kind of vicious circle, due to pessimistic and self-fulfilling expectations all around.

ATHENIAN An unhappy solution to a non-cooperative game you might say.

STRANGER Quite so. Keynes does not deny there may be a monetary route out of the impasse. A wage deflation would eventually lead to price deflation, raising the real value of money holdings, so via liquidity preference lead to an increased demand for bonds, raising their price and lowering money interest rates, which through the investment function would lead eventually to increased effective demand. But the fiscal route may be more direct and quicker in its effect on expectations. Trying to deflate across the board in the face of what seem to be excess supplies of goods and labour might be counterproductive, causing unexpected transfers from debtors to creditors and precipitating bankruptcies. Instead: “Government investment will break the vicious circle. If you can do that for a couple of years, it will have the effect, if my diagnosis is right, of restoring business profits more nearly to normal, and if that can be achieved then private enterprise will be revived. I believe you have first of all to do something to restore profits and then rely on private enterprise to carry the thing along….”

ATHENIAN A shot in the arm for enterprise in the hope of breaking the pessimism. But Keynes was hardly alone in such thinking.

STRANGER Quite true.

ATHENIAN And he certainly seemed to treat the opinions of others without due respect, which is to say he may have exaggerated the significance of his own. Hinting that he was the Einstein of economics set an especially bad example. Only the other day one eminence was comparing himself to Newton, and another was calling his friend Shakespeare. It will be Joyce and Pasternak next!

STRANGER Flattery and nepotism are common weaknesses, my friend. Like the rush to belief and worship.

ATHENIAN Besides you would have to assume the government to be outside the game, and only so being able to see the problem which private agents could not from inside the game. That may be too large an assumption, don’t you think?

STRANGER Yes it may. Yet it seems to me pump-priming was a possible solution being offered to a temporary problem. Many of the controversies may have come about because it became institutionalized, because discretionary fiscal policy became a permanent part of the government agenda.

ATHENIAN And a more direct route out was available too, was it not? With wealth placed in the consumption function directly, a deflation would increase the real value and affect effective demand directly. We would not have to wait for the roundabout effects through so-called liquidity preference.

STRANGER Which in a way brings us back to a central pillar of traditional theory: with given real data and given velocity of circulation, desired holding of real money balances will roughly be constant. In particular the demand for real money balances should not be seen as a function of the interest rate.

ATHENIAN The real rate or the monetary rate?

STRANGER For neoclassicals certainly the real; Keynes does not seem clear.

ATHENIAN There may lie a problem.

STRANGER The title of the book says “Employment, Interest, and Money”. No question employment is real and money is money — interest is the bridge. If you ask me to bet I would say Keynes’s agents make real responses to signals expressed as they must be in a large economy in monetary terms.

ATHENIAN Perhaps we ought to move on. Tell me, if you think Keynes’s book rightly or wrongly ranks as the most influential document of the last fifty years, would you agree it is Friedman’s address on the role of monetary policy which must rank second to it if not on a par with it?

STRANGER Certainly there can be few competitors.

ATHENIAN Well then, it appears to me the net effect of Friedman’s critique has been a restoration of the wicksellian theory and a banishment of the keynesian theory.

STRANGER Friedman of course makes his approach via a critique of the Phillips’ Curve.

ATHENIAN Yes, but it is Wicksell whom he acknowledges in advancing the notion of a natural rate of unemployment, one which has been “ground out by the walrasian system of general equilibrium equations” — in other words, one which happens to be consistent with the structure of the real data of the economy at a particular time.

STRANGER Though again we may as well speak of walrasian instead of natural.

ATHENIAN A monetary policy which tried to peg unemployment at lower than such a rate (if such a rate could be determined, which it cannot) is likely to be counterproductive. The initial effect of an expansionary policy on a walrasian equilibrium may be to increase real output. Workers assume the increase to reflect an increase in the unobservable real demand for their services, and hence they expect a higher real wage. Businesses see the same and assume it to reflect an increase in the unobservable real demand for their goods. But given there was no real excess demand in the first place for either labour or goods, the effect outside anything but the short run will be a return to the initial structure of real wages, and the temporary decline in unemployment is reversed to the walrasian rate at higher prices. If the government tries to maintain unemployment at less than the walrasian rate, it will have to concede — indeed it will have caused — accelerating inflation without any real fall in unemployment.

STRANGER And vice versa perhaps, so there would be a kind of knife-edge.

ATHENIAN Now your remark about Friedman making his approach via the Phillips Curve seems to me interesting. We may have been too hasty to make a comparison with the debate in the thirties. For the world suffers a very real and severe shock between Keynes’s book and the keynesian consensus, which is the Second World War itself.

STRANGER I am not sure I follow.

ATHENIAN Well think of the consensus afterwards on the need for macroeconomic policy — it is actually Tinbergen’s notion of a “policy-maker” which is married to what seems to be Phillips’s finding of a trade-off between inflation and unemployment. It becomes the role of the macroeconomist to advise the politician on how to minimize social disutility from inflation and unemployment subject to the Phillips Curve. Macroeconomics becomes a so-called “policy science”. Give your expert economist your social utility function, and he will tell you where to slide to on your Phillips Curve.

STRANGER The available instruments being money supply and tax rates. That is what I meant in saying Keynes’s idea became institutionalized.

ATHENIAN It seems to me this consensus is born out of the War.

STRANGER How so?

ATHENIAN Well just think of the structural problems of the time: demobilization of large armies, reconstruction, all the displaced peoples, and so on. What are democratic governments to do? Say to their voters, right, thank you very much, now could you please go home quietly? What could have been expected except an Employment Act? Governments were going to help their returning citizens find work, or at least it would have seemed irresponsible if they had not said they were going to.

STRANGER You are saying then that Friedman may have been arguing against a new orthodoxy, grown out of what might have been a sensible idea.

ATHENIAN Exactly. The world is a very different place now than in 1945, in ‘45 than in ‘33, in ‘33 than in 1914. Real shocks every time. It may be a grave mistake for us to look for a unique and universal theory which is supposed to explain all particular circumstances, all of history.

STRANGER Reminds me of the historical school.

ATHENIAN Why not? Again I hold no prejudice against them! Anyhow, consider that Lucas and others have followed Friedman to argue it is a mistake to formulate the problem as Tinbergen had done, with unemployment as a target in a social utility function along with inflation. If it ought to be assumed that people will not continually make the same mistakes in predicting policy, then a systematic employment policy is going to be discovered quickly enough and rendered either ineffective or counterproductive. This idea too has its origins in Wicksell. Examining an opinion that inflation might stimulate enterprise and free debtors, Wicksell says: “It need only be said that if this fall in the value of money is the result of our own deliberate policy, or indeed can be anticipated and foreseen, then these supposed beneficial effects will never occur, since the approaching rise in prices will be taken into account in all transactions by reasonably intelligent people.”

STRANGER Wicksell said that?

ATHENIAN Precisely that.

STRANGER It does sound very modern.

ATHENIAN Now Lucas speaks of how the advice that economists give should be limited only to “the well understood and empirically substantiated propositions of monetary economics, discouragingly modest as these may be.” What can we take him to mean? It seems to me he is sharing Friedman’s scepticism of the possibilities which had been claimed for macroeconomics by the keynesian consensus. And that surely has been a healthy scepticism, befitting good economists.

STRANGER As I said, there is so often a rush to belief.

ATHENIAN Which is really disastrous when combined with the craving for power.

STRANGER But the question remains, does it not, as to which propositions of monetary economics are to be considered “well understood and empirically substantiated”. I cannot help think the propositions taken to be well understood and empirically substantiated in Chicago may be very different from those taken to be well understood and empirically substantiated in Cambridge, or for that matter, those in the U. S. from those in Europe.

ATHENIAN I don’t see any difficulty in this. For first, it would have been granted there are propositions in economics which can be well understood and empirically substantiated. And that must be counted as progress! For something cannot be well understood if it cannot be understood at all, and where there is the possibility of understanding there must be the possibility of objective knowledge as well. And second, why should we not say the most appropriate task of economic theory or analytical economics is simply one of clarification and elucidation of the conceptual basis of economic thinking and expression? All theory ultimately is, or ought to be, “Critique of Language”. When we are faced with a particular and concrete problematic situation, the theorist is to whom we turn for conceptual guidance and criticism. If instead you take the role of the theorist to be one of searching the universe for grand and general and absolute and abstract truths, which need to be discovered before we can say anything about some concrete set of particulars, then it seems to me you will be either struck dumb by a total and debilitating scepticism or become very shrill in your dogmatism or alternate wildly between the two. To me it seems unimportant ultimately to whose flag one shows allegiance, or indeed that allegiance to any flag must be shown.

STRANGER It seems again I will not disagree. But you have sketched the critique of Friedman and Lucas and indeed the ghost of Wicksell addressed to the dogmas of the keynesian orthodoxy. And I have agreed with you this has been a healthy criticism of the sort we should expect economists to provide. But there has been serious question too of the framework used by Friedman and Lucas, hasn’t there? I am thinking especially of Tobin and Hahn.

ATHENIAN Tobin has done much to add clear and reasonable thinking about Keynes — his suggestion that a certain amount of inflation may be the only way to bring down real wages towards their walrasian rates in complex monetary economics is especially interesting; it shows how wide the common ground can be upon which the debate may occur. But you will have to tell me what Hahn’s criticisms have been. I have always found them too abstract and too caustic.

STRANGER That they tend to be, but don’t let that deter you. As I see it, Hahn argues somewhat as follows. We should grant Friedman and Lucas two important points: first, the government is itself a large economic agent whose actions and announced plans enter the calculations of private agents; secondly, erratic changes in monetary policy away from a steady k% rule may have perverse effects “by confusing signals of relative scarcity with those that arose from the monetary policy”. Also, we may accept that the assumptions sufficient for a full walrasian equilibrium with rational expectations suffice for the absence of any persistent involuntary unemployment by Keynes’s definition. But Hahn would say this may not be the relevant empirical description.

ATHENIAN In what way?

STRANGER Well for one thing the pricing axiom or the recontracting assumption of stability theory remains unexplained. It is possible traders will face quantity constraints, and this often seems so in markets for labour and credit. We may simply find prices not moving in the direction of excess demand even when a quantity constraint happens to be binding. The structure of wages may be “neither fixed, nor arbritrary, nor inflexible; it is what it is because given conjectures, no agent finds it advantageous to change it.” Moreover, it may not be plausible to suppose there will be convergence after arbitrary displacements back towards a stable equilibrium, because the conditions for stability are very stringent and uniqueness of equilibrium may also need to be postulated. Furthermore, it may be quite unsatisfactory to treat money in models which are isomorphic to the Arrow-Debreu model, because in such a world there is no logical use for money, so there must be some essential features of reality which have failed to be features of the model.

ATHENIAN You don’t think Patinkin’s integration was adequate?

STRANGER For many practical purposes perhaps, but certainly not to full logical satisfaction. If you put real money balances into the utility function and treat money just about like any other good, you have to be prepared to accept a possible equilibrium in which the price of money is zero. Lastly, if there are internal debts denominated in money as there are in fact, you may not assume equiproportional changes in all prices will not have real effects, unless you are prepared to assume away redistributions between creditors and debtors, which you can do only under another assumption that all households have parallel and linear Engel curves through the origin. Hahn’s line of argument is admittedly abstract, but you will have to admit it raises some fundamental questions.

ATHENIAN Another example we might say of the healthy scepticism of the theorist. It seems my turn to agree with you. But we can imagine replies too can we not?

STRANGER What do you have in mind?

ATHENIAN Well to argue there can be unemployment which is involuntary is not to have argued that an employment policy can be expected to remove it. This seems a premise and conclusion too frequently confounded by both keynesians and their critics, with disastrous consequences. Then, Buchanan would argue that a more thorough characterization needs to be given of the making of government policy, especially when it is proposed to supplant the market outcome. Policies are after all proposed, enacted, and put into effect by actual people — all of whom may need to be assumed to be pursuing private rewards as well in the course of their public duties. The relevant description for the economist needs to be one including this further fact that actual proposals of public policy can embody the private interests of the proposers too.

STRANGER Making it that much more difficult to determine what is in the public interest in a given case.

ATHENIAN Exactly. And so reinforcing the case for predictability and an orderliness in the framework of government.

STRANGER But we have been talking now for quite long enough my friend. I seem to feel a fear too that we have not gained anything at all in our discussions.

ATHENIAN Don’t be so pessimistic! Surely the point of reconstructing such conversations as we have done is not to hold absolutely to the matters raised in them. You and I after all have been making summary and highly simplified and unauthorized interpretations. I take the point of it to have been clarifying our thoughts, and perhaps to show ourselves how discussion can proceed between economists of different schools of thought. Arguments might come to a halt for any of a number of reasons, but they needn’t be supposed to have any logical or necessary end. Too often we let people retreat into different dogmatic positions, fostering the belief that each is starting from some set of absolute axioms ultimately irreconcilable with those of the other. We may need to keep insisting instead that the pursuit of knowledge and understanding is an open-ended activity with potentially indefinite limits. It yields conclusive results but has no absolute end. You or I might call a halt and retire from it, but that will not mean it cannot or will not continue without us.

STRANGER Perhaps so. But you are younger than I, and I have become tired by all these thrusts and parries. Besides, there has been the enjoyment of conversation itself.”

II

October 1929? Not!  by Subroto Roy / First published in Business Standard September 18, 2008

“Lehman Brothers filing for bankruptcy protection, Merrill Lynch taken over by Bank of America, Fannie Mae and Freddie Mac and now AIG being nationalised by the US Government, Bear Stearns getting a government bailout, many thousands of low-quality loans going bad … Does it all add up to an American financial crisis in the autumn of 2008 comparable to that in the autumn of 1929? Even Alan Greenspan himself has gone on record on TV saying it might.

But there are overriding differences. Most important, the American economy and the world economy are both incomparably larger today in the value of their capital stock, and there has also been enormous technological progress over eight decades. Accordingly, it would take a much vaster event than the present turbulence — say, something like an exchange of multiple nuclear warheads with Russia causing Manhattan and the City of London to be destroyed — before there was a return to something comparable to the 1929 Crash and the Great Depression that followed.

Besides, the roots of the crises are different. What happened back then? In 1922, the Genoa Currency Conference wanted to correct the main defect of the pre-1914 gold standard, which was freezing the price of gold while failing to stabilise the purchasing power of money. From 1922 until about 1927, Benjamin Strong of the Federal Reserve Bank of New York adopted price-stabilisation as the new American policy-objective. Britain was off the gold standard and the USA remained on it. The USA, as a major creditor nation, saw massive gold inflows which, by traditional gold standard principles, would have caused a massive inflation. Governor Strong invented the process of “sterilisation” of those gold inflows instead and thwarted the rise in domestic dollar prices of goods and services.

Strong’s death in 1928 threw the Federal Reserve System into conflict and intellectual confusion. Dollar stabilisation ended as a policy. Surplus bank money was created on the release of gold that had been previously sterilised.

The traditional balance between bulls and bears in the stock-market was upset. Normally, every seller of stock is a bear and every buyer a bull. Now, amateur investors appeared as bulls attracted by the sudden stock price rises, while bears, who sold securities, failed to place their money into deposit and were instead lured into lending it as call money to brokerages who then fuelled these speculative bulls. As of October 22, 1929 about $4 billion was the extent of such speculative lending when Chase National Bank’s customers called in their money.

Chase National had to follow their instructions, as did other New York banks. New York’s Stock Exchange could hardly respond to a demand for $4 billion at a short notice and collapsed. Within a year, production had fallen by 26 per cent, prices by 14 per cent, personal income by 14 per cent, and the Greatest Depression of recorded history was in progress — involuntary unemployment levels in America reaching 25 per cent.

That is not, by any reading, what we have today. Yes, there has been plenty of bad lending, plenty of duping shareholders and workers and plenty of excessive managerial payoffs. It will all take a large toll, and affect markets across the world.

But it will be a toll relative to our plush comfortable modern standards, not those of 1929-1933. In fact, modern decisionmakers have the obvious advantage that they can look back at history and know what is not to be done. The US and the world economy are resilient enough to ride over even the extra uncertainty arising from the ongoing presidential campaign, and then some.”


III

America’s divided economists by Subroto Roy First published in Business Standard October 26, 2008

“Future doctoral theses about the Great Tremor of 2008 will ask how it was that the Fed chief, who was an academic economist, came to back so wholeheartedly the proposals of the investment banker heading the US Treasury. If Herbert Hoover and FDR in the 1930s started something called fiscal policy for the first time, George W Bush’s lameduck year has marked the total subjugation of monetary policy.

In his 1945 classic, History of Banking Theory, the University of Chicago’s Lloyd Mints said: “No reorganisation of the Federal Reserve System, while preserving its independence from the Treasury, can offer a satisfactory agency for the implementation of monetary policy. The Reserve banks and their branches should be made agencies of the Treasury and all monetary powers delegated by Congress should be given to the Secretary of the Treasury…. It is not at all certain that Treasury control of the stock of money would always be reasonable… but Treasury influence cannot be excluded by the creation of a speciously independent monetary agency that cannot have adequate powers for the performance of its task…” Years later, Milton Friedman himself took a similar position suggesting legislation “to end the independence of the Fed by converting it into a bureau of the Treasury Department…”(see, for example, Essence of Friedman, p 416).

Ben Bernanke’s Fed has now ended any pretence of the monetary policy’s independence from the whims and exigencies of executive power. Yet Dr Bernanke’s fellow academic economists have been unanimous in advising caution, patience and more information and reflection upon the facts. The famous letter of 122 economists to the US Congress was a rare statement of sense and practical wisdom. It agreed the situation was difficult and needed bold action. But it said the Paulson-Bernanke plan was an unfair “subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.”

Besides, the plan was unclear and too far-reaching. “Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards…. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.”

The House’s initial bipartisan “backbench revolt” against “The Emergency Economic Stabilisation Act of 2008” (ESSA) followed this academic argument and rejected the Bernanke Fed’s advice. Is there an “emergency”, and if so what is its precise nature? Is this “economic stabilisation”, and if so, how is it going to work? The onus has been on Dr Bernanke and his staff to argue both, not merely to assert them. Even if the House “held its nose” and passed the measure for now, the American electorate is angry and it is anybody’s guess how a new President and Congress will alter all this in a few months.

Several academic economists have argued for specific price-stabilisation of the housing market being the keystone of any large, expensive and risky government intervention. (John McCain has also placed this in the political discussion now.) Roughly speaking, the housing supply-curve has shifted so far to the right that collapsed housing prices need to be dragged back upward by force. Columbia Business School economists Glenn Hubbard and Chris Mayer, both former Bush Administration officials, have proposed allowing “all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25 per cent…. close to where mortgage rates would be today with normally functioning mortgage markets….Lower interest rates will mean higher overall house prices…” Yale’s Jonathan Koppell and William Goetzmann have argued very similarly the Treasury “could offer to refinance all mortgages issued in the past five years with a fixed-rate, 30-year mortgage at 6 per cent. No credit scores, no questions asked; just pay off the principal of the existing mortgage with a government check. If monthly payments are still too high, homeowners could reduce their indebtedness in exchange for a share of the future price appreciation of the house. That is, the government would take an ownership interest in the house just as it would take an ownership interest in the financial institutions that would be bailed out under the Treasury’s plan.”

Beyond the short run, the US may play the demographic card by inviting in a few million new immigrants (if nativist feelings hostile to the outsider or newcomer can be controlled, especially in employment). Bad mortgages and foreclosures would vanish as people from around the world who long to live in America buy up all those empty houses and apartments, even in the most desolate or dismal locations. If the US’s housing supply curve has moved so far to the right that the equilibrium price has gone to near zero, the surest way to raise the equilibrium price would be by causing a new wave of immigration leading to a new demand curve arising at a higher level.

Such proposals seek to address the problem at its source. They might have been expected from the Fed’s economists. Instead, ESSA speaks of massive government purchase and control of bad assets “downriver”, without any attempt to face the problem at its source. This makes it merely wishful to think such assets can be sold for a profit at a later date so taxpayers will eventually gain. It is as likely as not the bad assets remain bad assets.

Indeed the University of Chicago’s Casey Mulligan has argued there is a financial crisis involving the banking sector but not an economic one: “We’re not entering a second Great Depression.” The marginal product of capital remains high and increasing “far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money…. So, if you are not employed by the financial industry (94 per cent of you are not), don’t worry. The current unemployment rate of 6.1 per cent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 per cent.”

Dr Bernanke has been a close student of A Monetary History of the United States in which Milton Friedman and Anna J Schwartz argued that the Fed inadvertently worsened the Great Contraction of 1929-1933 by not responding to Congress. Let not future historians find that the Fed, at the behest of the Treasury Secretary, worsened the Great Tremor of 2008 by bamboozling Congress into hasty action.”

IV

Would not a few million new immigrants solve America’s mortgage crisis?
October 10, 2008 — drsubrotoroy | Edit

America was at its best when it was open to mass immigration, and America is at its worst when it treats immigrants with racism and worse (for seeming “uppity”).

All those bad mortgages and foreclosures could vanish within a year or two by playing the demographic card and inviting in a few million new immigrants into the United States.  They would pour in from China, Vietnam, Thailand, Philippines, Indonesia, Mexico, South America,  South Africa, Nigeria, Egypt, Israel, Poland, Romania, Hungary, Belarus, Ukraine, Russia, Uzbekistan, Kazakhstan,  India, Sri Lanka, Bangladesh, and yes, Pakistan too, and more.  They would happily buy up all those empty houses and apartments, even in all those desolate  dismal locations.  If the USA’s housing supply curve has moved so far to the right that the equilibrium price has gone to near zero, the surest way to raise the equilibrium price would be by causing a  new wave of  immigration leading to a new demand curve arising at a higher level.   But yes, nativist feelings of racism towards the outsider or the newcomer would have to be controlled  especially in employment — racists after all are often rather “sub-prime” themselves and hence unable to accept characters who may be “prime” or at least less “sub-prime” from foreign immigrant communities.   Restoring a worldwide idea of an American dream fuelled by mass immigration may be the surest way for the American economy to restore itself.

V

122 Sensible American economists

September 26, 2008 — drsubrotoroy | Edit

“$700 billion comes to more than, uhhhm, $6,000 per income taxpayer in the USA.

I was glad to see the sensible letter of 122 American economists to US legislators regarding the Paulson-Bernanke plan to address America’s financial crisis.

Somehow, I have an inkling that foreign central banks have been left holding more bad US debt than might be remembered — which would explain the embarrassment of Messrs Paulson and Bernanke vis-a-vis their foreign counterparts… Dollar depreciation and an American inflation seem to be inevitable over the next several years.”

Satyam and IT-firms in general may be good candidates to become “Labour-Managed” firms

Satyam may be able to summarily solve the problems caused by its high-level corporate fraud by transforming itself into a “Labour-Managed Firm”.

