The media hype about the Budget is passing. The numbers have been debated and doubted. With a nod to Lewis Carrol, 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 main-stream economics has wings.
The Finance Minister disappointed economists who wanted bold reforms following the big election victory. 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. As expected, 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 make the rupee strong to claim the target has been reached, regardless of the impact of the exchange rate 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 of its depleting water resources. Water is disappearing underground: it will not trickle down from the economy’s $5 trillion top-line. Nor will incomes trickle down to the bottom any faster unless the shape of the economy is radically altered, not just its size increased. And to change its shape, main-stream economists’ ideas about how growth is brought about and measured must be changed. I will mention three ideas.
The first is the excessive focus on the top-line, and on incentives for people at the top to invest more so that the economy can grow more, an idea which 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 laisse-faire capitalism over socialism. Now history is returning. Around the world some conscientious wealthy capitalists are suggesting that they should be taxed more. India’s Finance Minister has taken tentative steps by increasing taxes on the very rich.
The second idea running through her pronouncements is a respect for small people and small enterprises. For decades, macho economists have made fun of Gandhi’s and Schumacher’s ideas that ‘small is beautiful’. They deride it as a romantic idea and not a practical solution to the big problems of the world. For them, ‘scale’, and concentration of wealth and power to obtain scale, are solutions for the world’s problems. 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 the concentration of power in business monopolies and against ‘crony-capitalist’ policy-making that favors big companies. The Finance Minister has highlighted the need to promote producer companies and clusters of small enterprises to give small enterprises collective economic and political power to improve terms of trade in their favor vis-a-vis large enterprises in India and abroad.
The third idea from main-stream 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 main-stream 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 labor markets must be smoothened to grow the economy. In this view, environmental resources and labor 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. According to economists, markets can function only when the commodity has a price and when traders are free to buy and sell freely from each other.
The theoretical foundations of faith in privatization and market mechanisms rests on the curious case of the Coase Theorem. Ronald Coase won a Noble Prize in Economics in 1991. The Coase Theorem derives from his paper, ‘The Problem of Social Cost’ which he wrote in 1966 at the University of Chicago, based on stripped down theoretical cases. Milton Friedman, Gary Becker, and other Chicago economists used Coase’s 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 in 1988, ‘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—which are essential qualities also for markets to function. However, mathematical economists strip these qualities out because they cannot be added into their equations.
One wonders how qualities of fairness and justice will be computed to determine when India’s economy has reached the $5 trillion mark. One wonders 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 become scarcer. And should labor 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 main-stream economists do not have the tools yet. Solutions to these challenges will require inter-disciplinary dialogues with democratic deliberations going beyond the numbers in the Budget.