Home >Opinion >Columns >Opinion | The economics of real issues facing real people in India

The media hype about the budget is passing. The numbers have been debated and doubted. With a nod to Lewis Carroll, the time has now come, as the walrus said to the carpenter, to talk of many things: of the rich and the poor, society and democracy, and whether mainstream economics has wings.

Finance minister Nirmala Sitharaman disappointed economists who wanted bold reforms. Instead of a rabbit from her hat (or the innovative bahi khata in which she had wrapped the budget), what they got was some “vision thing" about an inclusive economy. However, they did get a big bone to chew on: the expectation of a $5 trillion economy. There was debate about the calculation of this number, and how it would be affected by the rupee-dollar exchange rate. Could there be a temptation to strengthen the rupee to reach the target, regardless of its impact on the real economy?

Meanwhile, alarm bells are ringing about real issues such as rapidly depleting water sources. NITI Aayog projects that by 2030, the country’s water requirements will be double its water resources. Water will not trickle down from a $5 trillion economy. Nor will incomes trickle down to the bottom any faster, unless the shape of the economy is radically altered, not just its size increased. To change its shape, ideas of mainstream economists about how growth is brought about and measured must be changed. I will mention three ideas.

The first is our excessive focus on the $5 trillion number, and on incentives for people at the top to invest more so that the economy can grow more, an idea that has dominated public policies since “the end of history" caused by the collapse of the Soviet Union and victory of the Washington Consensus in the early 1990s. This marked the supposed eternal triumph of laissez faire capitalism over socialism. Now history is returning. Around the world, some conscientious wealthy capitalists want to be taxed more. Sitharaman has taken tentative steps by increasing taxes on the very rich.

The second idea running through her pronouncements is respect for small people and small enterprises. For decades, macho economists have made fun of Mahatma Gandhi’s and E.F. Schumacher’s idea that “small is beautiful". They deride it as a romantic idea, and not a practical solution to the world’s problems. For them, scale, and concentration of wealth and power to obtain scale, are the solutions. However, concentration of wealth and power destroys democracies, and it is not surprising that democratic movements are now stirring in the US, Europe and India too against business monopolies, and against “crony-capitalist" policymaking. The finance minister has highlighted the need to promote producer companies and clusters of small enterprises to help improve their terms of trade vis-à-vis large firms.

The third idea from mainstream economics merits a deeper conversation between the walrus and the carpenter. This is the idea of markets. Just as for a consultant with a hammer every problem is a nail to be hammered, for mainstream economists, markets are the solution for everything. They say water (and carbon emissions) must be priced to create more efficient markets to manage environmental resources; and labour markets must be smoothened to grow the economy. In this view, environmental resources and labour are commodities to be bought by whoever has the money to pay the price. Without a monetary price, there is no currency to determine value. Moreover, markets are not free when governments (or monopolists) set prices. They can function only when traders are free to buy and sell.

The theoretical foundations of faith in privatization and market mechanisms rests on the curious case of the Coase Theorem. The theorem derives from Nobel laureate Ronald Coase’s paper, The Problem Of Social Cost, which he wrote based on stripped-down theoretical cases. Milton Friedman, Gary Becker and other Chicago economists used the theorem to support their free market and anti-government ideologies. However, Coase insists he was misunderstood. He wrote in The Firm, The Market, And The Law: “My point of view has not in general commanded assent, nor has my argument, for the most part, been understood."

The notions that human beings are self-interested and rational in their transactions, and that economies grow with some invisible hand are attributed to Adam Smith in The Wealth Of Nations. Smith also wrote The Theory Of Moral Sentiments, saying that human beings value many things that cannot be as easily quantified as monetary transactions. They value fairness and justice in their communities. However, mathematical economists strip these qualities out because they cannot be added into their equations.

One wonders how the qualities of fairness and justice will be computed to determine when India’s economy has reached the $5 trillion mark. Or how the poor will pay for the right to use water if they do not earn enough to pay the price—which will rise because water will get scarcer. And should labour be reduced to a commodity, without any dignity and rights, whose price is determined purely by a transactional market?

These are fundamental issues about human values for which mainstream economists do not have tools yet. Solutions to these challenges will require inter-disciplinary dialogues with democratic deliberations going beyond the numbers in the budget.

Arun Maira was a member of the erstwhile Planning Commission

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