One of the new Government-appointed board members has stated publicly today that the company has little or no debt.  If this is true it would be interesting because not only were the vast cash-assets non-existent, the liabilities-side of the balance-sheet also may be small, which could mean the company was simply far smaller in terms of value than it had made itself out to be.  In a bankrupt firm, the remaining assets normally come to belong to the creditors but what if the main creditors happen to be the work-force?  If that is in fact the situation in this case, Satyam may be a prime candidate to be transformed into a “Labour-Managed Firm” of the sort discussed by Jaroslav Vanek (The General Theory of Labour Managed Firms and Market Economies, 1970) and James Meade (The theory of the labour-managed firm and profit-sharing, Economic Journal 1972), and surveyed by e.g. Louis Putterman in the New Palgrave Dictionary and by Martin Ricketts in The Economics of Business Enterprise 2003.

As I had briefly mentioned earlier here, the transition could be made by Satyam’s existing  technical and other staff being allowed to participate (with their personal savings and claims to future income) in any auction of the “works-in-progress” that constitute the client contracts the company presently has around the world and which constitute its major intangible asset.   This may be the single best way to preserve the firm’s value as well as the income-streams of its staff.

The staff would have to make a transition from being employees to becoming self-managers which may not be easy in practice, although in theory the information-technology industry may be well-suited to labour-managed firms given the peculiarly intangible nature of their products.  The marginal cost of production of (true) information is typically very high but the marginal cost of dissemination of information  is near- zero.

If this happened and a corrupt bankrupt Satyam-I transformed itself into a viable Labour-Managed Satyam-II, the newly appointed board would become redundant even more quickly than it would have done otherwise — though this board may be even less likely to know of Vanek and Meade than to be familiar with modern corporate finance.  Time perhaps to hit the textbooks, gentlemen, and burn that midnight candle!  Is that something we can expect from some of the key lobbyists of India’s organized business sector?

Subroto Roy

Postscript  1 :  Of course if the asset-side has been fraudulently exaggerated while the liabilities-side has been small, the fraud has been directly perpetrated on equity-holders who held stock that was overvalued  by the market as a direct result of the fraud.

Postscript 2:  I find (grotesquely) amusing the new found emphasis on “Independent Directors” in view of the obvious fraud in the advertised biographies of some rather notorious Independent Directors in the IT-business and other sectors of corporate India and the higher bureaucracy!   There seems in fact to have been a wild hyperinflation of reputations generally, especially in Delhi,  Mumbai,  Bangalore, Pune and other such hip with-it places  — people claiming to have earned PhDs when they have none,  people calling themselves “Dr” on the basis of some defunct Soviet management institute  having once paid them off, people claiming to be Harvard postgraduates on the basis of  some outsourced executive development programme of a few weeks’ duration, people claiming academic publications and academic affiliations which are non-existent, etc etc.   All that for another day!  (But any former students of mine who may find the above pertinent to themselves may please know their old prof is cross with them! Tsk tsk!)  (And then there was the one of the senior government economic planner who told his astrologer on the  telephone his correct date  of birth but had lied to the Government of India by a couple of years…. clearly he did not want to get his own Ptolomaic horoscope wrong even if his plans for India in the Copernican world went awry!)

America’s divided economists


America’s divided economists

by

Subroto Roy

First published in

Business Standard 26 October 2008

Future doctoral theses about the Great Tremor of 2008 will ask how it was that the Fed chief, who was an academic economist, came to back so wholeheartedly the proposals of the investment banker heading the US Treasury. If Herbert Hoover and FDR in the 1930s started something called fiscal policy for the first time, George W Bush’s lameduck year has marked the total subjugation of monetary policy.

In his 1945 classic, History of Banking Theory, the University of Chicago’s Lloyd Mints said: “No reorganisation of the Federal Reserve System, while preserving its independence from the Treasury, can offer a satisfactory agency for the implementation of monetary policy. The Reserve banks and their branches should be made agencies of the Treasury and all monetary powers delegated by Congress should be given to the Secretary of the Treasury…. It is not at all certain that Treasury control of the stock of money would always be reasonable… but Treasury influence cannot be excluded by the creation of a speciously independent monetary agency that cannot have adequate powers for the performance of its task…” Years later, Milton Friedman himself took a similar position suggesting legislation “to end the independence of the Fed by converting it into a bureau of the Treasury Department…”(see, for example, Essence of Friedman, p 416).

Ben Bernanke’s Fed has now ended any pretence of monetary policy’s independence from the whims and exigencies of executive power. Yet Dr Bernanke’s fellow academic economists have been unanimous in advising caution, patience and more information and reflection upon the facts. The famous letter of 122 economists to the US Congress was a rare statement of sense and practical wisdom. It agreed the situation was difficult and needed bold action. But it said the Paulson-Bernanke plan was an unfair “subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.”

Besides, the plan was unclear and too far-reaching. “Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards…. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.”

The House’s initial bipartisan “backbench revolt” against “The Emergency Economic Stabilisation Act of 2008” (ESSA) followed this academic argument and rejected the Bernanke Fed’s advice. Is there an “emergency”, and if so what is its precise nature? Is this “economic stabilisation”, and if so, how is it going to work? The onus has been on Dr Bernanke and his staff to argue both, not merely to assert them. Even if the House “held its nose” and passed the measure for now, the American electorate is angry and it is anybody’s guess how a new President and Congress will alter all this in a few months.

Several academic economists have argued for specific price-stabilisation of the housing market being the keystone of any large, expensive and risky government intervention. (John McCain has also placed this in the political discussion now.) Roughly speaking, the housing supply-curve has shifted so far to the right that collapsed housing prices need to be dragged back upward by force. Columbia Business School economists Glenn Hubbard and Chris Mayer, both former Bush Administration officials, have proposed allowing “all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25 per cent…. close to where mortgage rates would be today with normally functioning mortgage markets….Lower interest rates will mean higher overall house prices…” Yale’s Jonathan Koppell and William Goetzmann have argued very similarly the Treasury “could offer to refinance all mortgages issued in the past five years with a fixed-rate, 30-year mortgage at 6 per cent. No credit scores, no questions asked; just pay off the principal of the existing mortgage with a government check. If monthly payments are still too high, homeowners could reduce their indebtedness in exchange for a share of the future price appreciation of the house. That is, the government would take an ownership interest in the house just as it would take an ownership interest in the financial institutions that would be bailed out under the Treasury’s plan.”

Beyond the short run, the US may play the demographic card by inviting in a few million new immigrants (if nativist feelings hostile to the outsider or newcomer can be controlled, especially in employment). Bad mortgages and foreclosures would vanish as people from around the world who long to live in America buy up all those empty houses and apartments, even in the most desolate or dismal locations. If the US’s housing supply curve has moved so far to the right that the equilibrium price has gone to near zero, the surest way to raise the equilibrium price would be by causing a new wave of immigration leading to a new demand curve arising at a higher level.

Such proposals seek to address the problem at its source. They might have been expected from the Fed’s economists. Instead, ESSA speaks of massive government purchase and control of bad assets “downriver”, without any attempt to face the problem at its source. This makes it merely wishful to think such assets can be sold for a profit at a later date so taxpayers will eventually gain. It is as likely as not the bad assets remain bad assets.

Indeed the University of Chicago’s Casey Mulligan has argued there is a financial crisis involving the banking sector but not an economic one: “We’re not entering a second Great Depression.” The marginal product of capital remains high and increasing “far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money…. So, if you are not employed by the financial industry (94 per cent of you are not), don’t worry. The current unemployment rate of 6.1 per cent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 per cent.”

Dr Bernanke has been a close student of A Monetary History of the United States in which Milton Friedman and Anna J Schwartz argued that the Fed inadvertently worsened the Great Contraction of 1929-1933 by not responding to Congress. Let not future historians find that the Fed, at the behest of the Treasury Secretary, worsened the Great Tremor of 2008 by bamboozling Congress into hasty action.

One of many reasons John R Hicks was a great economist

Professor Sir John Hicks (1904-1989) was among the greatest of 20th Century economists.  I was much honoured by his letter to me of May 1 1984 sent to Blacksburg, where he acknowledged his departure in later life from the position he had taken in 1934 and 1939 on the foundations of demand theory.  (The context of our correspondence had to do with my criticism of the young Hicks and support for the ghost of Alfred Marshall.)

He later sent me a copy of his Wealth and Welfare: Collected Essays on Economic Theory, Vol. I (Cambridge, Mass.: MIT Press, 1981) as a gift.

In Philosophy of Economics, I said about this “It may be a sign of the times that economists, great and small, rarely if ever disclaim their past opinions; it is therefore an especially splendid example to have a great economist like Hicks doing so in this matter.”  It was remniniscent of Gottlob Frege’s response to Russell’s paradox; Philosophy of Economics described Frege’s “Letter to Russell”, 1902 (Heijenoort, From Frege to Gödel, pp. 126-128) as  “a document which must remain one of the most noble in all of modern scholarship; a fact recorded in Russell’s letter to Heijenoort.”

Introduction and Some Biography

My two main works, namely my book of 19 years ago Philosophy of Economics: On the Scope of Reason in Economic Inquiry (first published by Routledge, London & New York, 1989, 1991), and my monograph of 24 years ago Pricing, Planning and Politics: A Study of Economic Distortions in India (first published by the Institute of Economic Affairs, London, 1984) are both now republished here, each with a new preface. I have also published here for the first time the full story of my encounter with Rajiv Gandhi — an abbreviated version appeared in Freedom First in October 2001 which focussed on economic policy and deliberately excluded mention of my warnings about his vulnerability to assassination and my attempts in vain to get people around him to do something about it. I have also republished my three advisory memoranda to him between September 1990 and March 1991, which were first published in The Statesman‘s Editorial Page of July 31, August 1 and August 2 1991.

I have also published here now for the first time a public lecture I gave as the Wincott Visiting Professor of Economics at the University of Buckingham in 2004 titled “Science, Religion, Art and the Necessity of Freedom”. Also republished is “A General Theory of Globalization and Modern Terrorism” which was my keynote address to the Council of Asian Liberals and Democrats at their Manila meeting in November 2001; it appeared first in September 11 & Political Freedom: Asian Perspectives (eds. Smith, Gomez & Johannen) in Singapore in 2002.

I have also published for the first time my April 29 2000 address titled “Towards a Highly Transparent Monetary & Fiscal Framework for India’s Union and State Governments” to the Reserve Bank’s Annual “Conference of State Finance Secretaries”.

Also to be found in one place are my most recent signed writings since 2005 in The Statesman and elsewhere on India’s economy and foreign policy, Jammu & Kashmir, Pakistan, Afghanistan, China, Tibet, Taiwan, the United States, etc.

My political affiliation in India would be to a non-existent party — as may be seen from the article on a Liberal Party for India; and I trust it will be seen that I have dispensed criticism upon the present-day Congress Party, BJP/RSS and Communists equally harshly.

Readers are welcome to quote from my work under the normal “fair use” rule, but please quote me by name and indicate the place of original publication. Readers are also welcome to comment or correspond by email, though please try to introduce yourself.

The new preface of Philosophy of Economics is reproduced below as it is partly biographical.

“(Philosophy of Economics) germinated when I was 18 or 19 years of age in Paris, Helsinki and London, and it was first published when I was 34 in Honolulu. I came to economics from natural science (biology, chemistry, physics), not mathematics. It was inevitable I would be drawn to the beauty of philosophy as a theoretical discipline while being driven, as a post-Independence Indian, to economics as the practical discipline that might unlock secrets to India’s prosperity and progress. I belonged to an ancient family of political men, and my father, who had joined India’s new foreign service the year before I was born, inculcated in me as a boy an idea that I had “a mission” (though he later forgot he had done so).

I was fortunate to fail to enter Oxford’s PPE and instead go to the London School of Economics. LSE was at an intellectual peak in the early 1970s. DHN Johnson in international law, ACL Day in international monetary economics, Brian Griffiths vs Marcus Miller in monetary economics with everyone still in awe of Harry Johnson’s graduate lectures in macroeconomics, Ken Wallis, Graham Mizon, JJ Thomas, David Hendry in econometrics with the odd lecture by Durbin himself – I was exposed to a fully grown up intellectual seriousness from the day I arrived as an 18 year old. Michio Morishima as my professorial tutor told me frankly that, as an Indian, I would face less prejudice in Western academia than in the private sector, and said he was speaking from experience as a fellow-Asian. He turned out to be wrong but it was wise advice nevertheless, just as wise as his requiring pupils to read Hicks’ Value and Capital (which, in our undergraduate mythology, he himself had read inside a Japanese gunboat during war).

What was relatively weak at LSE was general economic theory. We were good at deriving the Best Linear Unbiased Estimator but left unsatisfied with our grasp of the theory of value that constituted the roots of our discipline. I managed a First and was admitted to Cambridge as a Research Student in 1976, where fortune had Frank Hahn choose me as a student. That at the outset was protection from the communist cabal that ran “development economics” with whom almost all the Indians ended up. I was wholly impecunious in my first year as a Research Student, and had to, for example, proof-read Arrow and Hahn’s General Competitive Analysis for its second edition to receive 50 pounds sterling from Hahn which kept me going for a short time. My exposure to Hahn’s subtle, refined and depthless thought as an economist of the first rank led to fascination and wonderment, and I read and re-read his “On the notion of equilibrium in economics”, “On the foundations of monetary theory”, “Keynesian economics and general equilibrium theory” and other clear-headed attempts to integrate the theory of value with the theory of money — a project Wicksell and Marshall had (perhaps wisely) not attempted and Keynes, Hicks and Patinkin had failed at.

Hahn insisted a central question was to ask how money, which is intrinsically worthless, can have any value, why anyone should want to hold it. The practical relevance of this question is manifest. India today in 2007 has an inconvertible currency, vast and growing public debt financed by money-creation, and more than two dozen fiscally irresponsible State governments without money-creating powers. While pondering, over the last decade, whether India’s governance could be made more responsible if States were given money-creating powers, I have constantly had Hahn’s seemingly abstruse question from decades ago in mind, as to why anyone will want to hold State currencies in India, as to whether the equilibrium price of those monies would be positive. (Lerner in fact gave an answer in 1945 when he suggested that any money would have value if its issuer agreed to collect liabilities in it — as a State collects taxes – and that may be the simplest road that bridges the real/monetary divide.)

Though we were never personal friends and I did not ingratiate myself with Hahn as did many others, my respect for him only grew when I saw how he had protected my inchoate classical liberal arguments for India from the most vicious attacks that they were open to from the communists. My doctoral thesis, initially titled “A monetary theory for India”, had to be altered due to paucity of monetary data at the time, as well as the fact India’s problems of political economy and allocation of real resources were more pressing, and so the thesis became “On liberty and economic growth: preface to a philosophy for India”. When no internal examiner could be found, the University of Cambridge, at Hahn’s insistence, showed its greatness by appointing two externals: C. J. Bliss at Oxford and T. W. Hutchison at Birmingham, former students of Hahn and Joan Robinson respectively. My thesis received the most rigorous and fairest imaginable evaluation from them.

I had been attracted to Cambridge partly by its old reputation for philosophy, especially that of Wittgenstein. But I met no worthwhile philosophers there until a few months before I was to leave for the United States in 1980, when I chanced upon the work of Renford Bambrough. Hahn had challenged me with the question, “how are you so sure your value judgements promoting liberty blah-blah are better than those of Chenery and the development economists?” It was a question that led inevitably to ethics and its epistemology — when I chanced upon Bambrough’s work, and that of his philosophical master, John Wisdom, the immense expanse of metaphysics (or ontology) opened up as well. “Then felt I like some watcher of the skies, When a new planet swims into his ken; Or like stout Cortez when with eagle eyes, He star’d at the Pacific…”

It has taken me more than a quarter century to traverse some of that expanse; when I returned to Britain in 2004 as the Wincott Visiting Professor of Economics at the University of Buckingham, I was very kindly allowed to deliver a public lecture, “Science, Religion, Art and the Necessity of Freedom”, wherein I repaid a few of my debts to the forgotten work of Bambrough and Wisdom — whom I extravagantly compared with the Bodhisattvas of Mahayana Buddhism, also saying that the trio of Wittgenstein, Wisdom and Bambrough were reminiscent of what Socrates, Plato and Aristotle might have been like.

I had written to Bambrough from within Cambridge expressing my delight at finding his works and saying these were immensely important to economics; he had invited me to his weekly discussion groups at St John’s College but I could not attend. Between 1979 and 1989 we corresponded while I worked in America on my application of his and Wisdom’s work to problems in economics. We met only once when I returned to Cambridge from Blacksburg for my doctoral viva voce examination in January 1982. Six years later in 1988 he said of my Philosophy of Economics, “The work is altogether well-written and admirably clear”, and on another occasion he said he was “extremely pleased” at the interest I had taken in his work. The original preface of Philosophy of Economics said he was not responsible for the use I had made of his writings, which I reiterated in the 2004 lecture. At our meeting, he offered to introduce me to Wisdom who had returned to Cambridge from Oregon but I was too scared and declined, something I have always regretted. It is only in the last few years that I have begun to grasp the immensity of Wisdom’s achievement in comprehending, explaining and extending the work of both Wittgenstein and Freud. His famous “Virginia Lectures” of 1957 were finally published by his admirers with his consent as Proof and Explanation just before his death in 1993. As for Bambrough, I believe he may have been or become the single greatest philosopher since Aristotle; he told me in correspondence there was an unfinished manuscript Principia Metaphysica (the prospectus of which appeared in Philosophy 1964), which unfortunately his family and successors knew nothing about; the fact he died almost in obscurity and was soon forgotten by his University speaks more about the contemporary state of academic philosophy than about him. (Similarly, the fact Hahn, Morishima and like others did not receive the so-called Economics “Nobel” says more about the award than it does about them.)

All I needed in 1980 was time and freedom to develop the contents of this book, and that I found in America — which I could not have done in either Britain or India. It would take eight or nine very strenuous years before the book could be written and published, mostly spent at Virginia Polytechnic Institute (1980-1985) and University of Hawaii (1986-1990) Economics Departments, with short interludes at Cornell (Fall 1983) and Brigham Young (1985-86). I went to Virginia because James M. Buchanan was there, and he, along with FA Hayek, were whom Hahn decided to write on my behalf. Hayek said he was too old to accept me but wrote me kind and generous letters praising and hence encouraging my inchoate liberal thoughts and arguments. Buchanan was welcoming and I learnt much from him and his colleagues about the realities of public finance and democratic politics, which I quickly applied in my work on India, published in 1984 in London as Pricing, Planning & Politics: A Study of Economic Distortions in India and republished elsewhere here. The visit to the Cornell Economics Department was really so I could talk to Max Black the philosopher, who represented a different line of Wittgenstein’s students, and Max and I became friends until his death in 1988.

Buchanan’s departure from Blacksburg led to a gang of inert “game theorists” to arrive, and I was immediately under attack – one senior man telling me I was free to criticise the “social choice” work of Amartya Sen (since he was Indian too) but I was definitely unfree to do the same of Sen’s mentor, Kenneth Arrow, who was Jewish! (Arrow was infinitely more gracious when he himself responded to my criticism.) On top of that arose a matter of a woman, fresh off the aeroplane from India, being assaulted by a senior professor, and when I stood for her against her assailant, my time in Blacksburg was definitely up.

The manuscript of this book was at the time under contract with University of Chicago Press, and, thanks to Mrs Harry Johnson there, I had come in contact with that great American, Theodore W. Schultz. Schultz, at age 81, told me better to my face what the book was about than I had realised myself, namely, it was about economics as knowledge — its subject-matter was the epistemology of economics. Schultz wrote letters all over America on my behalf (as did Milton Friedman at Stanford and Sidney Alexander of MIT, whom I had also met and become friends with), and I was able to first spend a happy year among the Mormons at Brigham Young, and then end up at the University of Hawaii where I was given responsibility for the main graduate course in macroeconomics. I taught Harry Johnson-level IS-LM theory and Friedman-Tobin macroeconomics and then the new “rational expectations” vs Keynesian material.

I was also offered a large University grant to work on “South Asia”, which led to the books Foundations of India’s Political Economy: Towards an Agenda for the 1990s, and Foundations of Pakistan’s Political Economy: Towards an Agenda for the 1990s, both created by myself and WE James, and which led to the origins of India’s 1991 economic reform and the India-Pakistan peace process as told elsewhere. Also, this book came to be accepted for publication by Routledge, as the first economics book in its famed International Library of Philosophy.

Just as I was set to be evaluated for promotion and tenure at the University of Hawaii, I became the victim of a most vicious racist defamation (and there was some connection with Blacksburg). Quite fed up with the sordidness of American academia as I had experienced it, I sued in the federal court, which consumed much of the next half dozen years as the case worked its way through the United States Supreme Court twice. Milton Friedman and Theodore W. Schultz stood as expert witnesses on my behalf but you would not have known it from the judge’s ruling. There had been not only demonstrable perjury and suborning of perjury by the State of Hawaii’s officers, there was also “after-discovered” evidence of bribery of court-officers in the US District Court for the District of Hawaii, and I had to return to India in 1996 quite exhausted to recuperate from the experience. “Solicitation of counsel, clerks or judges” is “embracery curialis”, recognized as extrinsic fraud and subversion of justice since Jepps 72 E R 924 (1611), “firmly established in English practice long before the foundation” of the USA, Hazel Atlas, 322 US 238 (1943). “Embracery is an offense striking at the very foundation of civil society” says Corpus Juris 20, 496. A court of equity has inherent power to investigate if a judgement has been obtained by fraud, and that is a power to unearth it effectively, since no fraud is more odious than one to subvert justice. Cases include when “by reason of something done by the successful party… there was in fact no adversary trial or decision of the issue in the case. Where the unsuccessful party has been prevented from exhibiting fully his case, by fraud or deception practised on him by his opponent, as…where an attorney fraudulently or without authority assumes to represent a party and connives at his defeat; or where the attorney regularly employed corruptly sells out his client’s interest to the other side ~ these, and similar cases which show that there has never been a real contest in the trial or hearing of the case, are reasons for which a new suit may be sustained to set aside and annul the former judgment or decree, and open the case for a new and a fair hearing….” (Hazel Atlas). There is no time-limit in United States federal law for rectification of fraud on the court of this sort, and I remain fully hopeful today of the working of American justice in the case.

The practical result was that this book was never able to be properly publicized among economists as it would have been had I become Professor of Economics at the University of Hawaii by 1992 as expected. The hardback sold out quickly on its own steam and went into paperback by 1991, and a friend told me it was being used for a course at Yale Law School. The reviews were mostly intelligent. Upon returning to Britain as the Wincott Visiting Professor in 2004, I found times had changed and so had Routledge who would not keep it in print let alone permit a second revised edition. But I am now free to republish the book as I please, and today in 2007, with the Internet growing to a maturity which allows the young geeks at WordPress.com to want to encourage blogging worldwide, I can think of no more apt place to reproduce the first edition of this book than here at my own blog http://www.independentindian.com.

This is not a second or revised edition, and it is unchanged in content except for this lengthy new preface made necessary by the adventures and dramas the book’s author found himself unwittingly part of since its first publication. I am 52 now and happy to say I endorse the book just as I had published it at 34, though I do find it a little impatient and too terse in a few places. The 1991 paperback corrected a few slight errors in the 1989 hardback, and has been used. I am planning an entirely new book which shall have its roots in this one though it will be mostly in philosophy and not economics — the outlines it may take may be seen in the 2004 public lecture I gave on the work of Bambrough and Wisdom mentioned above and published elsewhere; its main aim will be to uncover for new generations the immense worth there is in their work which is in danger of being lost.

