For the last two years, the Bharatiya Janata Party’s new think tank, the India Foundation, has been holding an “Ideas Conclave” around this time of the year. This year its theme was “Democracy, Development and Dissent”.
I was invited there by the newly incarnated Swarajya magazine, an effervescently serious magazine for those born after 1970. It is the perfect antidote to the eternally mournful Economic and Political Weekly.
Many well-known people spoke at the conference, most of them quite sensibly. However, despite “Development” forming the third leg of the theme, the debate was entirely focused on social, historical and political issues.
Normally, I do not miss economists but this time I did, because dissent in economics is well worth discussing. After all, if all things intellectual that emanate from the West are bad — that old intellectual slavery thing upon which the speakers dwelt at length — why should economics be an exception?
I give two examples of what needs to change. I know from experience, however, that I will be dismissed out of hand by those who are influential amongst economists.
They don’t like ijtihad or questioning. It is easier to get by with settled ‘truths’.
Example 1: Macro
It is now my belief that John Maynard Keynes, the economist-messiah of all democracies has — quite unintentionally, like Karl Marx — done the world a lot of harm because his theory has allowed politicians to treat public funds as their own.
The effect has been like handing a monkey a machine gun — unpredictable, inefficient and ultimately very destructive.
Keynes had meant well. He was addressing a specific set of circumstances in the 1930s: massive industrial overcapacity, massive unemployment and massive deficiency in overall demand.
To boost demand, he said, the government must undertake public works — for a short period, no more than two to three years. This, however, required public funds, which required higher taxes, which required the support of the rich classes, who were the main backers of the political parties.
So he designed an elegant theory, which ironically got implemented on a gigantic scale after the Second World War when demand was no longer deficient. This happened because Keynes was appropriated by Left-leaning politicians everywhere. They chose to spend on industrial investment and social programmes, which hadn’t been Keynes’s view at all.
His economic intent was to provide the means to governments to use up industrial overcapacity; his political intent was to make sure that massive, persistent unemployment did not result in an increase in the popularity of Communism. It was, as it happens, this fear that made the rich reluctantly agree to marginally higher taxation.
In post-1955 India, his theory has been used to fund everything — from bread factories to photo films; from steel mills to oil refineries; from bananas to banks and condoms; you name it, the taxpayer has paid for it. There are nearly 300 public sector companies in India today.
But today we need to question the relevance of classical Keynesian theory. It has outlived both its economic and political usefulness, at least against Communism.
Example 2: Micro
Going further back, there is Adam Smith, the exact opposite of Keynes, at least as far as the role of the government in an economy is concerned. There was no macroeconomics in his time.
He did, however, give us the central driving principle of modern economics and economies: competition. This, he suggested, would lead to the greatest good of the greatest number.
That, if you ask, say, Thomas Piketty, has not happened. As to why not, Marx had already explained it as far back as the middle of the 19th century.
Competitive capitalism worked along the lines predicted by Smith as long as it was confined to the real sectors. Firms competed, and produced real and better things, which they sold at lower prices. For instance, mobile phones.
But in 1971 Richard Nixon decided to dishonour his country’s commitments on the dollar. This eventually led, in the 1980s, to unregulated or poorly regulated competition in the financial sector, which produces nothing at all. It is, if you will, like the recitation of poems — pleasure for a few, pain for the rest.
The result of too much poetry was the financial collapse of 2008, which has changed the world forever, witness Trump, Abe, Putin, Xi and of course, Modi.
It is for this new reality — where capital and labour both are in excess supply — that the world needs a new disk operating system for economics. If anyone knows of any economist(s) who is building one, let me know, please.
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