Economics' Achilles heel

Half a century ago, when I attended my very first class in economics, the professor said economic theory was a discipline — he was careful not to say science — that studies the effect of scarcity on production and consumption.

For the last 15 years, however, I have been asking a different question: If economics studies scarcity, how do we study surpluses, especially huge ones in the factors of production? 

The immediate provocation for revisiting this matter is the minimum wage code Bill that the Cabinet approved a week back. It is designed to neutralise the effects of surplus labour on wage rates. 

Therefore, the Bill wants a universal minimum wage for all workers including those who earn more than Rs 18,000 per month. As it happens, this is the exact equivalent of the minimum support price (MSP) in agriculture. 

That price also serves to delink the earnings from land from the market structure for its output and its productivity. Once you say this is okay, it’s goodbye economics. 

The truth is that both the MSP and the minimum wage problem are results of abundance of labour: How does a family with one or one-and-a-half income earners support a family of five or above?

Many people think a minimum wage is warranted on humanitarian grounds. Politicians agree because it is convenient politically. Many economists also agree.
 

But one must not blame them. Twentieth century economics, having allowed the politics of scarcity to colour its prescriptions, has no answer. So the void has been bridged by politicians, who have interfered in the factor markets simply because they can and become arbitragers, who receive huge pecuniary and political benefits from such interventions.

This arbitrage is also called corruption. 

Between Scylla and Charybdis

The problem, if you take your head out of the sand, is this: The world had one billion people in 1900; today, it has over seven billion. India had 350 million people in 1951; today, it has 1.3 billion.  

This excess supply of labour, if you think about it, is the exact equivalent of too much money in the global system. Since 1971, the issuance of currency has not been linked to gold holdings. This delinking has allowed America to finance its deficits and export its inflation. 

This happened because America did to the world in 1971 what China is trying to do to it now — going back on promises and agreements that were considered permanent. Few people know that America reserves the right to repudiate its debt.

Only fools buy it. The more foolish buy more.

Meanwhile, these twin excesses, over time, have led to falling returns to both labour and capital. Everyone is trying to raise them, unsuccessfully.
 

But there is a problem here, which is both political and economic. The returns on one can go up if — and only if — returns on the other go down. 

The problem is, when returns to capital go up at the expense of labour, as they indeed have, inequality increases. If the reverse happens, productivity decreases. Democracies are thus caught between the rock of Scylla and the whirlpool of Charybdis.

This has resulted in the post-1945 battle between the shrill calls for equity and muted bleats for efficiency. Politics is ensuring that equity wins. 
 

Thanks to the suit-boot jibe, the Narendra Modi government, which promised efficiency, is vigorously pursuing equity. That is one other reason why capital is in coma.

Too few ideas

Economics is hedging its bets, mostly silently, and losing the battle. It needs to come up with a sensible answer for the consequences of these twin surpluses.

One is to go back to classical economics of booms, busts and flexible labour markets. But that is politically and socially unacceptable, just yet anyway. 
 

So an alternative intermediate paradigm must be found. But where to begin? 

I would say by rejecting the central proposition of Keynes that governments must be active participants in the economy not only via tax and tariff adjustments but also via massive public investments.

This contextual prescription has handed politicians an inter-temporal means to interfere. The results are there for us to see.

Economic theory, which has been rendered comatose by the Huns of mindless empiricism, must come up with a way of solving the twin-surplus problem. New Economics must go back to the Old Economics. 

That is the real challenge for economics in the 21st century.