At least two names failed to appear in the original list of acknowledgements. G. Bruce Chapman, now of the University of Toronto, and I talked much of serious ethics and political philosophy when I first arrived at Cambridge in 1976. And in 1980 in Blacksburg, Anil Lal, then a graduate student and house-painter, borrowed my copy of Bambrough’s work, read it, and later made a comment on the metaphysics of John Wisdom which allowed me to see things more clearly.

Ballygunge, Kolkata,
April 7 2007″

No Marxist MBAs? An amicus curiae brief for the Honourable High Court

Aren’t there any Marxist MBAs?

by

Subroto Roy

First published in The Statesman, August 29 2007, Frontpage comment,

The West Bengal Government and Tata Motors have come into what appears to be a most bizarre financial agreement regarding 645.67 acres of agricultural land in Singur. What we are told from court documents submitted on August 27 by Tata’s counsel Mr Samaraditya Pal to the Honourable Division Bench of the Chief Justice Mr SS Nijjar and Mr Justice Pinaki Chandra Ghose is that a complicated schedule of payments is being planned for 90 years.

First there is a plan for 30 years with changes occurring every five years, then there is a plan for another 30 years with changes occurring every ten years, and finally there is a plan for the last 30 years with no changes occurring at all. 90 years is a very long time. A child born today will likely not be alive when this agreement comes to end though his/her grandchildren could be.
Tata Motors itself is hardly today what it was ten years ago and is unlikely to be the same corporate body 50 or 90 years from now. The political entities known as West Bengal or for that matter the Republic of India itself may well be very different in 2047, one hundred years after Independence, let alone in 2097 when this purported agreement shall end. 90 years ago the Ford Motor Company was mass-producing its famous Model-T – any product that Tata Motors produces at Singur today is hardly going to be the same 90 years from now. Our great grand children may look back at all this when the agreement ends and say it all looks pretty ridiculous in retrospect.

Even so, the numbers that have been now released to the Honourable Court allow some simple calculations to take place. The first point is that a payment made in 2007 cannot be added directly to a payment made in 2008 or to one in 2009, etc. It is meaningless to do so. However, if, say, Rs 1000 is paid in each of these years, and the market interest-rate is, say, 10%, what we may do is add Rs. 1000 with Rs. 1000/(1.1) with Rs. 1000/(1.1) squared to obtain a summable stream of Rs. 1000+Rs.909+Rs826 = Rs. 2735.
That sum of Rs 2735 is the present-value of the stream of three payments of Rs 1000 in each of three years given a constant interest-rate of 10%. On such a basis, given the payment-structure stated to the Honourable Court by Tata Motors, and assuming a constant interest-rate of 8% per annum in each year for the next 90 years, the present-value of all the payments to be made by Tata to West Bengal for the 645.67 acres of Singur land comes to Rs. 274.13 million (Rs. 27.413 crore), or a price of about Rs. 0.4246 million (Rs. 4.246 lakh) per acre. That is the effective market price of the land as valued in the contract, assuming a constant interest-rate of, say, 8%. (If a variable market-determined interest-rate had been used e.g. some rate added to the London InterBank Offer Rate in a given year, we could not make such a calculation today.)

If we further assume that the value of paper-money relative to land and goods and services in general may itself deteriorate through inflation, this figure would change. If, for example, we assume a low rate of inflation of 4% per annum for each of 90 years, that would mean the relevant interest-rate to discount the stream of payments would have to be 8%+4% = 12%. On that assumption, the present value of the entire stream of payments proposed to be made by Tata to West Bengal comes to Rs. 140 million in current rupees, and the price per acre of land becomes Rs 0.217 million or Rs. 2.17 lakhs. If the rate of inflation was high, say 10% per annum, the present value becomes Rs. 81.7 million and the price per acre of land being paid by Tata Motors is Rs 0.126 million or Rs. 1.26 lakhs. In other words, the higher the rate of paper-money inflation that occurs in the future, the cheaper Tata has obtained the land (and, conversely, the worse off the original peasant owners of the land who have been left with paper money paid to them by the West Bengal Government).

The point is also clear that the higher the rate at which one discounts the future, the lower shall be the present-value of the land. And also the higher this discount-rate, the more irrelevant the future becomes to present decision-making.

It is astonishing that neither Tata Motors’ high-powered MBA embellished management cadre nor anyone entrenched in the Marxist academic or policy establishment of West Bengal seems to have made such obvious calculations for the Honourable Court to understand things easily. Instead they have “added” the total payments to be made “raw” and said that some Rs. 8.558 billion (Rs. 855.8 crores) is due to be paid over 90 years – a meaningless statement because no such addition over time makes any financial sense at all. Are there no Marxist MBAs, or are all MBAs being mistaught the basics in their finance-courses?

Milton Friedman: A Man of Reason, 1912-2006

A Man of Reason


Milton Friedman (1912-2006)

 

First published in The Statesman, Perspective Page Nov 22 2006

 

Milton Friedman, who died on 16 November 2006 in San Francisco, was without a doubt the greatest economist after John Maynard Keynes. Before Keynes, great 20th century economists included Alfred Marshall and Knut Wicksell, while Keynes’s contemporaries included Irving Fisher, AC Pigou and many others. Keynes was followed by his younger critic FA Hayek, but Hayek is remembered less for his technical economics as for his criticism of “socialist economics” and contributions to politics. Milton Friedman more than anyone else was Keynes’s successor in economics (and in applied macroeconomics in particular), in the same way David Ricardo had been the successor of Adam Smith. Ricardo disagreed with Smith and Friedman disagreed with Keynes, but the impact of each on the direction and course both of economics and of the world in which they lived was similar in size and scope.

 

Friedman’s impact on the contemporary world may have been largest through his design and advocacy as early as 1953 of the system of floating exchange-rates. In the early 1970s, when the Bretton Woods system of adjustable fixed exchange-rates collapsed and Friedman’s friend and colleague George P. Shultz was US Treasury Secretary in the Nixon Administration, the international monetary system started to become of the kind Friedman had described two decades earlier. Equally large was Friedman’s worldwide impact in re-establishing concern about the frequent cause of macroeconomic inflation being money supply growth rates well above real income growth rates. All contemporary talk of “inflation targeting” among macroeconomic policy-makers since the 1980s has its roots in Friedman’s December 1967 presidential address to the American Economic Association. His main empirical disagreement with Keynes and the Keynesians lay in his belief that people held the intrinsically worthless tokens known as “money” largely in order to expedite their transactions and not as a store of value – hence the “demand for money” was a function mostly of income and not of interest rates, contrary to what Keynes had suggested in his 1930s analysis of “Depression Economics”. It is in this sense that Friedman restored the traditional “quantity theory” as being a specific theory of the demand for money.

 

Friedman’s main descriptive work lay in the monumental Monetary History of the United States he co-authored with Anna J. Schwartz, which suggested drastic contractions of the money supply had contributed to the Great Depression in America. Friedman made innumerable smaller contributions too, the most prominent and foresighted of which had to do with advocating larger parental choice in the public finance of their children’s school education via the use of “vouchers”. The modern Friedman Foundation has that as its main focus of philanthropy. The emphasis on greater individual choice in school education exemplified Friedman’s commitments both to individual freedom and the notion of investment in human capital.

 

Friedman had significant influences upon several non-Western countries too, most prominently India and China, besides a grossly misreported episode in Chile. As described in his autobiography with his wife Rose, Two Lucky People (Chicago 1998), Friedman spent six months in India in 1955 at the Government of India’s invitation during the formulation of the Second Five Year Plan. His work done for the Government of India came to be suppressed for the next 34 years. Peter Bauer had told me during my doctoral work at Cambridge in the late 1970s of the existence of a Friedman memorandum, and N. Georgescu-Roegen told me the same in America in 1980, adding that Friedman had been almost insulted publicly by VKRV Rao at the time after giving a lecture to students on his analysis of India’s problems.

 

When Friedman and I met in 1984, I asked him for the memorandum and he sent me two documents. The main one dated November 1955 I published in Hawaii on 21 May 1989 during a project on a proposed Indian “perestroika” (which contributed to the origins of the 1991 reform through Rajiv Gandhi), and was later published in Delhi in Foundations of India’s Political Economy: Towards an Agenda for the 1990s, edited by myself and WE James.

 

The other document on Mahalanobis is published in The Statesman today for the first time, though there has been an Internet copy floating around for a few years. The Friedmans’ autobiography quoted what I said in 1989 about the 1955 memorandum and may be repeated: “The aims of economic policy (in India) were to create conditions for rapid increase in levels of income and consumption for the mass of the people, and these aims were shared by everyone from PC Mahalanobis to Milton Friedman. The means recommended were different. Mahalanobis advocated a leading role for the state and an emphasis on the growth of physical capital. Friedman advocated a necessary but clearly limited role for the state, and placed on the agenda large-scale investment in the stock of human capital, encouragement of domestic competition, steady and predictable monetary growth, and a flexible exchange rate for the rupee as a convertible hard currency, which would have entailed also an open competitive position in the world economy… If such an alternative had been more thoroughly discussed at the time, the optimal role of the state in India today, as well as the optimum complementarity between human capital and physical capital, may have been more easily determined.”

 

A few months before attending my Hawaii conference on India, Friedman had been in China, and his memorandum to Communist Party General Secretary Zhao Ziyang and two-hour dialogue of 19 September 1988 with him are now classics republished in the 1998 autobiography. Also republished there are all documents relating to Friedman’s six-day academic visit to Chile in March 1975 and his correspondence with General Pinochet, which speak for themselves and make clear Friedman had nothing to do with that regime other than offer his opinion when asked about how to reduce Chile’s hyperinflation at the time.

 

My association with Milton has been the zenith of my engagement with academic economics, with e-mails exchanged as recently as September. I was a doctoral student of his bitter enemy yet for over two decades he not only treated me with unfailing courtesy and affection, he supported me in lonely righteous battles: doing for me what he said he had never done before, which was to stand as an expert witness in a United States Federal Court. I will miss him much though I know that he, as a man of reason, would not have wished me to.

Subroto Roy

Indian Money and Credit

Indian Money & Credit
by
Subroto Roy
First published in The Sunday Statesman, August 6 2006, Editorial Page Special Article

One rural household may lend another rural household 10 kg or 100 kg of grain or seed for a short time. When it does, it expects to receive back a little more than the amount lent ~ even if that little amount is in services or in plain goodwill among friends or neighbours. That extra amount is “real interest”, and the percentage of its value relative to the whole is the “real rate of interest”. So if 10 kg of grain are lent for two weeks and 11 kg are returned, an implicit real rate of interest of 10 per cent has been paid over that short period. The future is always less valuable than the present in the sense that 10 kg of grain today is worth something more than the prospect of the same 10 kg of grain tomorrow.

But loans may be made in terms of money rather than real units of grain, thus the change in the value of money over the period of the loan becomes relevant. If a loan of Rs 100,000 is made by a bank to a borrower for one year at a simple interest rate of 13 per cent per annum, and the value of money then declines at 8 per cent over the year, the debtor is paying real interest of just about 13 per cent-8 per cent = 5 per cent. The Yale economist Irving Fisher described how this monetary rate of interest equals the real rate of interest plus the rate of monetary inflation, while the great Swedish economist Knut Wicksell predicted inflation if the monetary rate fell below the real rate, and vice versa.

And there is another consideration too. A new cycle-rickshaw costs about Rs 5,000. A rickshaw driver who does not own his own machine has to pay the owner of the rickshaw a fixed rental of about Rs 15 per day. Now a government policy may want to see more cycle-rickshaw drivers owning their own machines, and allocate bank-credit accordingly. But some fraction of the drivers are alcoholics and hence are bad credit-risks, while others are industrious, have strong family lives and are good credit-risks. If a creditor is unable to distinguish between who is an alcoholic and who is not, credit terms will tend towards subsidising the alcoholic and taxing the industrious.

On the other hand, a creditor who knows each debtor individually will also know their credit-risks, and price individual loans to them accordingly. India’s credit markets, both rural and urban, have been segmented always into “formal” and “informal”, and remain so despite (or perhaps because of) much government intervention in recent decades.

Banks and the Reserve Bank of India operate in formal financial markets, but the informal credit market is where the real action is. For example, a mosaic-machine used in the construction business costs Rs 15,000 brand new and gets to be rented out at the rate of Rs 150 per day.

Someone with access to formal sector bank loans at say 13 per cent per annum, might borrow the Rs 15,000, buy a machine, rent it out, break-even within a few months and make a whopping profit afterwards. Everyone would thus hunger after subsidised formal sector bank loans, and these would be rationed quickly and then come to be allocated to people known to bank officials (like their own friends and relatives).

Rates of return on capital, i.e. real profits, are and always have been massively high in India, and that is what is to be expected because capital, both machinery and finance, is relatively scarce as a factor of production. Rates of return on labour, i.e. real wages, are on the other hand relatively low in India thanks to our vast population. For these reasons we have had for three centuries foreigners coming to India to invest their capital in enterprise and make a profit, while Indians have emigrated all over the world from Fiji to Britain to America in search of higher wages.

Now all of this is very elementary reasoning well known to serious monetary economists, yet it seems to have always escaped India’s monetary and fiscal decision-makers. For example, just the other day, the Finance Minister said in Parliament that all rural banks had been instructed to lend farmers credit at a 7 per cent (monetary) rate of interest, and failure to do so would lead to  punishment. By the rickshaw example (in fact many cycle-rickshaw drivers are also marginal farmers), the FM did not wish to, and of course cannot in practice, distinguish between good and bad credit-risks among the recipients of such loans. If the value of money is declining by, say, 8 per cent per annum, a 7 per cent monetary rate is equivalent to a minus 1 per cent real rate. i.e., the FM would have done some Humpty Dumpty economics and caused the future prospect of holding Rs 1,000 tomorrow to be more and not less valuable than the certainty of holding Rs 1,000 today. It is inevitable there will be credit-rationing when credit is so massively subsidised, so the typical borrowing farmer will get some little fraction of his credit-needs at the official government price of 7 per cent per annum and then have to get the bulk of his credit-needs fulfilled in the informal market ~ at a price perhaps of 1 per cent-5 per cent PER DAY! The FM promising in his Budget to subsidise farm credit sounds nice on TV but may be wholly futile as a way of stopping farmers’ suicides.

The same kind of Humpty Dumpty monetary economics has been religiously pursued by the Reserve Bank of India for decades upon directions from its owner and master, the Finance Ministry ~ which in turn has always meekly followed the dictates of India’s unreasonable politicians of all parties. Formal sector interest rates in India have been for decades so artificially lowered that even if we use official figures measuring inflation, this leads to real interest rates being lower in capital-scarce India than in the capital-rich West! (See graphs).  Negative or near-zero real interest rates in India’s formal financial sector coexisting with massively high profit rates in informal credit markets point to continuous processes of low risk profits being made by arbitrage between the two. That is why the organised private and public sectors seem so pleased with official credit policies ~ while every borrower in the informal credit markets always has suicide not far from his/her mind.

Other than Dr Rangarajan who once mentioned it, we have never had an RBI Governor who has wished to see the Reserve Bank of India constitutionally independent of the Government of the day, and hence dedicated to restoring the integrity of India’s money. Playing with the repo rate or other short term monetary rates is fun and makes the RBI think it is doing something as important as the US or UK central banks. Certainly the upward trend in such short term rates over the last few months is better than the nonsensical flip-flops previously. But it is small potatoes compared to the really giant variables which are all fiscal and not monetary in India. For example, Sonia Gandhi (as advised by another naturalized Indian, Jean Drèze, disciple of the Non-Resident Amartya Sen) insisted on a massive “Rural Employment Guarantee”; Manmohan Singh and Pranab Mukherjee have insisted on massive foreign weapons’ purchases and government wage increases; Praful Patel on massive foreign aircraft purchases; Arjun Sengupta on Scandinavian welfare benefits; Montek Ahluwalia on nuclear reactor purchases (so South Delhi will be able at least to run its ACs in 20 years’ time). All this adds endlessly to the stock of government paper being held as bank-assets, while the currency remains inconvertible (See e.g. The Statesman 30 October 2005, 6-8 January, 23 April 2006).The RSS/BJP and JNU/Left have been equally bereft of serious thought.

Tell any suicidal farmer that the Government of India has been borrowing larger and larger amounts every year just to pay interest on previously incurred debts; it may make him realise there are famous and powerful people who are even more unwise than himself and amount to effective suicide-prevention therapy. But do not tell him that they unlike himself have been playing with public money ~ or you may have the opposite effect.

Indian Money and Banking

ON MONEY & BANKING

 

The deficit-finance of all public institutions flow like rivulets into the swamp that is our Public Debt, managed by the RBI

 

by

 

SUBROTO ROY

 

First published in The Sunday Statesman, Editorial Page, Special Article

April 23 2006

 

THE Reserve Bank of India, like all other public institutions, belongs to all of India’s people. There has been a tendency with every national institution, whether the ONGC or nationalised banks like SBI, or the IITs and IIMs or Air India and Indian Airlines or the Railways, Army, Navy, Air Force, IAS, IFS, Central Secretariat etc, even Parliament and State legislatures, to think that its assets, both tangible and intangible, are to serve the interests mainly of its employees, whether of Class 1, 2, 3, or 4. In fact, the assets of all such national institutions belong to all Indians: all one thousand million of us, from nameless street children and rural mendicants onwards. The body of our whole Indian citizenry own any and all such public institutions, and their employees are merely our “agents”, literally “public servants” who get paid salaries and perquisites out of public revenues. The task of managing and controlling these vast cohorts of public servants is a stupendous one of democratic politics and public administration. As a country we have never been very adept at it, indeed we often have been hopelessly incompetent. Without proper control and management, employees of national institutions have naturally tended to take over control of these assets, shifting liabilities onto the shoulders and budgets of the anonymous diffused body of citizenry who are supposed to be their masters. The public’s servants have tended to become the masters of the public’s assets and resources.

 

The RBI, as the nation’s Central Bank, has a unique position because its principal task is to establish and maintain the integrity of our money and banking system. The deficit-finance of all public institutions flow like rivulets into the swamp that is our Public Debt, managed by the RBI.

 

Money as such has no “intrinsic” worth. All the paper rupees, dollars, pounds, euros, yen in the world have less “intrinsic” usefulness than a hairpin or a button or a pair of shoelaces. Hairpins, buttons and shoelaces at least keep your hair, your shirt or your shoes together ~ the paper of paper money can be at best used to roll cigarettes perhaps. Yet paper money comes to be needed and is valued by everyone in every country ~ from street children upwards to Mr Premji, Mr Gates and Mr Mittal. Everyone accepts paper money as wages in exchange for his/her work, and then plans to use that same paper to buy food, shelter, clothing and other necessities with. I.e., we accept paper money for a short time believing we can use it to acquire useful things with. It has no intrinsic worth yet it is universally valued because everyone believes it will be accepted by everyone else in exchange for real goods and services which are in fact useful and conducive to life. The use of paper money depends on a fine and invisible web of collective trust permeating throughout the economy.

 

Banks arose due to the increasing complexity of modern economies in the last six hundred years. Paper currency was then supplemented in commerce by “deposits”, so that a transaction between two persons need not involve turnover of cash but can come to be accomplished by adjustment in their respective deposits with their banks. This vastly increased the quantum of trust ordinary people placed in the system of normal transactions, since they had to now believe not just in the exchangeability of paper money but also in the viability of the banks where they had placed their deposits. Currency plus Bank Deposits constitute what is called the “Money Supply”, and its controller is the RBI.

 

Our collective trust in money and banking is in and of itself something with economic value, which commercial banks are in a unique position to exploit. Banks can usually bet that all their customers will not demand their deposits at the same time, and so they are able to lend out as loans a very large fraction of what they have received as deposits from the public. Making such loans in turn causes the recipients of the loans to make new deposits (of what they have borrowed) in yet other banks, and this in turn acts as a signal to the receiving banks to make even more loans. Hence a process of “redeposit” or “deposit multiplication” occurs in any banking system where only a fraction of deposits is legally required to be kept as reserves by the bank. A Central Bank like the RBI then has the duty to see none of this gets out of hand: that while individual banks are acting to make profitable investments on the capital risked by a bank’s owners, they are, as a collective body, creating enough but not excessive credit to meet the needs of business.

 

In India, most banks came to be nationalised decades ago by Indira Gandhi on advice of P. N. Haksar, the mentor of Dr Manmohan Singh in his career as an economic bureaucrat. Whatever original capital they have had also arises from the public exchequer, and all their employees are effectively “public servants” under the Ministry of Finance. We have not been hearing from the RBI anything about the deleterious effects of this continuing state of affairs.

 

The RBI’s functions include managing the “Public Debt”, which stands today at perhaps Rs. 30 trillion (1 trillion= 1 lakh crore), on which interest of perhaps Rs 2-3 trillion must be paid by the Union and State Governments every year to those holding the debt (mostly the nationalised banking system under duress from the RBI). Why the stock-market has been doing so “well” is because it has been like an athlete on steroids. A stock market is supposed to be risky while a debt market is supposed to be safe. Our Government’s fiscal and monetary behaviour over decades has caused the formal debt market to yield negative returns, and so the stock-market has become relatively lucrative despite its risky nature.

 

It is also the RBI’s task to manage the country’s foreign exchange “reserves”, i.e. the residual balance left after all forex outgoings from purchases of imports (like petroleum or weapons) and payments of interest on or repayment of foreign loans have been subtracted from flows of incoming forex arising from export revenues, emigrants’ remittances, and new foreign loans and investments. These “reserves” do not belong to the Government or the nation in the same way tax-revenues belong to the Consolidated Fund of India. It was a shocking conceptual error of the Manmohan Singh Government’s most prominent economic bureaucrat to fail to see this and to suggest forex reserves could be used for “infrastructure” development. For the business press to get excited about forex reserves being at this or that level is also misleading, since high reserves may or may not indicate a better financial position just as a heavily indebted man may or may not be in a bad position depending on what kind of use he has made of his debts.

 

We have not been hearing of any of these matters from the RBI under Dr Y. V. Reddy. Instead, the one definite number we have received last week is that the RBI, under behest of its master, the Ministry of Finance, has been causing the Money Supply to grow at something like 15%. The Government’s apologists would like us to believe that this gets distributed between real economic growth in the region of 10% and inflation in the region of 5%. But for all that anybody really knows, it may be that real growth is at 5% and inflation is at 10%! Ask yourself if what you bought last year for Rs 1000 costs Rs 1050 or Rs. 1100 this year. Your guess may be as good as the Government’s.

