Marshall+Keynes has spelt disaster

This is the concluding part of a six-part series on India’s pre-Independence economists and how they have been forgotten by us. The series was based almost entirely on the collection of essays by pre-Independence economists put together by the economic historian, J Krishnamurti, in a 2009 volume called Towards Development Economics.  

The question arises: Why were pre-Independence Indian economists unable to provide a socially rooted framework for economic analysis? After all, their counterparts in the West had done precisely that.

One possible answer is that Western economists were seeking to analyse and explain the consequences of the Industrial Revolution. Indian economists, on the other hand, were trying to provide a framework that gave precedence to equity rather than efficiency. 

This was perhaps a natural consequence of the depredations of British rule, which had knocked India’s economy out. A direct consequence of this was that when investment planning began in the mid-1950s, there wasn’t very much by way of an Indian theoretical framework to fall back on. 

Harrod-Domar to begin with and then Jan Sandee’s formulations ruled the roost. Then came the war with China in 1962, the death of Nehru in 1964, two wars with Pakistan in 1965, the death of Lal Bahadur Shastri in 1966, not to mention the droughts of 1965 and 1966. They completely took the wind out of Indian sails.

By the time India recovered in the 1970s, economic analysis as an input into policy had mostly gone out of the window. True, Sukhamoy Chakravarty was there in the Planning Commission but if you look at the Fourth Plan document today, you will wonder what his contribution was.

From then onwards it has all been jugaad. Nowhere was this more apparent than in the tax and spend policies followed since 1971. Is it any wonder then that the results have been so pathetic? 

Keynesian Kamadhenu

Had Keynes known what the politicians would do with his theory of pump-priming he would probably have not put it forth. It became particularly useful for Indian governments after 1970.

As the level of political contestation increased, the incentive for governments elected by popular votes to spend tax revenues on populist programmes and poorly managed infrastructure and industrial projects also increased. Such expenditure didn’t need to be rooted in anything except a broad and deliberate misunderstanding of Keynes. 

Worse, very able economists abetted the politicians. You only have to read the Plan documents since 1972 and the Economic & Political Weekly to see how badly Keynes had been used.    

Many had hoped in 2014 that the Bharatiya Janata Party (BJP) would put an end to this nonsense. But the political incentives of Keynesian economics are far too strong.

One must hope that if the BJP gets a second term in 2019 it will implement Keynesian policies for what they were meant for — short-term boosts to aggregate demand when it sags.

Greed and intellect

The time has now come for some original thinking by Indian economists. It has become necessary to move away from the one-size-fits-all economic theory. 

In my view the starting point must be the abandonment of the postulate in which Western economics is rooted, namely, greed. The fancy name for it at the level of the individual is maximising utility and at the level of the firm, maximising profit. 

Western economics seeks to incorporate greed into an intellectual system and, when things get out of hand, to regulate it. The 20th century saw two modes of economic thought being universalised: Marshallian analysis at the microeconomic level and Keynesian solutions at the macroeconomic level. 

This is no longer, well, sustainable? The negative externalities are simply far too much and too many now.

In their own ways both Karl Marx and Gandhiji had pointed this out but both lost out because neither was able to go beyond appeals to human nature. 

Every country needs to develop analytical frameworks which are best suited to its context. The one-size-fits-all approach is highly unsuitable.

An alternative framework of analysis is not going to develop overnight but some Indian economists need to start thinking about these issues. To do so effectively, they will have to learn Indian sociology, rather than assume that it is irrelevant because their discipline is value-neutral.