Sudhir Mulji: Employment guarantee scheme

The magnitude of our unemployment is elegantly concealed through confusing definitions

It is unwise for a commentator to intervene in a professional argument between two distinguished economists like Amit Bhaduri (The Hindu, Dec 27) and T N Srinivasan (The Hindu, Jan 3 ) on so contentious a topic as the Employment Guarantee Scheme.

If I am emboldened to do so it is perhaps to make the point that both of them have chosen to argue within the framework of traditional economic principles, which may have less relevance than is generally supposed.

For example both Bhaduri and Srinivisan have proposed financing the ensuing fiscal deficit by further government borrowing, Bhaduri recommending it and Srinivasan warning against it; but neither have explored outright money printing as a solution; though Bhaduri's proposal of borrowing from the Reserve Bank may in effect mean that.

The debate has been conducted in conventional economic terms that we are all familiar with.

But in the past economists have not always argued only in this language.

Abba Lerner for example, in discussing unemployment elucidated his arguments for functional finance in the following words "In more and more ways Functional Finance is seen to run counter to basic economic principles.

Its declaration that real poverty "� the lack of real goods and services "� can be remedied by merely printing money smacks of magic or perhaps of a failure to understand the elementary lesson of economics: that money is not real wealth but only claims to wealth - that real wealth cannot be created by the printing press....

The notion that the economy can be made richer by wasteful activities and by unproductive investment seems too absurd to merit serious examination.

The whole theory seems to be quite topsy-turvy and leaves many with nothing but a sort of embarrassment at having been seduced even for a moment by its superficial plausibility". (Lerner "Economics of Employment" page 142).

But then Lerner goes on to point out that topsy-turvy economics is indeed appropriate for an economy suffering from unemployment.

He writes "In truth it cannot be denied that the economics of Functional Finance in its application to a condition of unemployment is topsy-turvy.

But this is no objection at all. Topsy-turvy economics is just what is appropriate for an economy that is suffering from unemployment."

I have quoted extensively from Lerner, not just because I am a great admirer of the logic of his economics, but also because such ideas have normally been dismissed, particularly in India, as absurd.

There seems to be a characteristic of present day economic thinking, similar to what J V Narlikar has described in scientific thought (The Culture of Science) which is to avoid even the presentation of unconventional and radical premises.

For example the sharpness and magnitude of our unemployment is elegantly concealed through confusing definitions produced by voluminous reports from the NSS, which survey every form of activity but are quite unable to provide a single figure for the overall rate of unemployment in the Indian economy.

Yet should it be so difficult to provide this? Admittedly labour is not homogenous, but it should surely be possible to devise ways of adding up the amount of unutilised manpower.

Instead the NSS survey enumerates employment status not by way of any attempt to calculate used productive capacity but simply by usual activity.

But as Amartya Sen points out "employment cannot be defined in terms of physical activity as such. This question of valuation (of this activity) is inescapable" (Sen "Employment, Technology and Development" page 4 OUP).

Fortunately the happy coincidence that much of the rural population works collectively in households enables us to classify such persons as employed so long as they are performing some activity including non- market activity like for example the collection of firewood for personal consumption.

That the magnitude of unemployment is substantially higher than one per cent inferred by analysts of NSS data is obvious to even casual observers if not to skilled statisticians.

But even to statisticians, the potential output lost from the disguised employment must be considerable. Apparently one such theoretical calculation of the potentially unemployed in China yielded a figure of 300 million people or about 30% of the population, and no doubt in India it would be at least as large.

However there is an obvious preference for selecting detailed categories that enable us to avoid unpalatable truths.

Those who advocate employment guarantee schemes are conscious that evading the issue by pretending to count numbers cannot alter the quality of poverty and the insecurity it provides to those who have no jobs.

This has now affected voting results not because of self-interest of the majority but because self-interest alone is not the sole criterion for determining the society we want.

Amartya Sen is right in seeking the valuation of our activity. We all need that to determine our worth, however unsatisfactorily it can be worked out.

Clearly Srinivasan places a low valuation on the activity expected to be carried out by those to be employed under the guarantee scheme, indeed he dismisses the work as a palliative of no greater value than a simple transfer of income; but then he could apply that same reasoning to some of the activity that NSS surveys classify as "employment."

If the NSS was asked to calculate excess labour capacity and convert those figures into unemployed labour force, we might be compelled to pay greater attention to the disturbingly low priority we give to unemployment in comparison to fiscal deficits and inflation.

Srinivasan is of course sympathetic to any programme that might ensure income to the poor, but for it to be sustainable he seeks a long-term solution "in which the economy generates productive employment."

But then one has also to be careful about productive employment. From classical economics onwards it has been argued that the creation of real wealth through competitive economics is productive; but then there is the devastating example of Keynes's description of digging for bank-notes that have been buried for us to find.

This is frequently misunderstood as one of Keynes's typical paradoxes and as suggesting that wealth can be created by such activity.

In fact it was no such thing; Keynes used it only to compare this potential activity with that of gold mining which he claimed "not only adds nothing whatever to the real wealth of the world ...but is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance."

Keynes was always colourful in his language and imagery, which has often distracted people from the economic point that he was making. But one possible purpose of his comment was to warn against distinctions between seemingly productive and seemingly unproductive activity.

He pointed out that we are willing to spend to build assets for the future, which may in fact never be used, but unwilling to relieve the immediate sufferings of the unemployed.

The same principle applies to those paid under EGS. It would be very desirable if we could find productive investment but however unproductive the work the guarantee represents an exchange between the disutility of work for the employed against the employer's payment.

This is as good a transaction as some others, which take place in a competitive economy.

(The views expressed here are the author's personal)