The Dream Team: A Critique

The Dream Team: A Critique

by Subroto Roy

First published in The Statesman and The Sunday Statesman, Editorial Page Special Article, January 6,7,8, 2006

(Author’s Note: Within a few weeks of this article appearing, the Dream Team’s leaders appointed the so-called Tarapore 2 committee to look into convertibility — which ended up recommending what I have since called the “false convertibility” the RBI is presently engaged in. This article may be most profitably read along with other work republished here: “Rajiv Gandhi and the Origins of India’s 1991 Economic Reform”, “Three Memoranda to Rajiv Gandhi”, “”Indian Money & Banking”, “Indian Money & Credit” , “India’s Macroeconomics”, “Fiscal Instability”, “Fallacious Finance”, “India’s Trade and Payments”, “Our Policy Process”, “Against Quackery”, “Indian Inflation”, etc)

1. New Delhi’s Consensus: Manmohantekidambaromics

Dr Manmohan Singh has spoken of how pleasantly surprised he was to be made Finance Minister in July 1991 by PV Narasimha Rao. Dr Singh was an academic before becoming a government economic official in the late 1960s, rising to the high office of Reserve Bank Governor in the 1980s. Mr Montek Singh Ahluwalia now refers to him as “my boss” and had been his Finance Secretary earlier. Mr Ahluwalia was a notable official in the MacNamara World Bank before being inducted a senior government official in 1984. Mr P Chidambaram was PVNR’s Commerce Minister, and later became Finance Minister in the Deve Gowda and Gujral Governments. Mr Chidamabaram is a Supreme Court advocate with an MBA from Harvard’s Business School. During 1998-2004, Dr Singh and Mr Chidambaram were in Opposition but Mr Ahluwalia was Member-Secretary of the Vajpayee Planning Commission. Since coming together again in Sonia Gandhi’s United Progressive Alliance, they have been flatteringly named the “Dream Team” by India’s pink business newspapers, a term originally referring to some top American basketball players.

Based on pronouncements, publications and positions held, other members or associates of the “Dream Team” include Reserve Bank Governor Dr YV Reddy; his predecessor Dr Bimal Jalan; former PMO official Mr NK Singh, IAS; Chief Economic Advisers Dr Shankar Acharya and Dr Ashok Lahiri; RBI Deputy Governor Dr Rakesh Mohan; and others like Dr Arvind Virmani, Dr Isher Ahluwalia, Dr Parthasarathi Shome, Dr Vijay Khelkar, Dr Ashok Desai, Dr Suman Bery, Dr Surjit Bhalla, Dr Amaresh Bagchi, Dr Govind Rao. Honorary members include Mr Jaswant Singh, Mr Yashwant Sinha, Mr KC Pant and Dr Arun Shourie, all economic ministers during the Vajpayee premiership. Institutional members include industry chambers like CII and FICCI representing “Big Business”, and unionised “Big Labour” represented by the CPI, CPI(M) and prominent academics of JNU. Mr Mani Shankar Aiyar joins the Dream Team with his opinion that a gas pipeline is “necessary for the eradication of poverty in India”. Mr Jairam Ramesh explicitly claimed authoring the 1991 reform with Mr Pranab Mukherjee and both must be members (indeed the latter as Finance Minister once had been Dr Singh’s boss). Dr Arjun Sengupta has claimed Indira Gandhi started the reforms, and he may be a member too. External members include Dr Jagdish Bhagwati, Dr. TN Srinivasan, Dr Meghnad Desai, Dr Vijay Joshi, Mr Ian Little, Dr Anne O. Krueger, Dr John Williamson, IMF Head Dr R Rato, and many foreign bank analysts who deal in Bombay’s markets. Harvard’s Dr Larry Summers joins with his statement while US Treasury Secretary in January 2000 that a 10% economic growth rate for India was feasible. His Harvard colleague Dr Amartya Sen — through disciples like Dr Jean Dreze (adviser to Sonia Gandhi on rural employment) — must be an ex officio member; as an old friend, the Prime Minister launched Dr Sen’s recent book while the latter has marked Dr Singh at 80% as PM. Media associates of the Dream Team include editors like Mr Aroon Purie, Mr Vinod Mehta, Dr Prannoy Roy, Mr TN Ninan, Mr Vir Sanghvi and Mr Shekhar Gupta, as well as the giddy young anchors of what passes for news and financial analysis on cable TV.

This illustrious set of politicians, government officials, economists, journalists and many others have come to define what may be called the “New Delhi Consensus” on contemporary India’s economic policy. While it is unnecessary everyone agree to the same extent on every aspect — indeed on economic policy the differences between the Sonia UPA and Vajpayee NDA have had to do with emphasis on different aspects, each side urging “consensus” upon the other — the main factual and evaluative claims and policy-prescriptions of the New Delhi Consensus may be summarised as follows:

A: “The Narasimha Rao Government in July 1991 found India facing a grave balance of payments crisis with foreign exchange reserves being very low.”

B: “A major cause was the 1990-1991 Gulf War, in its impact as an exogenous shock on Indian migrant workers and oil prices.”

C: “The Dream Team averted a macroeconomic crisis through “structural adjustment” carried out with help of the IMF and World Bank; hence too, India was unaffected by the 1997 ‘Asian crisis'”.

D: “The PVNR, Deve Gowda, Gujral and Vajpayee Governments removed the notorious license-quota-permit Raj.”

E: “India’s measurable real economic growth per capita has been raised from 3% or lower to 7% or more.”

F: “Foreign direct investment has been, relative to earlier times, flooding into India, attracted by lower wages and rents, especially in new industries using information technology.”

G: “Foreign financial investment has been flooding into India too, attracted by India’s increasingly liberalised capital markets, especially a liberalised current account of the balance of payments.”

H: “The apparent boom in Bombay’s stock market and relatively large foreign exchange reserves bear witness to the confidence foreign and domestic investors place in India’s prospects.”

I: “The critical constraint to India’s future prosperity is its “infrastructure” which is far below what foreign investors are used to in other countries elsewhere in Asia.”

J: “It follows that massive, indeed gargantuan, investments in highways, ports, airports, aircraft, city-flyovers, housing-estates, power-projects, energy exploration, gas pipelines, etc, out of government and private resources, domestic and foreign, is necessary to remove remaining “bottlenecks” to further prosperity for India’s masses, and these physical constructions will cause India’s economy to finally ‘take off’.”

K: “India’s savings rate (like China’s) is exceptionally high as is observable from vast expansion of bank-deposits, and these high (presumed) savings, along with foreign savings, will absorb the gargantuan investment in “infrastructure” without inflation.”

L: “Before the gargantuan macroeconomic investments bear the fruits of prosperity, equally large direct transfer payments also must be made from the Government to prevent mass hunger and/or raise nominal incomes across rural India, while existing input or other subsidies to producers, especially farmers, also must continue.”

M: “While private sector participants may increasingly compete via imports or as new entrants in industries where the public sector has been dominant, no bankruptcy or privatisation must be allowed to occur or be seen to occur which does not provide public sector workers and officials with golden parachutes.”

Overall, the New Delhi Consensus paints a picture of India’s economy on an immensely productive trajectory as led by Government partnered by Big Business and Big Labour, with the English-speaking intellectuals of the Dream Team in the vanguard as they fly between exotic conferences and international commercial deals. An endless flow of foreign businessmen and politicians streaming through Bangalore, Hyderabad, five-star hotels or photo-opportunities with the PM, followed by official visits abroad to sign big-ticket purchases like arms or aircraft, reinforce an impression that all is fine economically, and modern India is on the move. Previously rare foreign products have become commonplace in India’s markets, streets and television-channels, and a new materialist spirit, supposedly of capitalism, is captured by the smug slogan yeh dil mange more (this heart craves more) as well as the more plaintive cry pardesi jana nahin, mujhe chhorke (foreigner, please don’t leave me).

2. Money, Convertibility, Inflationary Deficit Financing

India’s Rupee became inconvertible in 1942 when the British imposed exchange controls over the Sterling-Area. After 1947 independent India and Pakistan, in name of “planned” economic development, greatly widened this war-time regime – despite the fact they were at war now only with one another over Jammu & Kashmir and, oddly enough, formed an economic union until 1951 with their currencies remaining freely convertible with each other.

On May 29 1984, the present author’s Pricing, Planning and Politics: A Study of Economic Distortions in India proposed in London that the Indian Rupee become a convertible hard currency again — the first time liberal economics had been suggested for India since BR Shenoy’s critique of the Second Five Year Plan (a fact attracting an editorial of The Times). The simple litmus test whether believers in the New Delhi Consensus have or have not the courage of their stated convictions – i.e., whether what they have been saying is, in its empirical fundamentals, more signal or noise, more reality or rhetorical propaganda – would be to carry through that proposal made 21 years ago. The Dream Team have had more than enough political power to undertake this, and it remains the one measure necessary for them to demonstrate to India’s people and the world that the exuberant confidence they have been promoting in their model of India’s economy and its prospects is not spurious.

What does convertibility entail?  For a decade now, India has had limited ease of availability of foreign exchange for traders, students and tourists. Indeed some senior Government monetary economists believe there is convertibility already except forex dealers are being allowed “one-way” and not “two-way” quotes! That is wrong. The Government since 1942 has requisitioned at the border all foreign exchange earned by exporters or received as loans or investment — allocating these first to pay interest and amortisation on the country’s foreign debt, then to make its own weapons and other purchases abroad, then to release by ration what remains to private traders, students, tourists et al. Current account liberalisation has meant the last of these categories has been relaxed, especially by removal of some import quotas. What a convertible Rupee would mean is far more profound. It would allow any citizen to hold and save an Indian money that was exchangeable freely (i.e. without Government hindrance) into moneys of other countries. Full convertibility would mean all the paper money, bank deposits and rupee-denominated nominal assets held by ordinary people in India becomes, overnight, exchangeable without hindrance into dollars, yens, pounds or euros held anywhere (although not of course at the “one-way” rates quoted today).

Now money is a most peculiar human institution. Paper money is intrinsically worthless but all of India’s 1,000 million people (from street children onwards) have need to hold it temporarily to expedite their individual transactions of buying and selling real goods and services. Money also acts as a repository of value over time and unit of account or measure of economic value. While demand to hold such intrinsically worthless paper is universal, its supply is a Government monopoly. Because Government accepts obligations owed to it in terms of the fiat money it has itself issued, the otherwise worthless paper comes to possess value in exchange. Because Government controls its supply, money also can be abused easily enough as a technique of invisible taxation via inflation.

With convertibility in India, the quantity of currency and other paper assets like public debt instruments representing fiscal decisions of India’s Union and State Governments, will have to start to compete with those produced by other governments. Just as India’s long-jumpers and tennis-players must compete with the world’s best if they are to establish and sustain their athletic reputations, so India’s fiscal and monetary decisions (i.e. about government spending and revenues, interest-rates and money supply growth) will have to start competing in the world’s financial markets with those of the EU, USA, Japan, Switzerland, ASEAN etc.

The average family in rural Madhya Pradesh who may wish, for whatever personal reason, to liquidate rupee-denominated assets and buy instead Canadian, Swiss or Japanese Government debt, or mutual fund shares in New York, Frankfurt or Singapore, would not be hindered by India’s Government from doing so. They would become as free as the swankiest NRI jet-setters have been for years (like many members of the New Delhi Consensus and their grown children abroad).  Scores of millions of ordinary Indians unconnected with Big Business or Big Labour, neither among the 18 million people in government nor the 12 million in the organised private sector, would become free to hold any portfolio of assets they chose in global markets (small as any given individual portfolio may be in value). Like all those glamorous NRIs, every Indian would be able to hold dollar or Swiss Franc deposit accounts at the local neighbourhood bank. Hawala operators worldwide would become redundant. Ordinary citizens could choose to hold foreign shares, real-estate or travellers’ cheques as assets just as they now choose jewellery before a wedding. The Indian Rupee, after more than 65 years, would once again become as good as all the proverbial gold in Fort Knox.

When added up, the new demand of India’s anonymous masses to hold foreign rather than Rupee-denominated assets will certainly make the Rupee decline in price in world markets. But — if the implicit model of India’s economy promoted by the Dream Team is based on correctly ascertained empirical facts — foreign and domestic investor confidence should suffice for countervailing tendencies to keep India’s financial and banking system stable under convertibility. Not only would India’s people be able to use and save a currency of integrity, the allocation of real resources would also improve in efficiency as distortions would be reduced in the signalling function of domestic relative prices compared to world relative prices. An honest Rupee freely priced in world markets at, say, 90 per dollar, would cause very different real microeconomic decisions of Government and private producers and consumers (e.g., with respect to weapons’ purchases or domestic transportation, given petroleum and jet fuel imports) than a semi-artificial Rupee at 45 per dollar which forcibly an inconvertible asset in global markets. A fully convertible Rupee will cause economic and political decisions in the country more consistent with word realities.

Why the Rupee is not going to be made convertible in the foreseeable future – or why, in India’s present fiscal circumstances if it was, it would be imprudent to do so – is because, contrary to the immense optimism promoted by the Dream Team about their own deeds since 1991, they have in fact been causing India’s monetary economy to skate on the thinnest of thin ice. Put another way, a house of cards has been constructed whose cornerstone constitutes that most unscientific anti-economic of assumptions, the “free lunch”: that something can be had for nothing, that real growth in average consumption levels of the masses of ordinary households of rural and urban India can meaningfully come about by nominal paper-money creation accompanied by verbal exhortation, hocus-pocus or abracadabra from policy-makers and their friends in Big Business, Big Labour and the media. (Lest half-remembered inanities about “orthodox economics” come to be mouthed, Maynard Keynes’s 1936 book was about specific circumstances in Western economies during the Depression and it is unwise to extend its presumptions to unintended situations.)

3. Rajiv Gandhi and Perestroika Project

On 25 May 2002, India’s newspapers reported “PV Narasimha Rao and Manmohan Singh lost their place in Congress history as architects of economic reforms as the Congress High Command sponsored an amendment to a resolution that had laid credit at the duo’s door. The motion was moved by…. Digvijay Singh asserting that the reforms were a brainchild of the late Rajiv Gandhi and that the Rao-Singh combine had simply nudged the process forward.”

Now Rajiv Gandhi was an airline-pilot and knew no economics. But the origins of the 1991 reform did come about because of an encounter he had, as Opposition Leader and Congress President from September 1990 onwards, with a “perestroika” project for India’s political economy occurring at an American university since 1986 (viz., The Statesman Editorial Page July 31-August 2 1991, now republished here; Freedom First October 2001). In being less than candid in acknowledging the origins of the reform, the Dream Team may have failed to describe accurately the main symptoms of illness that afflicted India before 1991, and have consequently failed to diagnose and prescribe for it correctly ever since.

The Government of India, like many others, has been sorely tempted to finance its extravagant expenditures by abusing its monopoly over paper-money creation. The British taught us how to do this, and in 1941-43 caused the highest inflation rates ever seen in India as a result. Fig. 1 shows this, and also that real growth in India follows as expected the trend-rate of technological progress (having little to do with government policy). Independent India has continually financed budget- deficits by money creation in a process similar to what the British and Americans did in wartime. This became most conspicuous after Indira Gandhi’s bank and insurance nationalisations of 1969-1970. Indeed, among current policy-makers, Pranab Mukherjee, Manmohan Singh, Arjun Sengupta, Montek Singh Ahluwalia, Bimal Jalan, NK Singh, Amaresh Bagchi and Shankar Acharya, were among those governing such macroeconomic processes before 1991 — albeit in absence of the equations that illustrate their nature. Why the Rupee cannot be made an honest, internationally convertible, stable money held with confidence by all Indians today, is because the Dream Team have continued with the same macroeconomics ever since. The personal and political ambitions of the tiniest super-elite that the New Delhi Consensus represent (both personal and political) have depended precisely on gargantuan unending deficit-financing backed by unlimited printing of paper-money, and hence the continuing destruction of the integrity of India’s banking system. A convertible Rupee would allow India’s ordinary people to choose to hold other stores of value available in the world today, like gold or monies issued by foreign governments, and thus force an end to such processes.

Two recent articles in The Statesman (Perspective Page 30 October 2005, Front Page 29 November 2005) outlined India’s financial repression and negative real interest rates (which suffice to explain the present stock market boom the way athletes perform better on steroids), and also how deficits get financed by money creation accompanied by wishful projections of economic growth in an upside down imitation of how macroeconomic policy gets done in the West.

“Narrow Money” consists mostly of hand-to-hand currency. “Broad Money” consists of Narrow Money plus bank-deposits. Modern banking is built on “fractional reserves”, i.e. a system of trust where your bank does not literally hold onto deposits you place there but lends these out again – which causes further deposit expansion because no individual banker can tell whether a new deposit received by it is being caused by the depositor having himself borrowed. As a general rule, bank lending causes further deposit expansion. Why India’s (and China’s) bank deposits have been expanding is not because Indians (or Chinese) are superhuman savers of financial assets in banks but because the Government of India (and China) has for decades compelled (the mostly nationalised) banks to hold vast sums of Government debt on the asset side of their balance-sheets. Thus there has been humongous lending by the banking system to pay for Government expenditures. The Dream Team’s macroeconomics relies entirely on this kind of unending recourse to deficit finance and money creation, causing dry rot to set into banks’ balance sheets (Figs. 2,3, 4).   If the Rupee became convertible, those vast holdings of Government debt by banks would become valued at world prices. The crucial question would be how heavily New York, London and Hong Kong financial markets discounted Indian sovereign debt. If upon convertibility, the asset sides of domestic Indian banks get discounted very heavily by world financial markets, their insolvency upon being valued at international prices could trigger catastrophic repercussions throughout India’s economy. Hence the Rupee cannot be made convertible — and all our present inefficiencies and inequities will continue for ever with New Delhi’s rhetorical propaganda alongside. The capital flight of 10 out of 1000 million Indians will continue, leaving everyone else with the internal and foreign public debts to pay.

4. A Different Strategy had Rajiv Not Been Assassinated

Had Rajiv Gandhi not been assassinated and the perestroika project allowed to take its course, a different strategy would have been chosen. Honest money first demands honest Government and political leadership. It would at the outset have been recognised by Government (and through Government by all India’s people) that the asset-liability, income-expenditure and cash-flow positions of every public entity in the country without exception — of the Union Government, every State and local Government, every public undertaking and project – is abysmal.  Due to entanglement with government financial loans, labour regulations, subsidies, price controls, protection and favouritism, the same holds for the financial positions of vast numbers of firms in the organised private sector. Superimpose on this dismal scene, the bleak situation of the Rule of Law in the country today – where Courts of Justice from highest to lowest suffer terrible abuse receiving pitiable amounts of public resources despite constituting a third and independent branch of India’s Government (while police forces, despite massive expenditure, remain incompetent, high-handed and brutal). What India has needed ever since 1991 is the Rule of Law, total transparency of public information, and the fiercest enforcement of rigorous accounting and audit standards in every government entity and public institution. It is only when budgets and financial positions become sound that ambitious goals can be achieved.

The Dream Team have instead made a fetish of physical construction of “infrastructure”, in some grandiose make-believe dreamworld which says the people of India wish the country to be a superpower. The Dream Team have failed to properly redefine for India’s masses the appropriate fiscal and monetary relationship between State and citizen – i.e. to demarcate public from private domains, and so enhance citizens’ sense of individual responsibility for their own futures, as well as explain and define what government and public institutions can and cannot do to help people’s lives. Grotesque corruption and inefficiency have thus continued to corrode practically all organs, institutions and undertakings of government. Corruption is the transmutation of publicly owned things into private property, while its mirror image, pollution, is the disposal of private wastes into the public domain. Both become vastly more prevalent where property rights between private and public domains remain ill demarcated. What belongs to the individual citizen and what to sovereign India –their rights and obligations to one another – remains fuzzy. Hence corruption and pollution run amuck. The irrational obsession with “infrastructure” is based on bad economics, and has led to profoundly wrong political and financial directions. The Rupee cannot be made an honest stable money because India’s fiscal and monetary situation remains not merely out of control but beyond New Delhi’s proper comprehension and grasp. If and when the Dream Team choose to wake up to India’s macroeconomic realities, a great deal of serious work will need to be done.

 

Posted in Academic economics, Academic research, Accounting and audit, Amartya Sen, Atal Behari Vajpayee, Banking, Big Business and Big Labour, BJP, BR Shenoy, China, Communists, Congress Party, Deposit multiplication, Economic Policy, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of Exchange Rates, Economics of Public Finance, Financial markets, Freedom, Governance, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's credit markets, India's Government economists, India's interest rates, India's savings rate, India's stock and debt markets, India's 1991 Economic Reform, India's agriculture, India's Agriculture & Food, India's balance of payments, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's corruption, India's currency history, India's Democracy, India's Economic History, India's Economy, India's Exports, India's farmers, India's Foreign Exchange Reserves, India's Foreign Trade, India's Industry, India's inflation, India's Jurisprudence, India's Labour Markets, India's Land, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's political lobbyists, India's political parties, India's Politics, India's Polity, India's Public Finance, India's Reserve Bank, India's Revolution, India's Rule of Law, India's State Finances, Indira Gandhi, Inflation, John Maynard Keynes, Macroeconomics, Manmohan Singh, Mendacity in politics, Milton Friedman, Monetary Theory, Political cynicism, Political Economy, Political mendacity, Rajiv Gandhi, Redeposits, University of Hawaii, Unorganised capital markets. Leave a Comment »

Waffle but No Models of Monetary Policy: The RBI and Financial Repression

Waffle but No Models of Monetary Policy:

The RBI and Financial Repression (A Stock Market on Steroids)

by

Subroto Roy
First published in The Statesman, Perspective Page, October 27 2005

If the average Indian citizen feels flummoxed at hearing all the fancy words from official spokesmen and the talking heads on TV and the expensive pink business newspapers — words like “credit offtake”, “liquidity”, “reverse repo rate” “medium term”, “inflation mandate” etc — there is help at hand. It is as likely as not that the purveyors are as flummoxed themselves even while they bandy these terms about in what has been passing for monetary policy in India in recent years. No one has any reliable economic models backed by time-series data to support all the waffle.

Here is an example.

The Government (and specifically the department of the Finance Ministry known as the RBI) will have us believe that the decline in the value of money that has been occurring in India has been at less than 5% per annum.  According to official figures, the average Indian’s purchase of consumable goods and services (food, housing, clothing, transport etc) has been costing more every year by merely 5% at the very most. “What you can buy for Rs. 1000 in one year, you have to pay just Rs 1050 to buy the next year” is what the Government will have us believe. But is anyone’s personal experience of the diminishing value of the domestic currency in India consonant with what official spokesmen say inflation happens to be?

You may well reply that you cannot quite recall what Rs. 1000 bought for you last year. Precisely so. Nor really can anyone else — and that mutual collective loss of memory on the part of the public is something that India’s Government (like many other governments across time and space) has been literally banking on!

Consider a few very simple calculations. Suppose a citizen earns an annual income of Rs. 100,000, and an honest Government told him/her to pay total taxes (from both income and expenditure) of 10%. Clearly Rs. 90,000 would be left for the citizen to spend on his/her various choices of consumption or saving afterwards. If the citizen could assume the value of money was constant (inflation was 0%) then this Rs. 90,000 in one year would buy the same amount of goods and services the next year. But instead we may be living in a political system where the Government officially taxes very lightly, and then dishonestly taxes very heavily by reducing the value of money invisibly, i.e. by inflation. The Government may make the official tax-rate 8% and the actual inflation-rate 15%. The citizen who has Rs. 100,000 will then pay Rs. 8,000 in nominal taxes, but the Rs. 92,000 that is nominally left over for his own consumption and savings, will be made to decline by a further 15% every year.

I.e., a further value of Rs.13,800 (15% of Rs. 92,000) would effectively disappear as an invisible tax from the household budget due to the decline in the value of money, without the household being any wiser. In real terms, the household would have only Rs. 78,200 left.

Where would that extra value disappear to? Clearly, the beneficiary of this invisible extraction of real resources from household budgets would be the only entity that is able to compel the decline in the value of money, namely, the Government, which holds monopoly power to print the pieces of paper (at zero cost) that we call “money” and which we are forced by circumstances to use to expedite our real transactions of goods and services. Roughly speaking, that is how the Government’s own budget deficit gets financed in India.

I.e., the Government of India has its own (massive) expenditures — not merely on things like roads and bridges and military tanks and submarines, but also on ministers and bureaucrats’ wages etc., besides enormous interest payments on past debts incurred by the Government. If the expenditures exceed the visible revenues raised from taxation, as they have done by perhaps 40-50% or more every year for several decades, then the difference gets bridged by printing more paper money over which the Government has had a monopoly.

In India, a total of perhaps 18 million people work in all branches of government and a total of perhaps 12 million people work in the entire organised private sector. That makes 30 million people — with 4 dependants each, that accounts for perhaps 150 million people in the country. That leaves another 850 million people in our population of 1,000 million. Everyone, whether in the 150 million or the 850 million, rich and named or poor and anonymous, has had to use for his/her real transactions of goods and services the paper that the Government produces as money. By causing a decline in the value of this paper every year by x%, everyone who holds this paper, as well as assets denominated in this paper, suffers an invisible taxation of x% without quite realising it. The real revenue the Government of India extracts in this way is what has allowed it to balance its own books.

Furthermore, in the Indian case, what is said to be the inflation-rate and the actual inflation-rate experienced by ordinary people, may well be two different things. The wage-bill of those 18 million people employed by government agencies are linked directly to what official spokesmen say the inflation-rate is, so if the actual rate being experienced was higher and was announced as such, so would have to be that wage-bill and public expenditure! Official spokesmen may tell us the decline in the value of money has been merely 5% or less a year, so what cost Rs. 1000 last year costs Rs. 1050 this year, but as a matter of plain fact, the average citizen’s experience (and memory) may well tell him/her something different – e.g. that what cost Rs. 1000 last year, is in fact costing Rs. 1100 or Rs 1150 or Rs 1200 this year.

So much for the value of money. Now turn to interest-rates.

Here too, the average citizen need not be a rocket-scientist to know that relative to the Western countries, India is labour abundant and is capital scarce. Roughly speaking, that means we have relatively more people and fewer high-rise concrete buildings than the West does. Where then would you expect wages (the price of labour) to be higher, in the West or in India? Clearly in the place where labour is more scarce, namely, the West. And where would you expect interest-rates (the price of capital) to be higher? Clearly, where capital is relatively more scarce, namely India. Such was clearly the case between 1864 and 1926 (Fig. 1). Calcutta bank interest-rates were uniformly higher by about 2-3% than London bank interest-rates (in an era of zero inflation). But something wholly different occurred in the pseudo-socialist India after Independence. E.g., for the years 1975-1992 official Indian interest-rates (adjusted for inflation) were uniformly lower than those in world capital markets represented by the USA (Fig. 2). That remains true today. Not only have the higher wages of the West been attractive to Indians, so seems to be the higher real rates of return on capital! Hence everyone who could fled India – exporting their adult children and their savings abroad , leaving future generations of the anonymous masses with larger public debts to pay the bills in due course. There has been a flight of skilled labour and as well as capital flight from India — are foreigners going to come when they can see the Indian “elite” has fled? Official real interest-rates in India today may well be negative if inflation is  properly measured, which would explain the Bombay stock-market boom the same way an athlete can perform better when on steroids.

Of course in the unorganised capital markets, actual real rates of return have always been higher in India than in the West and remain so. Just ask anyone in the unorganised capital markets how much he has to pay to rent machinery on a daily basis e.g. in the building or construction trade in an Indian city or small town or village. He will quote you rates of 2% or 5% or 10% — per day. Hence there is a massive distortion between what is happening in the unorganised capital markets all over the country and the official money markets the RBI believes itself to be presiding over in Bombay. Until the RBI starts to tell us frankly about this phenomenon, which is known to economists as “financial repression” and which has been caused by runaway Government spending programmes in India for decades, the average citizen may discount all the talk about a few basis points changing here and there on this or that nominal rate, in our pale imitation of what we think the US Fed or the European or British central banks do as policy. The truth is the RBI has never been allowed to model itself after those institutions. Instead, India has had nationalised commercial banking whose pampered inefficient management and staff have allowed the holding of massive amounts of government debt as assets in their balance-sheets, all denominated in an inconvertible controlled currency, and all presided over by a “one-tier” central bank patterned on the old Gosbank of the former Soviet Union, completely subservient to the dictates of the runaway spending that this or that particular set of politicians in power may demand. If there are dreams to be dreamt by honest economists in India, it would be for all that to be made to change.

Philosophy of Economics: On the Scope of Reason in Economic Inquiry (1989)

Apropos *Philosophy of Economics*

“Dr. Roy’s book, Philosophy of Economics, which I have read in galleys, I regard as a masterpiece, not only in economic analysis but in philosophic analysis as well.  Sidney Hook 1989

“I shall have to ponder your rejection of the Humean position which has, I suppose, been central in not only my thought but that of most economists. Candidly, I have never understood what late Wittgenstein was saying, but I have not worked very hard at his work, and perhaps your book will give guidance.” Kenneth J. Arrow, letter to the author, 1989

“I was grateful for the reminder of the passage of Aristotle at which I had not looked for many years and found the criticism of Arrow well justified and important.”  FA Hayek, letter to the author, 1981

“It is an extraordinarily well-written and well-thought through book that shows a wide-ranging capacity and understanding of economics as a discipline in both its macro and micro aspects.” Milton Friedman 1991, Evidence in the US District Court for the District of Hawaii.

“There is no doubt whatsoever that he has a thorough and deep understanding of the major issues that have occupied macroeconomics over the past fifty years…. It is a sign of real understanding that Roy can state these ideas not in terms of jargon, not in terms of equations or technical terms, but in straightforward English using only a minimum of specifically economic terminology. All in all, it is a very knowledgeable and sophisticated performance.”Milton Friedman, 1989

“I had the privilege of reading early drafts of this book. I saw it emerge as an in-depth analysis of the philosophical foundations of economics. It is scholarship of a high order. It is an original contribution of major importance to economic thought.”  Theodore W. Schultz 1989

“The core of Roy’s study is devoted to the nature and grounds of economics as knowledge; it examines the basic intellectual roots of economics. It is cogent and, what is exceedingly rare these days, it is refreshingly lucid…. Roy’s book is in several important respects an original contribution, the most important being his treatment of the philosophical foundations of economics as knowledge. He is all too modest in assessing the importance of his contribution.” Theodore W. Schultz, 1983

“(This) is a very ambitious work directed at the foundations of normative judgements in economics. The author arrives at some conclusions very closely matching those I arrived at some years ago. It is clear, however, that Dr. Roy arrived at his conclusions completely independently. That is all the more piquant to me in that the philosophical underpinning of his work is the development of philosophy in England  from the later Wittgenstein, while mine derives principally from earlier work in the United States by the pragmatists… Dr. Roy reveals a clear understanding of the methodological positivism that invaded economic policy analysis in the thirties and still dominates the literature of economics…. Following Renford Bambrough….he arrives at a position equivalent to that of the American pragmatists, especially Dewey, who insist that the problematic situation provides the starting point for the analysis of a problem even though there are no ultimate starting points. The methodological implication is the support of inquiry as fundamental, avoiding both scepticism and dogmatism. Roy develops his position with a great deal of attention to the ramifications of the problem both in philosophy and in economics. While his treatment of economic questions is ‘from the top down’ so to speak, it reveals a strong command of conventional economic analysis. He writes very well and thinks very clearly. He is certainly not afraid to tackle the big questions. His book reveals a keen mind, ready to pay almost undue respect to his forerunners, but anxious also to achieve originality….”Sidney Stuart Alexander, 1985

“I know that I have to continue to bear the responsibility for things that I wrote nearly fifty years ago.  I am however glad that your attention has been drawn to that passage written much more recently…. building up to what I think is  a coherent point of view very different from that which I took in ’34 and ’39…. concerned with a field not far removed from that you  reach…”   John R Hicks, letter to the author, 1984

“A work altogether well written and admirably clear.”Renford Bambrough, 1985

“I like very much the courage in trying to produce a genuine philosophy of economics. Such a book is badly needed and could be very useful to economists. The fine use made of extensive readings in older as well as contemporary theorists and the splendid choice of quotations would themselves be worth the price of admission. The style maintains a fine level of clarity and emphasis.” Max Black 1985

“The discussion of Arrow’s theorem under unintended interpretations focuses our understanding on what is really fundamental to this famous result…. Roy has obviously thought much harder about the foundational and methodological problems in economics than most of his fellow-economists.” Anonymous

“Roy’s platonist view of what is the purpose of government is very odd at this stage of history. He seems to suppose that there is an objectively best state of affairs which we must simply discover. The more urgent issue in politics is generally not that of knowing what is the best thing to do but of dealing with conflicting interests. Conflict of interests is not merely disagreement over facts.” Anonymous

“The author has performed a very valuable service for economists interested in the philosophical problems and positions discussed. He has not misrepresented the positions he discusses and his account of various issues and different positions on those issues is philosophically adequate. Many economists will be stimulated as a result of reading this work to reconsider their own positions on the issues Roy addresses.” Anonymous

“The work has many strengths. It is wide in its references and its outlook. Its endorsement of objectivism is both right and timely. The chapter on mathematics in economics is particularly fine.” Anonymous

KGZ
“The author intends to discuss some of the central philosophical questions facing modern economic theory. In the foreground is a disposition of the conventional problem of value-independence. Roy sees the value-independence postulate as “Hume’s Scepticism”. He defines Hume’s First and Second Laws on the basis of two signified propositions taken from R. M. Hare. (1) From positive empirical premises, no normative postulate can be derived; in order to establish obligatory propositions, at least one normative proposition is needed. (2) In a specified economic context, after all empirical and formal/logical matters are resolved, little scope exists for further intersubjectively valid answers. Valuations beyond this limit are based on the subjective feelings of the economist to the concerned problem. The scientific/theoretical attitude representative of most economists of the 20th century has been based on this characteristic Humean scepticism. To show this, the author reviews short representative quotations from some of the known names of recent economic theory: Friedman, Myrdal, Lionel Robbins, P. A. Samuelson, Hicks, Joan Robinson, Hayek, Oskar Lange, Schumpeter, Arrow, Blaug, Frank Hahn. Subsequently, the author raises the point as to what explains this scientific-theoretical approval. A cursory survey of important real and virtual historical developments since antiquity confirms that the essential reason for the reported wide acceptance of a humean position by the economic scientist indeed could have been as a defensive posture against dogmatism and political dictatorship (“It is part of the democratic reaction against medieval authoritarianism” p.45). Conditioned by their “disgust with the tyrannies and ideologies of the twentieth century”, these authorities tried to protect economic science and guarantee the objectivity of research by resort to moral scepticism. Hence the author arrives at the starting position of his actual subject: After using Hume to escape from dependence on Plato e tutti quanti, has not value-free economics gotten into a fresh dependence, namely, moral scepticism and its philosophical consequence, moral indifference? Here too a contradiction is shown to arise, namely, that each argumentation against the normative can stand its ground only through normative premises. Thus ultimately something like correct standards become necessary. This however is only a marginal problem compared to a very much more important point: whether the moral scepticism permeating the strict scientific-theoretical position, is not just part of a very much more comprehensive scepticism, which includes Hume’s own criticism of induction as well. But then the same scepticism makes positive theory dubious as well: “Either all of positive economics is attacked with just as much scepticism as anything in normative economics, or we accept one and reject the other when instead there are reasons to think they share the same ultimate grounds and must be accepted or rejected together”(p.47). The author illustrates the difficulties with radical scepticism in a continental traversal of economic theory: micro and macroeconomics, mathematical economic theory and welfare theory are stations on this tour. A solution of the problem in the strict sense is not given nor could have been expected. But Roy delivers a methodical rule which permits a more exact definition of the limits to which normative discussion can take place precisely and objectively: first, to distinguish always whether an objective answer is at all possible to certain questions, and secondly, to ask who is competent or in the best position to give an answer. For readers interested in a new, thoroughly subtle discussion of a basic yet customary problem, this book will be profitable reading. However, the author could have argued some matters slightly more elaborately and others less redundantly, and set forth the central idea more clearly through appropriate summaries.” Karl Georg Zinn, in Jahrbücher für Nationalökonomie und Statistik / Zeitschrift für Wirtschaft und Statistik. Vol. 209, Nr. 5/6 (May 1992), p 573-574, translated from the German by Nahar Bhattacharya. 

“Effectively demonstrates the direct and significant links between the basic philosophical beliefs held by economists and their fundamental disagreements” Kyklos (Switzerland).

“Every rule of good argument is flouted. Does little to grapple with the large issues to which he rightly urges us to attend.” Times Literary Supplement (UK).

“Not the book to set off the revolution in economic epistemology and it is not even a reliable introduction to the field for undergraduates.” Journal of Applied Philosophy (UK).

“Subroto Roy’s Philosophy of Economics is a formidable contribution…. The author’s aim is to steer a middle course between scepticism and dogmatism in his account of the knowledge we can have of economic phenomena, and in this he largely succeeds. The result is a most distinguished and valuable exploration of the nature of economic inquiry.” John Gray, Economic Affairs (UK).

“Interesting and well-written. Definitely worthwhile being read by any economist interested in the philosophical foundations of his subject and profession.”
Journal of Institutional & Theoretical Economics (Germany).

“Roy’s basic argument is that the theory of economic knowledge underlying the work of most economists is logically inconsistent… The inconsistency lies in not permitting the skepticism that undermines the analysis of normative problems to destroy the logical foundation underlying positive analysis….. This well-documented study is a worthwhile contribution to the burgeoning literature on the philosophy of economics.” Choice

“The central argument of the book shows that the skepticism/dogmatism choice is a false dichotomy, that one need not embrace dogmatism in order to have objectivity or give up objectivity for freedom…. In the final section of the book Roy applies his critique… to several debates in economics. Chapter 8 presents the development of macroeconomics from John Maynard Keynes to the present through a dialogue between economists of opposing schools… Chapter 9 is a rich, wide-ranging discussion of mathematical models in economics…. Chapter 10 discusses the foundations of welfare economics… Roy shows how philosophical mistakes can lead economic thought astray, even though some of his arguments are also unsound. As a philosopher I find it encouraging to see an economist apply recent developments in epistemology to economic debates.” Journal of Economic History

“Accomplished, interesting and ambitious.” Mary Farmer, Manchester School (UK) 

“Perfectly sensible.” De Economist (Netherlands).

“Engaging and illuminating study. His seamless style may lull the reader into underestimating the extent and difficulty of the philosophical ground covered.” Research in History & Methodology of Economics (USA).

“(Roy’s) message is for his fellow economists, urging them not to shy away from the treatment of normative issues in their discipline.” – Economics and Philosophy

“When Roy refers to the present received theory of economics, he means that this is the view not only of Chicago, but also of Cambridge, Massachusetts, and Cambridge, England, of Friedman, Samuelson, Myrdal, Hayek, and Joan Robinson. His coverage is broad…. In one place he states that it is precisely because it is possible for even a unanimous group of experts to be wrong that we have a reason, an objective reason, why freedom is to be valued. ‘Freedom is necessary for objectivity.’…. Whether one agrees or disagrees, one has to be impressed by the knowledge and sophistication involved in Roy’s presentation. Involved here is no run-of-the-mill carping at the economics establishment. This is a serious thoughtful work.” Social Science Quarterly

https://independentindian.com/thoughts-words-deeds-my-work-1973-2010/philosophy-of-economics-on-the-scope-of-reason-in-economic-inquiry-1989/

scan0001

scan0002scan0004scan0005

First published by Routledge of London & New York , 1989, in the International Library of Philosophy

Library of Congress HB72.R69 1989

British Library 330’.01-dc19
Economics – philosophical perspectives
ISBN 0-415-03592-9

Reprinted in paperback, 1991
Library of Congress HB72.R69.1991
British Library 330’.01-dc20
ISBN0-415-06028-1

Postscript Twitter 8 July 2016

 pabeypabe

Philosophy of Economics

On the Scope of Reason in Economic Inquiry

Subroto Roy
© 1989, 1991, 2007 Subroto Roy

First published by Routledge of London & New York , 1989, in the International Library of Philosophy,

Library of Congress HB72.R69 1989

British Library 330’.01-dc19
Economics – philosophical perspectives
ISBN 0-415-03592-9

Reprinted in paperback, 1991
Library of Congress HB72.R69.1991
British Library 330’.01-dc20
ISBN0-415-06028-1

Preface to 2007 WordPress.com Republication

This book germinated when I was 18 or 19 years of age in Paris, Helsinki and London, and it was first published when I was 34 in Honolulu. I came to economics from natural science (biology, chemistry, physics), not mathematics. It was inevitable I would be drawn to the beauty of philosophy as a theoretical discipline while being driven, as a post-Independence Indian, to economics as the practical discipline that might unlock secrets to India’s prosperity and progress. I belonged to an ancient family of political men, and my father, who had joined India’s new foreign service the year before I was born, inculcated in me as a boy an idea that I had “a mission” (though he later forgot he had done so).

I was fortunate to fail to enter Oxford’s PPE and instead go to the London School of Economics. LSE was at an intellectual peak in the early 1970s. DHN Johnson in international law, ACL Day in international monetary economics, Brian Griffiths vs Marcus Miller in monetary economics with everyone still in awe of Harry Johnson’s graduate lectures in macroeconomics, Ken Wallis, Graham Mizon, JJ Thomas, David Hendry in econometrics with the odd lecture by Durbin himself – I was exposed to a fully grown up intellectual seriousness from the day I arrived as an 18 year old. Michio Morishima as my professorial tutor told me frankly that, as an Indian, I would face less prejudice in Western academia than in the private sector, and said he was speaking from experience as a fellow-Asian. He turned out to be wrong but it was wise advice nevertheless, just as wise as his requiring pupils to read Hicks’ Value and Capital (which, in our undergraduate mythology, he himself had read inside a Japanese gunboat during war).

What was relatively weak at LSE was general economic theory. We were good at deriving the Best Linear Unbiased Estimator but left unsatisfied with our grasp of the theory of value that constituted the roots of our discipline. I managed a First and was admitted to Cambridge as a Research Student in 1976, where fortune had Frank Hahn choose me as a student. That at the outset was protection from the communist cabal that ran “development economics” with whom almost all the Indians ended up. I was wholly impecunious in my first year as a Research Student, and had to, for example, proof-read Arrow and Hahn’s General Competitive Analysis for its second edition to receive 50 pounds sterling from Hahn which kept me going for a short time. My exposure to Hahn’s subtle, refined and depthless thought as an economist of the first rank led to fascination and wonderment, and I read and re-read his “On the notion of equilibrium in economics”, “On the foundations of monetary theory”, “Keynesian economics and general equilibrium theory” and other clear-headed attempts to integrate the theory of value with the theory of money — a project Wicksell and Marshall had (perhaps wisely) not attempted and Keynes, Hicks and Patinkin had failed at.

Hahn insisted a central question was to ask how money, which is intrinsically worthless, can have any value, why anyone should want to hold it. The practical relevance of this question is manifest. India today in 2007 has an inconvertible currency, vast and growing public debt financed by money-creation, and more than two dozen fiscally irresponsible State governments without money-creating powers. While pondering, over the last decade, whether India’s governance could be made more responsible if States were given money-creating powers, I have constantly had Hahn’s seemingly abstruse question from decades ago in mind, as to why anyone will want to hold State currencies in India, as to whether the equilibrium price of those monies would be positive. (Lerner in fact gave an answer in 1945 when he suggested that any money would have value if its issuer agreed to collect liabilities in it — as a State collects taxes – and that may be the simplest road that bridges the real/monetary divide.)

Though we were never personal friends and I did not ingratiate myself with Hahn as did many others, my respect for him only grew when I saw how he had protected my inchoate classical liberal arguments for India from the most vicious attacks that they were open to from the communists. My doctoral thesis, initially titled “A monetary theory for India”, had to be altered due to paucity of monetary data at the time, as well as the fact India’s problems of political economy and allocation of real resources were more pressing, and so the thesis became “On liberty and economic growth: preface to a philosophy for India”. When no internal examiner could be found, the University of Cambridge, at Hahn’s insistence, showed its greatness by appointing two externals: C. J. Bliss at Oxford and T. W. Hutchison at Birmingham, former students of Hahn and Joan Robinson respectively. My thesis received the most rigorous and fairest imaginable evaluation from them.

I had been attracted to Cambridge partly by its old reputation for philosophy, especially that of Wittgenstein. But I met no worthwhile philosophers there until a few months before I was to leave for the United States in 1980, when I chanced upon the work of Renford Bambrough. Hahn had challenged me with the question, “how are you so sure your value judgements promoting liberty blah-blah are better than those of Chenery and the development economists?” It was a question that led inevitably to ethics and its epistemology — when I chanced upon Bambrough’s work, and that of his philosophical master, John Wisdom, the immense expanse of metaphysics (or ontology) opened up as well. “Then felt I like some watcher of the skies, When a new planet swims into his ken; Or like stout Cortez when with eagle eyes, He star’d at the Pacific…”

It has taken me more than a quarter century to traverse some of that expanse; when I returned to Britain in 2004 as the Wincott Visiting Professor of Economics at the University of Buckingham, I was very kindly allowed to deliver a public lecture, “Science, Religion, Art and the Necessity of Freedom”, wherein I repaid a few of my debts to the forgotten work of Bambrough and Wisdom — whom I extravagantly compared with the Bodhisattvas of Mahayana Buddhism, also saying that the trio of Wittgenstein, Wisdom and Bambrough were reminiscent of what Socrates, Plato and Aristotle might have been like.

I had written to Bambrough from within Cambridge expressing my delight at finding his works and saying these were immensely important to economics; he had invited me to his weekly discussion groups at St John’s College but I could not attend. Between 1979 and 1989 we corresponded while I worked in America on my application of his and Wisdom’s work to problems in economics. We met only once when I returned to Cambridge from Blacksburg for my doctoral viva voce examination in January 1982. Six years later in 1988 he said of my Philosophy of Economics, “The work is altogether well-written and admirably clear”, and on another occasion he said he was “extremely pleased” at the interest I had taken in his work. The original preface of Philosophy of Economics said he was not responsible for the use I had made of his writings, which I reiterated in the 2004 lecture. At our meeting, he offered to introduce me to Wisdom who had returned to Cambridge from Oregon but I was too scared and declined, something I have always regretted since. It is only in the last few years that I have begun to grasp the immensity of Wisdom’s achievement in comprehending, explaining and extending the work of both Wittgenstein and Freud. His famous “Virginia Lectures” of 1957 were finally published by his admirers with his consent as Proof and Explanation just before his death in 1993. As for Bambrough, I believe he may have been or become the single greatest philosopher since Aristotle; he told me in correspondence there was an unfinished manuscript Principia Metaphysica (the prospectus of which appeared in Philosophy 1964), which unfortunately his family and successors knew nothing about; the fact he died almost in obscurity and was soon forgotten by his University speaks more about the contemporary state of academic philosophy than about him. (Similarly, the fact Hahn, Morishima and like others did not receive the so-called Economics “Nobel” says more about the award than it does about them.)

All I needed in 1980 was time and freedom to develop the contents of this book, and that I found in America — which I could not have done in either Britain or India. It would take eight or nine very strenuous years before the book could be written and published, mostly spent at Virginia Polytechnic Institute (1980-1985) and the University of Hawaii (1986-1990) Economics Departments, with short interludes at Cornell (Fall 1983) and Brigham Young (1985-86). I went to Virginia because James M. Buchanan was there, and he, along with FA Hayek, were whom Hahn decided to write on my behalf. Hayek said he was too old to accept me but wrote me kind and generous letters praising and hence encouraging my inchoate liberal thoughts and arguments. Buchanan was welcoming and I learnt much from him and his colleagues about the realities of public finance and democratic politics, which I quickly applied in my work on India, published in 1984 in London as Pricing, Planning & Politics: A Study of Economic Distortions in India and republished elsewhere here. The visit to the Cornell Economics Department was really so I could talk to Max Black the philosopher, who represented a different line of Wittgenstein’s students, and Max and I became friends until his death in 1988.

Buchanan’s departure from Blacksburg led to a gang of inert “game theorists” to arrive, and I was immediately under attack – one senior man telling me I was free to criticise the “social choice” work of Amartya Sen (since he was Indian too) but I was definitely unfree to do the same of Sen’s mentor, Kenneth Arrow, who was Jewish! (Arrow was infinitely more gracious when he himself responded to my criticism.) On top of that arose a matter of a woman, fresh off the aeroplane from India, being assaulted by a senior professor, and when I stood for her against her assailant, my time in Blacksburg was definitely up.

The manuscript of this book was at the time under contract with University of Chicago Press, and, thanks to Mrs Harry Johnson there, I had come in contact with that great American, Theodore W. Schultz. Schultz, at age 81, told me better to my face what the book was about than I had realised myself, namely, it was about economics as knowledge — its subject-matter was the epistemology of economics. Schultz wrote letters all over America on my behalf (as did Milton Friedman at Stanford and Sidney Alexander of MIT, whom I had also met and become friends with), and I was able to first spend a happy year among the Mormons at Brigham Young, and then end up at the University of Hawaii where I was given responsibility for the main graduate course in macroeconomics. I taught Harry Johnson-level IS-LM theory and Friedman-Tobin macroeconomics and then the new “rational expectations” vs Keynesian material.

I was also offered a large University grant to work on “South Asia”, which led to the books Foundations of India’s Political Economy: Towards an Agenda for the 1990s, and Foundations of Pakistan’s Political Economy: Towards an Agenda for the 1990s, both created by myself and WE James, and which led to the origins of India’s 1991 economic reform and the India-Pakistan peace process as told elsewhere. Also, this book came to be accepted for publication by Routledge, as the first economics book in its famed International Library of Philosophy.

Just as I was set to be evaluated for promotion and tenure at the University of Hawaii, I became the victim of a most vicious racist defamation (and there was some connection with Blacksburg). Quite fed up with the sordidness of American academia as I had experienced it, I sued in the federal court, which consumed much of the next half dozen years as the case worked its way through the United States Supreme Court twice. Milton Friedman and Theodore W. Schultz stood as expert witnesses on my behalf but you would not have known it from the judge’s ruling. There had been not only demonstrable perjury and suborning of perjury by the State of Hawaii’s officers, there was also “after-discovered” evidence of bribery of court-officers in the US District Court for the District of Hawaii, and I had to return to India in 1996 quite exhausted to recuperate from the experience. “Solicitation of counsel, clerks or judges” is “embracery curialis”, recognized as extrinsic fraud and subversion of justice since Jepps 72 E R 924 (1611), “firmly established in English practice long before the foundation” of the USA, Hazel Atlas, 322 US 238 (1943). “Embracery is an offense striking at the very foundation of civil society” says Corpus Juris 20, 496. A court of equity has inherent power to investigate if a judgement has been obtained by fraud, and that is a power to unearth it effectively, since no fraud is more odious than one to subvert justice. Cases include when “by reason of something done by the successful party… there was in fact no adversary trial or decision of the issue in the case. Where the unsuccessful party has been prevented from exhibiting fully his case, by fraud or deception practised on him by his opponent, as…where an attorney fraudulently or without authority assumes to represent a party and connives at his defeat; or where the attorney regularly employed corruptly sells out his client’s interest to the other side ~ these, and similar cases which show that there has never been a real contest in the trial or hearing of the case, are reasons for which a new suit may be sustained to set aside and annul the former judgment or decree, and open the case for a new and a fair hearing….” (Hazel Atlas). There is no time-limit in United States federal law for rectification of fraud on the court of this sort, and I remain fully hopeful today of the working of American justice in the case.

The practical result was that this book was never able to be properly publicized among economists as it would have been had I become Professor of Economics at the University of Hawaii by 1992 as expected. The hardback sold out quickly on its own steam and went into paperback by 1991, and a friend told me it was being used for a course at Yale Law School. The reviews were mostly intelligent. Upon returning to Britain as the Wincott Visiting Professor in 2004, I found times had changed and so had Routledge who would not keep it in print let alone permit a second revised edition. But I am now free to republish the book as I please, and today in 2007, with the Internet growing to a maturity which allows the young geeks at WordPress.com to want to encourage blogging worldwide, I can think of no more apt place to reproduce the first edition of this book than here at my own blog http://www.independentindian.com.

This is not a second or revised edition, and it is unchanged in content except for this lengthy new preface made necessary by the adventures and dramas the book’s author found himself unwittingly part of since its first publication. I am 52 now and happy to say I endorse the book just as I had published it at 34, though I do find it a little impatient and too terse in a few places. The 1991 paperback corrected a few slight errors in the 1989 hardback, and has been used. I am planning an entirely new book which shall have its roots in this one though it will be mostly in philosophy and not economics — the outlines it may take may be seen in the 2004 public lecture I gave on the work of Bambrough and Wisdom mentioned above and published elsewhere; its main aim will be to uncover for new generations the immense worth there is in their work which is in danger of being lost.

At least two names failed to appear in the original list of acknowledgements. G. Bruce Chapman, now of the University of Toronto, and I talked much of serious ethics and political philosophy when I first arrived at Cambridge in 1976. And in 1980 in Blacksburg, Anil Lal, then a graduate student and house-painter, borrowed my copy of Bambrough’s work, read it, and later made a comment on the metaphysics of John Wisdom which allowed me to see things more clearly.

Ballygunge, Kolkata,
April 7 2007

TO: R.A.R.

Contents

Preface

1. Introduction

Part I

2. Hume and the Economists

3. Understanding the Consensus

4. Difficulties with Moral Scepticism

Part II

5. Objectivity and Freedom

6. Expertise and Democracy

Part III

7. An Example from Microeconomics

8. A Dialogue in Macroeconomics

9. Mathematical Economics and Reality

10. Remarks on the Foundations of Welfare Economics

Envoi

Notes and References

Select Bibliography

Preface to First Edition
The publication of this work marks the end of an adventure of more than a decade and a half, most of the writing being done between 17 December 1980 and 22 May 1987. It has been quite perilous at times, especially as a foreigner in the West, and over the years many teachers, colleagues, friends and members of family have contributed to the author’s learning with their thoughts and actions. A number of senior scholars in economics and philosophy — especially Professor Frank Hahn, Professor James Buchanan, Professor Sidney Alexander, Professor Milton Friedman, Professor Max Black, Professor Sidney Alexander, Professor Amartya Sen, Professor Peter Bauer, Professor T. W. Hutchison and Dr C. J. Bliss, have lent their support to the work as it developed, even when they may have not known of its final form, or disagreed with its content, or been themselves a subject of its criticism. Most especially, the work has been honoured in the last six years with the unwavering encouragement of Professor T. W. Schultz of the University of Chicago. And Professor Ted Honderich of University College London has shown it the kindest consideration, without which publication would have been much delayed. Finally, a large philosophical debt will be seen to be owed to the work of Mr. Renford Bambrough of St. John’s College, Cambridge; however he should not be considered responsible for the use that has been made here of his writings.
HONOLULU
15 AUGUST 1988.

1. Introduction

1. IN this book, some of the central philosophical questions facing the modern economist will be raised. Most attention will be given to the question of the appropriate relationship between the positive and the normative, as well as to its parent question of the appropriate scope of objective reasoning in the making of evaluative judgements. Closely related is the question of the appropriate role of the economic expert in society, while slightly more distant questions have to do with the significance of interpersonal comparisons of utility, with the philosophical status of the concepts and theorems of mathematical economics, and with how judgements of probability should be understood. It is this family of questions which will be the concern of the present work.

Economics is a science with potentially important practical bearing upon the lives of men and nations. The state of the modern world may have been affected more profoundly and subtly by the use or misuse of economic knowledge than by many another science. Yet anyone familiar with the intellectual history of the field will know it to have seen more conflicts, and often conflicts of a more destructive kind, than may be reasonably expected or tolerated in the development of a scholarly discipline. The reader will be familiar with the many explicit and implicit divisions of opinion that have occurred upon theories and methods and evidence and policies, which have sometimes torn apart individual university departments and even threatened the integrity of the science itself. Indeed the modern economist in a despondent mood might be inclined to say of the state of his discipline as David Hume once said of philosophy: “There is nothing which is not the subject of debate, and in which men of learning are not of contrary opinions. The most trivial question escapes not our controversy, and in the most momentous we are not able to give any certain decision. Disputes are multiplied, as if everything was uncertain, and they are settled with the utmost warmth, as if everything was certain.”
At the same time as there have been deep and persistent divisions on substantive questions of economic theory and method and evidence and policy, there has been a deliberate or inadvertent consensus about the answer to an important question in the theory of knowledge. Modern economists happen to have been practically unanimous in their opinion on the possible scope of objective reasoning in the making of judgements, and thus in their opinion on the appropriate relationship between the positive and the normative. A broad consensus has developed to the effect that while common reasoning can have some scope in evaluative discussion, it is quite possible in practice and in principle for this scope to become exhausted. At such a point of the exhaustion of reason, only sheer and unadulterated subjective differences will be found to remain between people. Put another way, it has been believed possible for judgements ultimately to become immune to rational question and criticism.

Many of the pioneers of twentieth century economic thought, Kenneth J. Arrow, Milton Friedman, F. A. Hayek, Sir John Hicks, Oskar Lange, Gunnar Myrdal, Lionel Robbins, Joan Robinson, Paul Samuelson, Joseph Schumpeter, Jan Tinbergen, to name but a few, who between themselves would represent all of the main schools of contemporary economics, may be found to have shared such a thesis in the theory of knowledge, differing amongst themselves only upon the relatively minor question of the precise amount of room reasoning should be considered to have: some saying a great amount, others saying almost none, but all agreeing that whatever the exact amount it is a finite amount, both actually and potentially. The theory of demand, the theory of macroeconomic policy, the theory of welfare economics, the theory of social choice — each has in whole or in part rested upon an epistemological premise of this kind. If such a consensus can be shown to have existed, the reader may agree it to be something of a remarkable fact, since it would be difficult indeed to find a single substantive proposition of theory or method or evidence or policy to which a similar measure of consensus among modern economists might obtain.
One of the objects of the present work will be to argue that the fact there have been tremendous disharmonies on substantive economic questions, may not be independent of the fact there has been this kind of harmony in the theory of knowledge among many of the pioneers of twentieth century economics as well as the many more who have followed them. If the epistemological point hitherto accepted as true happens in fact to be false, it becomes possible that the scope of objective reasoning on substantive questions has been artificially prevented from being extended as far as it could have and should have been. Evaluative judgements are clearly of indefinite variety: attitudes towards goods or people, expectations of the future, recommendations to buy or sell, advice to a friend or a student or a government, etc. — roughly, all judgements taken by an individual or social agent about a right or optimal course of action in given circumstances. We shall find the consensus has been that it is possible for reasoning to come to a necessary halt in the process of coming to such judgements, whether the maker of the judgement is a public body or a private individual acting in the capacity of consumer or voter. A large amount (and possibly the whole amount) of what may deserve to be within the domain of common and objective reasoning comes to be placed instead under the rule of subjective will and caprice. Not only must we live with the fact that discussions between citizens or economists or politicians or spouses or states do frequently come to end without resolution, because there happens to be a lack of patience or tolerance or perseverance or good humour or whatever, but also that such outcomes may be written into the script from the start. In any normative discussion, we are to be permitted to call a unilateral halt merely by declaring “Well that is a value judgement of mine” or “That is a personal opinion of mine”, with the implication that any further questioning is out of bounds and unacceptable. Given a theory which allows us in this way to declare as we please what to call objective science and what to call subjective opinion, and given that it may be but human nature to be sceptical of the other fellow’s dogma while being oblivious to one’s own, we may have some explanation of how the consensus among economists in the theory of knowledge may have caused and preserved a state of affairs in which rival substantive dogmas can thrive — because the processes of common reasoning and even communication itself may have been allowed too often to come to a virtual standstill. (Or move at a snail’s pace.) “Disputes are multiplied, as if everything was uncertain, and they are settled with the utmost warmth, as if everything was certain.”

The gist of the present work will be that the present consensus in the theory of economic knowledge is logically inconsistent. It is therefore untenable and deserves to be abandoned. Men can aspire to, and in fact do attain and possess, certain and objective knowledge in an indefinite number of contexts. At the same time, there is no proposition of any kind held by anyone which must be thought of as necessarily closed to further question on grounds of reason or evidence. This simple maxim is something that may be found to hold in any field of human inquiry or endeavour one cares to mention — mathematics or medicine, ethics or physics, history or probability, logic or theology — and it will be our purpose in this work to examine its consequences in the context of economics in particular.

§2. Our study is one in what may be called theory of economic knowledge, and it may be worth a moment to consider what may be meant by this.

Bertrand Russell said of pure mathematics that it was a subject “in which we do not know what we are talking about” — meaning that the pure mathematician does not normally intend to refer in his theorems to substantive factual truths about the world. The epistemology or theory of knowledge of a discipline may be thought of similarly as being not concerned with either affirming or denying, corroborating or refuting the substantive propositions that happen to be made within the discipline. The study of the theory of economic knowledge may be thought of as not making any commitment one way or another to the substantive propositions which are to be found within the department of economics itself. Instead it is a more abstract undertaking, which seeks to examine certain kinds of questions from outside the department in the practical hope of dissolving or at least clarifying the character of substantive questions and controversies that may be occurring within. For example, to ask whether a criterion of truth and falsity can be applied to economic propositions, or whether objective knowledge is possible in the field, or how the kinds of propositions made in economics are to be justified, or how they compare and contrast with propositions made in other departments of inquiry — these would be the kinds of question we might see asked in the theory of economic knowledge; from which too the importance can be seen of generally abstaining from making substantive commitments in the process.

Much of the present work, especially Parts I and II, may be understood to be an attempt to provide a theory of economic knowledge of this kind. Thus the reader will not find in it commitments made to any substantive economic propositions. There is no theorem reported of the existence or efficiency of some new kind of economic equilibrium, no new model or evidence offered of the influence of the supply of money on prices, no new theory of how the expectations of economic agents may be formed or fulfilled or disappointed, no new evidence or explanation of why some country may be experiencing rapid growth or high inflation or increasing unemployment. No new result within economic science; one might almost say, nothing substantive! The present work will offer no more than “a machine to think with” on certain philosophical aspects of economics; it intends to leave economics as it is — and yet in so doing to have shown the way out of some of the philosophical difficulties that are encountered in its study. “For the clarity that we are aiming at is indeed complete clarity. But this simply means that the philosophical problems should completely disappear.”

Yet the practical purpose to making an investigation of this kind may be stated quite readily. For suppose, for sake of argument, we granted the truth of our simple maxim and assumed the epistemological concepts ‘knowledge’ and ‘doubt’, and their allied concepts ‘objectivity’ and ‘freedom’, should not be seen as incompatible in the project of inquiry. What consequences would follow from accepting such a viewpoint? Clearly first of all, we would be placed in a happy position of being able to say that no matter how deep or persistent the actual disagreements between economists or between citizens on economic questions happened to be, there is knowledge to be had in the study of economics. Not just high sophistry or rhetoric or political posturing or the opinions and prejudices of different people — but certain and objective knowledge about those actions, events, and phenomena that are part of the economic context. We would be able to say, in other words, there are at least some propositions in economics which are true, and which moreover can be known to be true.

An important ambiguity is possible here in asking whether there is knowledge about a given matter, insofar as such a question can be taken either as asking whether it is possible for there to be any knowledge about the matter, or as asking whether it is known that someone actually possesses such knowledge and how that has been determined. Defining as an expert someone who has the most reasonable and justifiable answer to give to a question, we need to distinguish, in other words, the relatively cool logical question of whether here can be any such thing as expert knowledge from the more heated political question of who is supposed to be such an expert and how we are supposed to know that. For instance, a question like “Is there a proof to Fermat’s last theorem?” can be understood either in the manner of the pure mathematician, as asking whether there can be a proof to the proposition it is impossible xn + yn = zn for positive integers x, y, z, n, and n > 2; or in the manner of the historian of mathematics, as asking whether any human being has come up with such a proof, as Fermat himself claimed to have done but of which no record exists. Among the great thinkers, Plato is the most influential to have crossed these wires in suggesting it possible not only for there to be objective knowledge about mathematics and ethics and statesmanship, but also for a special and closed set of experts to come to be identified to whom such knowledge should be thought of as being exclusively given. Plato’s theory can be and has been interpreted as giving license to elitism and dictatorship, yet the natural protest which the ideas of these would evoke in most of us may lead to an equal and opposite error of denying the very possibility of knowledge because we feared or wished to reject the idea of being ruled by a closed set of self-described experts. Once these wires are uncrossed, we may see it to be quite possible to maintain there can be objective knowledge and expertise in economics, without making any commitments toward specifying who should be considered an expert on some economic issue, or how we are supposed to determine that, or for that matter claiming any such knowledge or expertise for ourselves.

A second consequence of our simple maxim may seem more troubling. For by its second part, we should also have to say that even while there is objective knowledge in economics, there is nevertheless no proposition in the field which must be thought of as being necessarily closed to further question. Not the proposition that every human act is a rational act, nor the proposition that economic agents continually maximize utility, or are well modelled as doing so, nor the proposition that the market economy cannot be expected to reach full employment and needs to be and can be actively supplemented by macroeconomic policy, nor the proposition that the growth of money is necessary and sufficient for inflation, nor the proposition that free trade will maximize world output given factor immobility, nor the proposition that externalities imply a possible scope for taxes and subsidies, nor the proposition that the histories of nations is a history of class struggle.

By the second part of the maxim, there is no axiom or theorem of economic theory, no finding of economic history, no estimate of the value of an economic coefficient, no prediction of the course of an economic variable, no proposal of economic policy, which must be thought of as being closed to further question. None whatsoever. “No statement is immune to revision” (Quine).

Taken together, then, the net consequence of supposing objectivity and freedom, knowledge and doubt, to be compatible concepts deserving of equal respect, is that we shall be able to chart a course which steers us clear of two perennial and opposing hazards besetting all projects of human inquiry, viz., Scepticism and Dogmatism — the modern origins of which were traced by the American philosopher Charles Sanders Peirce to the cartesian proposal that philosophy “must begin with universal doubt, whereas scholasticism had never questioned fundamentals.” In the pages to follow, we will be denying universal doubt and we shall be free to question fundamentals. In an indefinite number of contexts, there is certain and objective knowledge to be had. Scepticism, understood technically as a logical thesis denying that we can possibly have or know that we have certain knowledge, is therefore a false thesis. At the same time, there is no proposition which is necessarily closed to question. Dogmatism, understood technically as a logical thesis implying there can be or must be some propositions which are absolutely and incorrigibly true, is therefore an equally false thesis. In place of a theory of knowledge restricting the scope of common reasoning to the finite or even the potentially finite, it is possible to have a theory of knowledge extending this scope to the potentially infinite. In particular, while normative proposals in economics or elsewhere may be supposed to be objectively better or worse depending on the soundness of the positive grounds given in their support, there are no unquestionable normative proposals — because there are no unquestionable positive grounds. The simple practical result of making the present investigation is that it will permit a sure and safe course to be found between Scepticism and Dogmatism for any project of economic inquiry.

§3. Would such a simple and straightforward thesis be new to economics in any way? To what extent would the argument which has been summarized above and which will be developed in the chapters to follow not been expressed before? The reader may wish an answer to such a question, and the author presently takes this to be as follows. With respect to the general debate which has occurred about knowledge and scepticism especially in moral philosophy, there will be little if anything in the present work which is a direct or novel contribution to it. While the philosophers have not been concerned with political economy at all, we shall be passive participants to their discussions, listening in to see what can be learned for our purposes and not intending to add to them directly. It may be remembered of course that it has not been long since economics formally broke away from philosophy to become a specialized discipline in its own right, in the belief the concerns of economics are of a more concrete and practical kind than those of philosophy. Since then we have made many highly abstract and theoretical claims, while also becoming scornful of philosophical thinking and believing ourselves to be exempt from its influences. Yet serious philosophical thought constitutes a mature and magnificent conversation which it would be foolish for any serious science to be deaf to. Moreover, it has been quite widely believed that there have been significant advances in philosophical understanding in the present century, and we are responsible to take such a claim seriously. It will be one of the aims of the present work to apply what may be learned from these discussions towards resolving, or at least clarifying, some of the main substantive disputations in modern economic science.

These are two broad traditions of moral philosophy relevant to our subject-matter, one deriving from Aristotle, the other from Hume (and a line of sceptics before him). Even though it would be unwise to expect agreement within either tradition, we may for convenience speak of an aristotelian and a humean tradition respectively. With respect to the discussions among economists on the relationship of the positive to the normative, we shall find an eminent consensus to have appeared on the humean side. This work will declare for the other side, and in so doing shall have to dissent from the humean consensus upon which all of the theory of social choice and much of the theory of welfare economics and theory of economic policy have appeared to rest. As far as is known by the author, there seem to have been but two published dissents on similar lines among economists in recent decades: those of Sidney Alexander and Amartya Sen. Of these, Professor Sen’s dissent has been very short and hesitant, and he would seem to have withdrawn it in other writings. Professor Alexander’s dissent has been clear and vigourous, but unlike his work on the balance of payments, his philosophical work has not received attention, and the present work was mostly developed in complete ignorance of its existence.

By the end of this work however, a clear choice should have been set out for the reader on the question of the relationship of the positive to the normative — between the consequences of accepting the humean consensus among economists and the consequences of the position of Professor Alexander and the author and possibly Professor Sen. The simple maxim “Objective knowledge is possible and yet there is no proposition which is closed to question” should not undermine its own content by being closed to question itself — instead it is supposed to refer and apply to itself as well. It may be true and deserving of our belief but it is not self evidently so, and will have to earn its credentials at the common bar of reason. Ultimately it will have to be the reader’s individual judgement whether it has been successfully shown that, contrary to what has been supposed by many of the pioneers of twentieth century economics, no conflict must arise between knowledge and doubt, objectivity and freedom. The history of the discussion may accord to our side the advantage J. S. Mill had seen to be enjoyed by all minority opinions: if the opinion of one or a few is false then not much will be lost by believing in it, while if it proves better able to stand the tests of time then much may be gained by allowing it to replace error. Put differently, it may seem quite risky that the pioneers of modern economic science have placed all their philosophical eggs in the humean basket — just in case it is Hume himself who happens to be mistaken.

§4. In Part I of the work will be found described the received theory of economic knowledge and its possible justification, as well as an account of the logical difficulties that arise with it. Chapter 2 has the task of documenting as fully as possible the existence of a humean consensus among economists in recent decades. Chapter 3 then examines the kinds of reasons that may incline us to be persuaded to such a view, and which may go to explaining how it has seemed to be an attractive theory to so many economists. These reasons appear to have been of two different but related sorts.

First the concept of value as used in ordinary life and ethics may have become confounded with the concept of economic value or scarcity or rareté in Walras’s term. Where economists have referred to a theory of value, they may have meant to refer more accurately to a theory of relative prices as determined by conditions of scarcity. The advance of the original neoclassicals in the late nineteenth century was to establish the importance of subjective estimations of economic agents to the determination of the relative prices of goods — as opposed to say how much labour went into different production processes as the classical economists might have said, or how much intrinsic value God had placed in the goods as the scholastics might have said. While it is clear by now that such an observation is broadly correct, it would be a mistake to go from a premise that market prices are determined in part by subjective estimations to a conclusion that the relative prices thus determined in any sense establish an order of how goods deserve to be valued or not. Goods are indeed valued the way they are because people happen to value them. Yet equally, in most cases, people seem to value goods in the way they do because the goods deserve to be thus valued — for example, because, like food or clothing or shelter, the goods are conducive to some valuable human purpose.
Secondly, it is possible the consensus has been motivated by a desire to find an effective shield against dogmatism and tyranny. For example, the context of an open parliamentary democracy presupposed by the modern theory of economic policy may have derived out of the experience of the great tyrannies of twentieth century history. There may have been a natural and understandable desire that the choices and decisions of citizens in the capacity of voters or consumers should be treated with the fullest due respect, and a humean scepticism may have been adopted because it has been believed to be something which is necessary and sufficient for this kind of respect to be shown. This would be an outstanding reason for adopting a humean point of view, and one which any critic must be required to account for. Yet it also places in relief the fatal self-contradiction that is present within the humean theory. For example, a theory of economic policy which has to rely upon an assumption of the polity being open and democratic would have to be silent about the conduct of economic policy in societies which were demonstrably not open or democratic, making it a theory very special and contingent in its range of application. Moreover, to give the defence of political or economic or religious freedom as a reason for holding a subjectivist epistemology would be to have left freedom entirely defenceless and toothless from those who would attack it from within precisely the same subjectivist framework. For example, if we conflated a general right to express an opinion freely with an idea that what such an opinion expresses is itself a matter of subjective opinion, then clearly, by the same token, an opinion that opinions should be freely expressed might also be considered merely subjective, and therefore no better or worse than its contrary. Within a subjectivist theory of knowledge, there ultimately can be nothing to choose between freedom and tyranny.

Chapter 4 is a survey of these kinds of logical difficulties with the humean position stated in Chapters 2 and 3. Its main result will be that the anti dogmatic campaign of the humean cannot succeed, and in fact comes to make the Sceptic resemble the Dogmatist more than anything else. It is possible this happens because both Sceptic and Dogmatist are sharing the same deductivist model of justification, to the effect that we cannot know a proposition to be true or right unless we have deduced it as the conclusion of a set of premises of whose truth or rightness we are certain. The Sceptic sees the threat of infinite regress that is implicit in such a model, and then denies we can be certain of anything. The Dogmatist sees the potential regress too, but responds to it by calling a halt at some arbitrary point, denying the need or possibility of going any further. In Part II a fresh picture will be given which attempts to preserve the truths the Sceptic and Dogmatist would each like us to take notice of, while correcting for the distortions both would force upon us by their unequivocal adoption of a deductivist model of justification. Chapter 5 reframes the main philosophical problems of Part I in the terms of the ancient dualism between Nominalism and Realism, and brings to light a possible resolution of this which has been advanced by a number of modern philosophers. Chapter 6 develops the argument further and applies it to the question of the appropriate role of expertise in a democracy. Taken together, Part II contains the main outlines of a fresh theory of economic knowledge with which to replace the flawed and inconsistent theory to which so many economists have thus far subscribed.

Part III of the work consists of a series of diverse illustrations and possible applications of the theory of knowledge developed in Part II. Chapters 7-10 all give examples of how inquiry and criticism can be seen to proceed in economics without sacrifice of either objectivity or freedom. Chapter 7 examines an actual debate on a concrete question of microeconomic policy, which may be compared and contrasted with the more academic examples of later chapters. Chapter 8 examines aspects of the division in macroeconomics and monetary theory since J. M. Keynes’s General Theory of Employment, Interest and Money. Chapter 9 considers a question with wide and general reference to economic theory: how the relationship between mathematical economics and real economic phenomena might be best understood. This has been the subject of long and bitter disputation, and some light is attempted to be shed on it from the vantage point of the philosophy of mathematics. It is possible that certain views in the philosophy of mathematics have been presupposed in modern mathematical economics; once these are exposed and aired, some of the conceptual problems which have been faced in this discussion may come to be dissolved. The theory of probability and expected utility and the theory of general equilibrium will be used as brief illustrations. Finally, in Chapter 10, the possible philosophical sources of the controversy surrounding the question of interpersonal comparisons of utility will be described, and a possible resolution suggested. This will be argued to have bearing on received understanding of the foundations of welfare economics.

§5. It will be found in the present work, then, that we shall be denying universal doubt on the one hand, while yet being free to question fundamentals on the other. Such a project will entail a critical examination of the philosophical premises and assumptions advanced by some of the most distinguished contemporary scholars in our field, and it is to be hoped the spirit in which the present criticism is offered will not be misunderstood. Every generation holds a peculiar advantage over preceding generations in having available to it what has gone before, while not being able to anticipate the criticisms of its own beliefs that will certainly come in the future. This kind of advantage that the present holds over the past may be thought of as being quite arbitrary, and we can expect it to carry with it a responsibility of taking what has gone before into serious account. Since no individual is able to do so on his own, we find every generation as a whole attempting to provide itself with critical discussions, which, when integrated over time, constitute the grand and unending conversation we call the history of human thought. It is with such a model in mind of a continuing and self-critical tradition of scholarship that we shall seek to address the questions raised at the beginning about the foundations of economic knowledge, while not making any pretence whatsoever to finality, and instead leaving the entire treatment as open as it can be made to the examination and criticism of others.

PART I

2. Hume and the Economists
THERE has been a broad and long standing consensus among economists about the character of the relationship between positive and normative propositions, as well as about the related question of the appropriate scope and limits of economic expertise in society. Joining in this consensus have been many of the pioneers of twentieth century economic thought: Kenneth J. Arrow, Milton Friedman, F. A. Hayek, Sir John Hicks, Oskar Lange, Gunnar Myrdal, Lionel Robbins, Joan Robinson, Paul A. Samuelson, Joseph Schumpeter, Jan Tinbergen, to name but a few. Many others are likely to be found in explicit or implicit agreement, while a survey by Professor T. W. Hutchison suggests that some of the most renowned figures of nineteenth century economics should probably be included as well. The main purpose of this chapter will be to provide enough documentary evidence to show that such a consensus has in fact existed. When we think of how many deep and wide differences there have been over the years in the field that was once called political economy and is now called economic science, differences on questions of method and theory and evidence and recommendations of policy, the existence of such a consensus may seem quite a remarkable fact.

Very briefly, what appears to have been accepted is that it is possible to identify a body of progressively changing knowledge called ‘positive economics’, which is the main contribution of economists to human knowledge and understanding in general. It consists of such things as the microeconomic and macroeconomic descriptions of present and past states of an economy, conditional predictions of such states in the future, hypothetical or substantive explanations of what economic causes may have what economic effects, the deduction and analysis of theorems of economic significance, and so on. That is to say, positive economics has been supposed to consist of the domain of propositions in an economic context which have to do in one way or another with questions of what is the case, or with what has been the case in the past or may be expected to be the case in the future. In contrast, evaluative or prescriptive or ‘normative’ propositions, having in one way or another to do with what ought to be done or not done by a government or a private economic agent, have been believed to fall into quite a different category. These have been believed to amount sooner or later to being expressions of subjective personal opinion, either on the part of the individual economist himself or of those whom he may happen to be advising.

Most economists who have considered the matter have allowed that there is usually at least some scope, and sometimes much scope, for common reasoning on logical and empirical grounds to be brought to bear in normative discussion; making it possible that at least some of the disagreements between economists or citizens or politicians on normative questions can come to be objectively resolved. But it has been believed possible also for the processes of common reasoning to become exhausted in discussions of normative questions like those of economic policy or ethics or jurisprudence, in a way they are not supposed to become exhausted in discussions of positive questions like those of economic theory or econometrics or natural science or mathematics. Once such a point of the exhaustion of reason has been reached, any residual conflict which remains is to be considered necessarily irreconcilable and of a sheer normative kind. And such sheer normative opinions, upon which it is not possible to bring to bear any further objective consideration, are to be supposed to express the purely subjective attitudes and feelings of the individual person, opinions which might happen to be shared by others too, but which are certainly closed to further argumentation, whether in public or in the person’s own mind. Put a little differently, the theory of knowledge and policy which we shall see to have been widely accepted by many economists in the twentieth century, has made an assumption that while all questions of analysis and evidence can have objectively true or false answers, only some and not all questions of evaluation and prescription can have objectively right or wrong answers.

§2. Underlying the consensus among economists has been a more general thesis in the theory of knowledge or epistemology. It is a thesis which may be called ‘moral scepticism’, and its most brilliant and influential exponent in the modern period has been David Hume (1711-1776). Among those to have advanced influential and persuasive points of view of a similar kind in twentieth century moral and political philosophy have been C. L. Stevenson, R. M. Hare, A. J. Ayer, and Karl Popper.

In the course of a critique of dogmatic religion and ethics, the young Hume was to attack with a sceptical scalpel what he took to be the illogic of trying to deduce evaluation and prescription from analysis and description: “In every system of morality, which I have hitherto met with… the author proceeds for some time in the ordinary way of reasoning… when of a sudden I am surpriz’d to find, that instead of the usual copulations of propositions, is, and is not, I meet with no proposition that is not connected with an ought or an ought not. This change is imperceptible; but is, however, of the last consequence. For as this ought, or ought not, expresses a new relation or affirmation, ’tis necessary that it shou’d be observ’d and explain’d; and at the same time that a reason should be given, for what seems altogether inconceivable, how this new relation can be a deduction from others, which are entirely different from it.” While the precise context and implications of this passage continue to divide philosophers, it will be adequate for our present purpose to follow the sympathetic and influential modern interpretation given by the Oxford moral philosopher R. M. Hare, and obtain for an economic context what may be called Hume’s First Law: No normative conclusion, for example, about what a private economic agent or a government ought to do or not do, can be validly deduced from a set of solely positive premises, i.e., from premises which only describe what is the case. No normative conclusion can be deduced without at least one normative premise having been made. A dualism of this kind between the ‘is’ and the ‘ought’ has been frequently supposed to separate science from ethics, the objective from the subjective, the rational from the irrational, public knowledge from private opinion.

Hume was to reinforce this opinion a decade later in a more recondite form of words: “[A]fter every circumstance and every relation is known, the understanding has no further room to operate, nor any object on which it could employ itself. The approbation or blame which then ensues cannot be the work of the judgement, but of the heart; and is not a speculative proposition or affirmation, but an active feeling or sentiment.” This passage too continues to divide philosophers, but for our present purpose R. M. Hare’s recent writing is once more helpful in obtaining a modern interpretation. Hare asks whether, in addition to logical questions and factual questions about how the world is, there can be “irreducibly evaluative or prescriptive questions” as well; once we have “done all we can” by way of reasoning and adducing evidence, “will there remain something to be done which is neither logic nor fact finding but pure evaluation or prescription?” Hare answers yes it is possible, and in the same vein we may restate the idea to obtain for an economic context what may be called Hume’s Second Law: After every empirical question and every logical and mathematical question has been answered in an economic problem, there is no further scope for common reasoning to work. If an evaluative statement is made at such a point, then it can express no more than a subjective attitude or feeling of the individual economist towards the subject.

This is a maxim which does grant that a measure of common reasoning and evidence can be brought to bear upon particular normative questions, and so some normative disagreements may come to be objectively resolved. But it also allows for the potential for such reasoning to become exhausted, leaving merely a subjective residue of personal sentiment or feeling which people might or might not happen to share with one another but which would be beyond further question and discussion. In the pages to follow, a position will be referred to as ‘humean’ if it implicitly or explicitly endorses one or both of Hume’s Laws as stated above. The small h is used to suggest that a close examination of Hume’s works may show him to have been not entirely clear in his own meaning, as well as to suggest that the question of what Hume himself may have actually or fully meant is not of as direct importance for the present purpose as the question of what he has been taken to mean by contemporary economists.

The remainder of this chapter is given to documenting at fair length the fact that a number of the pioneers of twentieth century economics have quite unambiguously seemed to endorse a humean point of view in the theory of knowledge. Chapter 3 will be given to placing this fact in an appropriate historical context. This needs to be done not only in order to understand the nature of the consensus as fully as possible, but also to realize how close economists have been to one another on a central question in the theory of knowledge, even while being engaged in any number of deep and well known and seemingly interminable disputes on substantive matters. The reader who may be impatient with a detailed record of this kind, or who is prepared for the present to take its existence for granted, may wish to move on directly to Chapter 3 without losing the main threads of the argument.

§3. Friedman. Following Neville Keynes, Professor Milton Friedman has clearly and emphatically argued the importance of extending the scope of common reasoning in economics: “Positive economics is in principle independent of any particular ethical position or normative judgments…. [it] is, or can be, an ‘objective’ science, in precisely the same sense as any of the physical sciences…. Normative economics and the art of economics, on the other hand, cannot be independent of positive economics…. differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action — differences that in principle can be eliminated by the progress of positive economics — rather than from fundamental differences in basic values, differences about which men can ultimately only fight.” It is well known that in this and other works, Friedman has argued for the extension of common reasoning and evidence, or positive economics, as the surest means to resolving normative disputations. Yet from the passage quoted, it is clear that Friedman has also accepted something like Hume’s Second Law, to the effect that while common reasoning can have some and indeed much scope, a point of ultimate and sheer normative disagreement can still be reached, distant though it might be, where reasoning must be considered to have become exhausted and “men can ultimately only fight”. In the same essay, Friedman added that it was the practical importance of economics which impeded objectivity and promoted confusion between “scientific analysis and normative judgment”, suggesting an endorsement of Hume’s First Law as well.

Myrdal. Gunnar Myrdal argued for many years that a number of economic concepts purporting to be analytical or descriptive in character in fact had evaluative or prescriptive overtones. Myrdal and his editor and translator, Professor Paul Streeten, argued that a view that there is no place for normative judgments in economic science has been a guise for the advocacy of a specifically liberal political economy, a thesis which might well be endorsed by many marxian and keynesian economists. While postponing an assessment of this claim to a later chapter, we may note that Myrdal also happened to endorse the extension of the scope of positive economics, with as much emphasis as Friedman would do after him: “By subjecting to impartial criticism those arguments in political controversies which concern the facts and the causal relations between them, economic science can make an important contribution to the political sphere. As often as not, conflicting political opinions spring not so much from divergent valuations about the best possible future state of society and the proper policy for securing it, as from subjectively coloured and therefore distorted beliefs regarding actual social conditions.” Myrdal went on to endorse Hume’s First Law in recommending that the economist leave the supply of evaluative premises to the politician. While the economist can provide descriptions, explanations and conditional predictions, “the scientist must not venture beyond this. If he wishes to go further he needs another set of premises, which is not available to science: an evaluation to guide him in his choice of the effects which are politically desirable and the means permissible for achieving them.” Finally, Myrdal reached the humean conclusion that the normative differences between economists are ultimately beyond objective resolution: “[E]conomic reasoning is often obscured by the fact that normative principles are not introduced explicitly, but in the shape of general ‘concepts’. The discussion is thus shifted from the normative to the logical plane. On the former there is either harmony or conflict; conflict can only be stated, not solved by discussion. On the logical plane we should define our concepts clearly and then operate with them in a logically correct manner. What is ‘correct’ and what ‘false’ can be discussed with the methods of logic, whereas conflicting interests can be recognized, never solved scientifically.”

Robbins. In his influential writings over many years, Lionel Robbins made a distinction between ‘economic science’, having to do with such questions as how best to allocate scarce resources between alternative ends, and ‘political economy’ or normative theories of economic policy, prescribing the ends themselves and the weights to be attached to them. In his well known methodological work we read as clear a statement of Hume’s First Law as might be found in economics: “Propositions involving ‘ought’ are on an entirely different plane from propositions involving ‘is’…. Economics is neutral as between ends. Economics cannot pronounce on the validity of ultimate judgements of value…. Economics deals with ascertainable facts; ethics with values and obligations. The two fields of inquiry are not on the same plane of discourse. Between the generalizations of positive and normative studies there is a logical gulf fixed which no ingenuity can disguise and no juxtaposition in space or time can bridge over.” Robbins’s endorsement of the Second Law was equally emphatic. While positive economics extends the scope of common reasoning, it is still possible to find normative differences which are rationally irresoluble: “If we disagree about ends it is a case of thy blood or mine — or live and let live according to the importance of the difference or the relative strength of our opponents. But if we disagree on means, then scientific analysis can often help us to resolve our differences. If we disagree about the morality of the taking of interest (and we understand what we are talking about), then there is no room for argument.”
Samuelson. Professor Paul Samuelson has seemed to feel a tension in the humean position, but also that its logic compelled him to follow closely in Robbins’s path: “It is fashionable for the modern economist to insist that ethical value judgments have no place in scientific analysis. Professor Robbins in particular has insisted upon this point, and today it is customary to make a distinction between the pure analysis of Robbins qua economist and his propaganda, condemnations and policy recommendations qua citizen. In practice, if pushed to extremes, this somewhat schizophrenic rule becomes difficult to adhere to, and it leads to rather tedious cicumlocutions. But in essence Robbins is undoubtedly correct. Wishful thinking is a powerful deterrent of good analysis and description, and ethical conclusions cannot be verified in the same way that scientific hypotheses are inferred or verified.”

Hicks. Like Samuelson, Professor Sir John Hicks has seemed to feel a tension in the humean position, yet he too must be considered as having endorsed at least an important version of it. On the one hand, Hicks has seemed critical of mid-century positivism and emotivism, and claimed the main rationale of the “new welfare economics” to be that it allowed a route of escape from them. “During the nineteenth century, it was generally considered to be the business of an economist, not only to explain the economic world as it is and as it has been, not only to make prognostications (so far as he was able) about the future course of economic events, but also to lay down principles of economic policy, to say what policies are likely to be conducive to social welfare, and what policies are likely to lead to waste and impoverishment.” Since then positivism had declared that explanation and only explanation may be part of scientific economics, and any move to prescribe “must depend upon the scale of social values held by the particular investigator. Such conclusions can possess no validity for anyone who lives outside the circle in which these values find acceptance. Positive economics can be, and ought to be, the same for all men; one’s welfare economics will inevitably be different according as one is a liberal or a socialist, a nationalist or an internationalist, a christian or a pagan.” But such a position is “rather a dreadful thing to have to accept”, one which might “become an excuse for the shirking of live issues, very conducive to the euthanasia of our science.” Fortunately we are not compelled to accept it, since the new welfare economics advanced by Kaldor, Hotelling and Hicks himself was a viable alternative, not open to the objections the positivists had raised to the utilitarianism of Pigou and others.

Yet we may ask, what had the new welfare economics been about? And did it in fact make a break with the positivism which seemed to be troubling Hicks, or had it not been prompted precisely by humean doubts? As is well known, the new welfare economics had to do with questions such as whether the potential gainers from a change in policy could possibly compensate the potential losers from the change by enough so as to get them to go along with it, or conversely for the losers from a change to compensate the gainers from the change by enough so as to get them to go along without it, and so on. As Hicks himself makes clear, it was a discussion very much motivated by the belief that while the Pareto criterion was not a wholly adequate substitute for the utilitarianism of Pigou, any emendation of the paretian theory must leave untouched its basic positivistic premise, viz., that interpersonal comparisons cannot be conceived of as anything but purely subjective judgements, outside the scope of objective reasoning. Hicks claimed it was because the new welfare economics avoided making interpersonal comparisons that it should be considered a positive advance, a scientific advance. And Hicks has emphasized that he, like Robbins, has not wanted any truck with interpersonal comparisons. The old welfare economics of Pigou required one “to admit the possibility of comparing the satisfactions derived from their wealth by different individuals. This is where Professor Robbins parts company; for my part, I go with him.” More recently: “A single individual… shows by his choices that he prefers one thing to another; we may put this, if we like, in the form of saying that he derives (or thinks he derives) greater satisfaction from the one than from the other. But there is no similar way in which we can see that the satisfaction derived by one individual from one good is greater than the satisfaction derived by another individual from another good; these satisfactions are not compared in any actual choice, so that for the comparison between them there is not the same evidence.”
While we shall be returning to these questions in Chapter 10, what we may note here is that since interpersonal comparisons certainly amount to being a particular species of evaluative judgement, Hicks’s scepticism with respect to the possibility of making them objectively must be considered to amount to an endorsement of at least a species of moral scepticism. If so, it would seem to sit uncomfortably with Hicks’s opinion that he had not cared much for the positivist dichotomy between explanatory science and subjective prescriptions, which was said to have prompted the search for the new welfare economics in the first place.

Robinson. Writing on the theory of employment, Joan Robinson was to give a superbly clear account of the humean position at its best, which requires no commentary: “[All economic] controversies should be capable of resolution. The rules of logic and the laws of evidence are the same for everyone, and in the nature of the case there can be nothing to dispute about. Controversies arise for five main reasons. First, they occur when the two parties fail to understand each other. Here patience and toleration should provide a cure. Second, controversies occur in which one (or both) of the parties have made an error of logic. Here the spectators at least should be able to decide on which side reason lies. Third, two parties may be making, unwittingly, different assumptions, and each maintaining something which is correct on the appropriate assumptions…. Here the remedy is to discover the assumptions and to set each argument out in a manner which makes clear that it is not inconsistent with the other. Fourth, there may not be sufficient evidence to settle a question of fact conclusively one way or the other. Here the remedy is for each party to preserve an open mind and to assist in the search for further evidence. Fifth, there may be differences of opinion as to what is a desirable state of affairs. Here no resolution is possible, since judgements of ultimate values cannot be settled by any purely intellectual process…. argument in the nature of the case can make no difference to ultimate judgements based on interest or moral feeling. The ideal is to set out all the arguments fairly on their merits, and agree to differ about ultimate values. On questions of policy, the differences can never be resolved.”

Hayek. Professor F. A. Hayek has stated an unambiguous commitment to Hume’s First Law, as when he wrote recently: “Our starting point must be the logical truism that from premises containing only statements about cause and effect, we can derive no conclusions about what ought to be.” In his earlier discussion of the economics of socialism, Hayek had hinted at the Second Law as well, saying that “problems of ethics, or rather of individual judgements of value… [are]… ones on which different people might agree or disagree, but on which no reasoned arguments would be possible.” If the questions about socialist planning are ethical by this definition then “no scientist, least of all the economist” would have anything to say about them. Positive argument presumes there to be some common values between the participants: “Meaningful discussion about public affairs is clearly possible only with persons with whom we share at least some values. I doubt if we could even fully understand what someone says if we had no values whatever in common with him. This means, however, that in practically any discussion it will be in principle possible to show that some of the policies one person advocates are inconsistent or irreconcilable with some other beliefs he holds.” In particular, the argument over socialist planning should be seen to be one on positive grounds: “[E]veryone desires, of course, that we should handle our common problems as rationally as possible and that, in so doing, we should use as much foresight as we can command. In this sense, everybody who is not a complete fatalist is a planner, every political act is (or ought to be) an act of planning, and there can be differences only between good and bad, between wise and foresighted and foolish and shortsighted planning. An economist, whose whole task is to study how men actually do and how they might plan their affairs is the last person who could object to planning in this general sense.” The dispute between socialists and their critics is “not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.”

Lange. Oskar Lange, the famous adversary of Hayek and Robbins on the question of socialist planning, was agreed with them that the only task within the scope of scientific economics was the determination of the best means, with economic ends having been decided politically. He gave this infelicitous analogy to the economist’s role: “The situation may be compared with that of two physicians treating a patient. There is no necessity of interpersonal agreement about the objective of the treatment. One physician may want to heal the patient, the other may want to kill him (e.g., the patient may be a Jew in a Nazi concentration camp; one physician may be a fellow prisoner who wants to help him, the other may be a Nazi acting under orders to exterminate Jews). But once the objective is set for the purposes under discussion (either of the two physicians may, of course, refuse to act upon it), their statements as to whether a given treatment is conducive to the end under consideration have interpersonal validity. Any disagreement between them can be settled by appeal to fact and to the rules of scientific procedure.”

Schumpeter. In discussing the wertfrei controversy between Carl Menger and the German historical school, Joseph Schumpeter was to suggest that the epistemological matters involved were neither difficult nor interesting and could be disposed of shortly. The distinction between ‘is’ and ‘ought’ had been correctly and adequately drawn already, so it only needed to be accepted that an ‘ought’ statement “that is to say, a precept or advice, can for our purpose be reduced to a statement about preference or ‘desirability’.” Schumpeter went on to endorse Hume’s First Law, saying that an acceptance of one value judgement always requires the acceptance of others. This “is of little moment when the ‘ultimate’ value judgments to which we are led up as we go on asking why an individual evaluates as he does, are common to all normal men in our cultural environment.” Unlike Lange, Schumpeter gave the physician as a negative analogy: “[T]here is no harm in the physician’s contention that the advice he gives follows from scientific premises, because the — strictly speaking extra-scientific — value judgment involved is common to all normal men in our cultural environment. We all mean pretty much the same thing when we speak of health and find it desirable to enjoy good health. But we do not mean the same thing when we speak of the Common Good, simply because we hopelessly differ in those cultural visions with reference to which the common good has to be defined in any particular case.” I.e., common reasoning can proceed in normative discussion but only so long as we find common values among “all normal men in our cultural environment”, which is to suggest reasoning may be helpless with abnormal men or those who are outside our cultural environment. Further, siding with Menger, Schumpeter suggested that the bitterness of the wertfrei controversy could be explained because it had been not so much a logical dispute as one between those who were practising and those who were protesting a kind of scholarly deceit, viz., the propagation of personal dogmas within an ostensible pursuit of objective knowledge: “Those who profess to be engaged in the task of widening, deepening, and ‘tooling’ humanity’s stock of knowledge and who claim the privilege that civilized societies are in the habit of granting to the votaries of this particular pursuit, fail to fulfil their contract if, in the sheltering garb of the scientist, they devote themselves to what really is a kind of political propaganda.”

Arrow. In opening his famous paper on the theory of social choice, Professor Kenneth J. Arrow was to refer explicitly to the ancient ontological dualism between Nominalism and Realism. To take aggregate rankings of “social states” as independent of individual rankings “is to assume, with traditional social philosophy of the Platonic realist variety, that there exists an objective social good defined independently of individual desires. This social good, it was frequently held, could be best apprehended by the methods of philosophic inquiry. Such a philosophy could be and was used to justify government by elite, secular or religious, although the connection is not a necessary one. To the nominalist temperament of the modern period the assumption of the existence of the social ideal in some Platonic realm of being was meaningless.” Nineteenth century utilitarianism had “sought instead to ground the social good on the good of individuals”, which, when combined with a hedonistic psychology, implied “each individual’s good was identical with his desires” and “the social good was in some sense to be a composite of the desires of individuals.” Such a view “serves as a justification of both political democracy and laissez faire economics, or at least an economic system involving free choice of goods by consumers and of occupations by workers.”
While Arrow found it necessary to remark that a connection between elitist rule and a Realist ontology was “not a necessary one”, he did not also remark upon whether he took a connection between democratic rule and a Nominalist ontology to be logically necessary. If not, then we might of course entertain other cases equally well, such as Nominalism being associated with elitist rule, or Realism with democratic rule, or perhaps more subtle cases which may arise from a denial of the dualism altogether — matters to which we shall return more explicitly in Part II. In any case, it would seem evident Arrow’s sympathy has been with the humean thesis, which he endorses strongly in suggesting, like Schumpeter, that no distinction can be made between a personal preference and a judgement of value: “One might want to reserve the term ‘values’ for a specially elevated or noble set of choices. Perhaps choices in general might be referred to as ‘tastes’. We do not ordinarily think of the preference for additional bread over additional beer as being a value worthy of philosophical inquiry. I believe, though, that the distinction cannot be made logically, and certainly not in dealing with the single isolated individual. If there is any distinction between values and tastes it must lie in the realm of interpersonal relations.” That Arrow believes normative questions to be only personally and subjectively answerable is further suggested by his remarks that “[t]he only rational defense of what may be termed a liberal position… is that it is itself a value judgment”; that his own values are such he is willing “to go very far indeed in the direction of respect for the means by which others choose to derive their satisfactions”; that he personally shares “a strongly affirmed egalitarianism, to be departed from only when it is in the interest of all to do so”; that he is personally “in favor of very wide toleration”; and so on. In Chapters 9 and 10, we shall return to examine certain aspects of the theories of general equilibrium and social choice which Professor Arrow has helped pioneer.

Blaug. In his influential writings in the history and methodology of economics, Professor Mark Blaug has appealed directly to Hume, declaring that the “orthodox Weberian position on wertfrei social science is essentially a matter of logic: as David Hume taught us, ‘you can’t deduce ought from is’.” Blaug grants that scientific practice does continually call for the exercise of judgement, but he wishes to distinguish “methodological” judgements, having to do with such questions as “the levels of statistical significance, selection of data, assessment of their reliability, and adherence to the canons of formal logic”, from “normative” or “appraising” judgements, which “refer to evaluative assertions about states of the world, including the desirability of certain kinds of behavior and the social outcomes that are produced by that behavior; thus all statements of the ‘good society’ are appraising value judgments.” It is judgements of this latter sort which are “incapable of being eliminated in positive science”. In support of such a dualism Blaug claims “there are long established, well tried methods for reconciling different methodological judgments” but none “for reconciling different normative value judgments — other than political elections and shooting it out at the barricades.” Blaug’s acceptance of Hume’s Second Law is as explicit as may be found in contemporary economics. There sometimes can be rational discussion over normative differences “and that is all to the good because there is a firmer tradition for settling disputes about facts than for settling disputes about values. It is only when we distill a pure value judgment… that we have exhausted the possibilities of rational analysis and discussion.” Echoing Robbins, Blaug suggests that at such a terminal point we are left with “factual statements and pure value judgments between which there is indeed an irreconcilable gulf on anyone’s interpretation.” Like Arrow, Blaug also makes reference to an ontological division between Realism (or “essentialism”) and Nominalism, and hints at a necessary link between a Realist ontology and dogmatism and tyranny. From Plato and Aristotle up through the nineteenth century, Western thought had been under the malign and mistaken impression that “it is the aim of science to discover the true nature or essence of things”. Such a view “raises its ugly head” even today, and Blaug charges the authors of a recent marxian thesis as being one such recent manifestation: “Adherents of essentialism are inclined to settle substantive questions by reaching for a dictionary of their own making, and Hollis and Nell exemplify this tendency to perfection: reproduction is the ‘essence’ of economic systems because we tell you so!”

Hahn. Professor Frank Hahn reports that contemporary economists “in keeping with the Positivist perspective” make “a thorough distinction of ‘is’ from ‘ought’ (positive from normative).” While Hahn has been mostly guarded in his own opinion as to the precise relationship between positive and normative, he has suggested recently that while normative questions are subject to reasonable argument, and economic theory is intended to widen this scope of common reasoning, “the intention is to take a small step in distilling what are genuinely questions of values.” Such a remark would seem to place Hahn among the moderate humeans like Joan Robinson and Milton Friedman — which in turn would make it an interesting fact that while Hahn has had long and well known disputes on substantive matters with both Friedman and Robinson, he would appear closely agreed with them on a point in the theory of knowledge, viz., that while there is much room for objective discussion to take place, it is possible for sheer differences of a normative kind to exist and come to be identified.

A few others. To take some final examples, Professor Robert Sugden affirms “Hume’s Law reflects a liberal view of the universe”; Professor William Baumol and Professor Allan Blinder write in their textbook that the economist defines rational decisions as those “that are most effective in helping the decision maker achieve his own objectives, whatever they may be”; Professor James Quirk writes in his textbook that “normative economics is based on a system of axioms, but these axioms concern ethics” and because these and any propositions derived from them are not “verifiable through empirical observation”, a person is “free to accept or reject the conclusions of normative economics as he wishes, simply by accepting or rejecting the axiom system — there are no scientific issues involved.” And Professor Jack Hirschleifer wrote in his textbook that “if one economist prefers Maoism and another capitalism, or if one prefers to exterminate and the other to tolerate an inconvenient minority group, the fundamental sources of contention are almost surely divergences in ethical values… [which] will not be eliminated by advances in scientific economics.”

3. Understanding the Consensus
THE great German philosopher and mathematician Gottlob Frege suggested at one place that we should not “ask for the meaning of a word in isolation, but only in the context of a proposition.” In the same vein, it may be said the meaning of a proposition or a hypothesis should not be asked for except in relation to the particular context in which it has been advanced. And we can maintain this without requiring the description of such a context to be fully explicit or even one which can be easily expressed in words. A proposition needs to be understood in relation to the fullest possible description of its implicit and explicit context — which may be a good sense too in which to understand the reference by Wittgenstein to the concept of a “language game” .

In the previous chapter, we have marshalled considerable evidence for our initial thesis that there has been a broad measure of consensus among many of the pioneers of modern economics about the appropriate relationship of the positive to the normative. Irrespective of their many and well known substantive differences, they have seemed all to share an affinity with a humean thesis of moral scepticism, whether in a radical way like Schumpeter and Professor Arrow when they say there can be no difference in kind between personal preferences and value judgements, or in a more moderate way like Joan Robinson and Professor Friedman and Professor Hahn, when they say there can be a great amount of room for objective argumentation to take place about normative questions before a naked and irreconcilable difference will be found to appear. The first question that needs now to be addressed is how this consensus should be understood, and this will require as full a description as can be attempted in this work of the context in which it has occurred. The second question would be whether or not the consensus is correct and justified — whether or not there are firm and adequate grounds for us to think we should join it, and so take the is ought dualism to be a barrier which it is neither possible nor necessary to surmount. The reader will have known from the Introduction that it is a main purpose of this study to make the argument that such grounds are not in fact available, that a humean position is ultimately untenable and misleading, and deserves to give way to a theory of economic knowledge and policy which treated objectivity and freedom as compatible concepts deserving of equal respect. Nevertheless we are first obliged to identify the strengths and motivations of a humean point of view, if only so that we might explain how it has come to command the kind of assent it has done among many of the most eminent of twentieth century economists as well as the many more who have followed them. When expressed as thoroughly as it has been by some, a humean point of view is certainly a respectable and recondite one to hold in the theory of knowledge; there seems nothing obvious that is wrong with it; to the contrary, it may seem foolhardy to try to refute it or even place its merits under scrutiny. In other words, a well thought-out moral scepticism deserves the respect of its critics, and any difficulties with it may be expected to be of a relatively subtle and not self evident kind.
The purpose of this chapter will be then to give as full a description as possible of the historical and political context — of the “language game” or the civilization — within which it is possible for the humean consensus in modern economics to be understood. The economists quoted in Chapter 2 do not appear to have attempted such descriptions themselves, and may even have assumed a humean point of view on the positive and normative to be self-evidently justified, for little thought seems to have been given as to why we should want to endorse it. Thus it will be fair to caution the reader that while a possible justification and explanation of a humean point of view will be given here, it will be one which has been constructed by a critic. Furthermore, the discussion will refer first to a more distant and then a more proximate context, and the discussion of the former will have to be speculative and greatly simplified — a mere thumbnail sketch of an actual drama of indefinite proportions.

§2. The adoption of moral scepticism in twentieth century economics may be most briefly explained as having been motivated by a genuine desire to shield against dogmatism and tyranny, whether in political, economic, scientific, or religious contexts. As scientist and scholar, the economist has been naturally concerned to extend the scope of common reasoning, as well as to protect the objectivity of the findings of his science from the imposition of personal or political dogma. Equally, it has been felt that the choices of the individual agent who is studied by economists, whether as consumer or voter, deserve to be treated with the fullest respect. A humean scepticism may have been adopted because it has been believed to be necessary and possibly sufficient for this kind of respect to be shown to the results of popular choice, whether in parliament, the market place, or in private life. This is summarized in for instance Sugden’s remark “Hume’s Law reflects a liberal view of the universe”, as well as in Schumpeter’s suggestion that the wertfrei controversy had been merely one between those who practised and those who protested a kind of scholarly deceit, namely, the propagation of personal dogma in the guise of a pursuit of knowledge. In other words, someone might become a moral sceptic because he wishes to defend, and wishes perhaps to be seen as defending, the freedom of the individual person to form and hold his or her own normative beliefs, as well as the objectivity of science from being compromised by the forced imposition of the beliefs of any one or a few people. In particular, the modern humean economist is likely to wish to contrast his theory as sharply as possible with the famous theory given by Plato, both directly with the political philosophy which is to be found in Plato’s writings, as well as indirectly, with the medieval scholasticism which came to be deeply influenced by the rediscovered works of Plato and Aristotle and to which the origins of modern economic and political thought can be traced.

Now the question of whether there is any objective knowledge in a field of inquiry is open to be understood either as asking whether there possibly can be any knowledge in the field, or as asking who should be thought of as possessing such knowledge and how they may have been identified. The first of these senses can be thought of as epistemological and the second as political in character. In Republic, Plato offered answers to both questions with respect to the knowledge of the statesman, and the answers he gave were yes — not only is it logically possible for there to be objective knowledge of use to the statesman, but it is practically possible to identify certain men and women in society as actually possessing or being considered fit to possess such knowledge. It is these special people who are the only true lovers of wisdom in society, and since we surely should want the policies of a state in which we lived to be the wisest and most prudent possible, informed by the best available knowledge, it appears to follow at once that what needs to be done is unite knowledge with authority and make these special people our guardians and rulers.

Plato’s ideal city-state is a place where individual freedom is conspicuous by its absence. Its rulers are to be imagined as being about as perfect rulers as there can be: the single and genuine source of all true wisdom and justice, and deserving therefore to be granted absolute authority on all significant questions of private and political conduct, including the right to suppress dissent, since any dissent would be misguided by definition. This is not to say the philosopher-kings would be entitled to a life of luxury or even ordinary comforts. To the contrary, since those who deserve to be philosopher-kings may well be disinclined to seek power and privilege for themselves in the normal course of politics, they may have to be first discovered and then forcibly drafted to take the office which rightfully should be theirs. In preparation for the serious business of piloting the ship of state, they will be placed in seclusion and rigourously educated in such disciplines as aesthetics and gymnastics and mathematics and music, their lives certainly without any of the signs of corruption that we would frequently associate with the exercise of power. At the end of the tenure of one generation of such rulers, they will be retired and replaced by a new generation, bred and educated through a similar and careful programme of eugenics and training in the arts and sciences of statesmanship. Finding actual examples of such extraordinary beings may be quite impossible; perhaps some appropriate mixture of the Dalai Lama, Gandhi, Attaturk and Mozart’s Sarastro might help our modern imagination.
A number of modern political thinkers have roundly condemned Plato for having written a theory hostile to democratic political institutions, and even for having provided the blueprints for the tyrannies of modern history. Yet while there is no question that Plato was no friend of democracy, or at least of the kind of democracy which had brought about the judicial murder of his friend and teacher Socrates, a fair-minded reader of Republic is unlikely to find in it any justification of tyranny at all. If we were to define tyranny in the way Plato and his contemporaries would have done as the rule of the ignorant and capricious, it would be a state of affairs Plato found abhorrent, the complete antithesis of his own ideal of a full union between knowledge and authority, of rule by the genuinely wise and the genuinely good; even the faulted system of democracy would be preferable to it. Moreover, Plato was to discuss at length the dynamics of how even his ideal city-state would be likely to degenerate into a tyranny; and besides, his single attempt to put theory into practice ended in pathetic failure, when he accepted an invitation to train a fatuous prince, who was incapable of and soon became bored with the rigorous education Plato had in mind for him, and who eventually became the worst of tyrants, much to Plato’s disgust. In fact Kant, the modern lover of freedom, was led to come to the defence of Plato, the ancient authoritarian, precisely because the logical possibility of a utopia is suggested to the reader of Republic — a state of affairs in which everyone is a genuine lover of wisdom, everyone a philosopher-king, and therefore all external government made redundant. Republic is a masterpiece of philosophy and mathematics and literature and political economy as well, and it would be a mistake to suppose its author to have been so inexperienced of human nature and society as to provide it as a textbook for grand or petty tyrannies, whether of his own time or of ours.

What is true however what is true is that the theological culture of medieval Europe would come to be deeply influenced by the rediscovered works of Plato and Aristotle, with which a synthesis of medieval Christianity was sought to be made. And it may also be fair to say that regardless of Plato’s intentions, Republic came to provide something of a model for the tyrannies to be experienced in subsequent European history.
Social and economic life in medieval Europe is marked by a four-fold division of society into the nobility, the clergy, free artisans and tradesmen self governed within a system of guilds and corporations, and the peasantry. The medieval church is seen as an eternal institution representing divine will on earth, deserving to be endowed with final and absolute authority on all significant questions of right conduct, somewhat perhaps in the manner of Plato’s philosopher-kings. Specific duties and rights belong to the members of different occupations, and it is within one’s calling that one is expected to lead one’s life in accordance with the divine law as interpreted by the church and the natural law as discovered by the temporal authorities. In particular, there is a notion that economic activities may be licit or illicit in nature, and since the general moral question of what ought to be done is closely identified with whether there is the sanction of the church for it to be done, whether a particular economic activity is to be approved of or not comes to depend on whether or not it has such a sanction. There is an idea too of economic goods having a ‘true’ or ‘intrinsic’ or ‘natural’ value endowed in them by God — an idea which will become perhaps a precursor of the labour theory of value of classical economics in the eighteenth and nineteenth centuries. Determining this intrinsic value establishes the ‘just’ price of a good or service, i.e., the price at which it ought to be traded, even if the actual market price as determined by the subjective estimates and actions of traders happens to contingently differ from this. There is a related concept of ‘equivalence’ in transactions, with a suggestion that one party to a trade can gain from it only at the expense of the other. Merchants and middlemen thus come to be treated with some disdain, since it does not seem apparent they are adding anything to the intrinsic values of goods, making the just price of their services seem hard to determine. Indeed the unabashed pursuit of wealth by anyone is probably the object of some considerable social and religious disapproval. Similar thinking may underlie the condemnation of usury, since, given a premise of money having no intrinsic worth, what is perceived to be the lending out of money should seem to have a just price of nought.

The common medieval culture and economy was to be transformed drastically though differently across Europe between the fourteenth and eighteenth centuries. The sea routes are discovered, nation states emerge competing with one another in trade and war, the age of modern science begins, a long and rapid succession of scientific discoveries and technological inventions takes place, there is a vast expansion of commerce and population and the settlement of European colonies in other continents. Accompanying these transformations in some places are intellectual rebellions against the medieval church, and almost everywhere in Europe a decline in the influence of formal faith. The assertion of individual will and conscience as the principal guides of human conduct is a challenge directed at church doctrine and dogma; but given that the medieval concept of reasoning is one of reason ultimately bounded by the doctrines and dogmas of faith, the assertion of a subjective individual will may have been assumed to amount to being a challenge to the full possibilities of objective reasoning itself.

In this new mercantilist age, the pursuit of material gain must come to be freed of the sanction of the church, and once more, since right and wrong are closely identified with such sanction and prohibition, a declaration of the independence of economic activity from the sanction of the church amounts virtually to a declaration of its independence from ethics as well. In particular, the medieval notion of ‘equivalence’ in the intrinsic value of goods in a transaction is transformed with the aid of mechanistic analogies at hand into a concept of ‘equilibrium’ in trade, such that each party to a trade is conceived of as gaining from it as an individual and continuing to transact until the prospect of such gain has come to be exhausted. It is understandable perhaps that England and Holland will be in the vanguard of the mercantilist revolution, given their theological distance from Rome as well as their growing commercial interests and naval power. Nor does it seem obviously foolish, at least in the early mercantilist years, for the wealth of a nation to be identified with its ability to export and its holdings of precious metals, when the circumstances of the time make it a first priority of the business of government to have liquid payment available for navies and armies. In France there comes to be the liberal protest of the physiocrats against the iniquities upon the peasantry, a protest which serves to rehabilitate a more secular version of the natural law of the scholastics. But the calls of men like Quesnay and Turgot for reform are too late, and the system of physiocracy is itself swept away with the onset of the French Revolution.

Adam Smith however has admired and learned from the physiocrats, while observing at first hand the dismal effects of a staling British mercantilism. This he rises to condemn in The Wealth of Nations, thereby starting an intellectual revolution of his own, ringing in a new century of free enterprise and imperial expansion, and establishing the concern of the economist with the workings of individual interest and the market economy which continues to this day. Forty years later it is David Ricardo who introduces to political economy the practice of an abstract hypothetical method, by which it is a body of abstract and general principles that the economist’s