Table Of Content

1 An Expedition into Real Life Economics WEALTH and ILLFARE is intended for readers who do not have much knowledge in economics, but are eager to know how economic systems function. In particular, it deals with the phenomenon that many find disturbing, the soaring affluence of the few and the continuing misery of the many that is increasingly becoming evident globally and in our country. Ownership and control over resources, different forms of mediation and asymmetry of information are identified as clues for any interested reader to develop skills to study real life economic problems. It is a unique and timely contribution by a reputed practitioner who, over the past half a century, has influenced generations of students and through his earlier writings the general public as well. ISBN: 978-81-8291-120-8 Publisher: Books for Change, Bangalore 2 About the Author Dr. C. T. Kurien is one of India’s senior economists. He was Professor in the Madras Christian College (1962-78) and Director of the Madras Institute of Development Studies (1978-88). His books include: Poverty and development (1973), Poverty, Planning and Social Transformation (1978), Dynamics of Rural Transformation (1980), Growth and Justice (1991), The Economy: An Interpretative Introduction (1992), Global Capitalism and the Indian Economy (1994), Rethinking Economics: Reflections based on a study of the Indian Economy (1996). His most recent essay was on the international financial crisis titled Inter-Planetary Economics: The Meltdown and Beyond (2009). Through his many books, professional papers and newspaper articles he has influenced generations of economists and the reading public. He has retired from active academic life and now lives in Bangalore. 3 WEALTH AND ILLFARE An Expedition through Real Life Economics “Ill fares the land…where wealth accumulates and men decay” Oliver Goldsmith C. T. Kurien 2012 4 TABLE OF CONTENTS INTRODUCTION 6 Part I: BASIC ECONOMIC ACTIVITIES AND RELATIONSHIPS 15 Chapter 1: Economics of a Single Household 17 Chapter 2: Economics of Multiple Households 29 Chapter 3: Exchange and Intermediation 42 Part II: THE INTERMEDIARIES 52 Chapter 4: Money and Markets 54 Chapter 5: Banking and Finance 68 Part III: PRODUCTION AND AGGREGATION 93 Chapter 6: The Organization of Production 95 Chapter 7: The State 113 Chapter 8: The National Economy 126 Chapter 9: The Global Economy 152 Part IV: THE INDIAN ECONOMY 184 Chapter 10: The Indian Economy: Evolution and Structure 185 Chapter 11: Growth and Transformation 203 Chapter 12: India Today: Wealth and Illfare 226 CONCLUSION 250 5 INTRODUCTION Dear Reader, You have picked up this book, I imagine, because you recognize that economic events both in your immediate surroundings and elsewhere are impacting your life as also of society as a whole. If you are a home-maker you know that the rising prices of daily necessities are related to the happenings in the farms in the rural areas, the policies within the country and outside that determine the price of petrol, and may be because of all the developments in the much talked about ‘global economy’. If you are an IT professional you are acutely aware that your progress in life depends much more on the changes and chances of the world outside than on your own skills. If you are a social worker involved in poverty alleviation programmes, you are convinced that the people whose welfare you are concerned with are not largely responsible for their present plight. But you do not find it easy to explain the phenomenon of the continuance of mass poverty even as a few in the country quickly make their way to the top. We are all aware of many more issues of this kind. What is perhaps missing is an understanding of how such things hang together. That is what the discipline of economics is supposed to do – to provide the interconnections of the many puzzling economic problems that are part of our everyday experience. I have had a long engagement with economics for about six decades – as student, teacher, researcher, author and commentator. I turned to economics because I was seeking explanations for real life issues, specifically for the prevalence of mass poverty in the country. From my acquaintance with the subject I can tell you that while there are many “schools” within it, most of them professing to deal with practical issues, they can 6 be broadly divided into two basic approaches. Let me refer to them as ‘logic-centred’ and ‘life-centred’. The former creates an abstract economic system (a make-believe world, if you like) concentrating on what is a prioiri determined to be the central principle coordinating the decisions of its different participants and thus leading to what may be thought as the ideal set up. But, of course, the participants must behave as ‘theory’ expects them to. Internal consistency and universal applicability are claimed to be the features of such a system. If the real world throws up situations different from the ideal, the inference then is that some conditions required for the ideal have not been adhered to. Removing these external impediments through ‘policy instruments’ can get the real world closer to the ideal is the claim. Exposition of economics, especially in class room teaching turns out to be enumeration (rigourous or otherwise) of the conditions required for a smoothly functioning and (internally) self-adjusting economic system. In the second approach the emphasis is on contextuality, temporal and spatial, of economic phenomena as they arise from and reflect the ever-changing social processes. The basic premise is that the economy is not a self-contained closed entity governed by its own laws but part of and greatly contributing to larger social relationships. Hence economic problems must be probed keeping in mind such social factors as the ownership of resources, the manner of control over them, divisions and power configurations that arise from them and much more. Real human beings in the variety of social contexts are the actors that shape the economy. A familiar ‘riddle’ may bring out the essential difference between the two approaches. Ten birds are perched on the branch of a tree. A hunter comes and shoots one and it falls down. How many birds are left on the branch? 7 The common sense answer to this ‘riddle’ is known to everyone – or nearly everyone. Have you tried out this riddle on any of our smart urban kids who have not seen birds, except in cages or TV, but are otherwise very well-schooled? I have, and the answer is not rarely, “Nine”. In one instance, a youngster thought that this riddle was an insult to his knowledge of arithmetic and so added, “No big deal”! Why does this smart youngster give 9 as answer to the above trick question? Obviously because it comes naturally to him that 10 – 1 = 9, or to make it a little more sophisticated, 10x – 1x = 9x, no matter what the x is -- apples, oranges or birds or whatever-- a case of trained logical thinking. But note that when you give the answer to the riddle as ‘None’, instead of ‘Nine’ you are also relying on sound logic, but modified by your knowledge of the behaviour of birds. You have to concede, then, that logic is not always “pure and simple”, and two forms of it will have to be recognized. Abstract context-independent logic, and logic based on the realities of life. This distinction is not always made, but is of crucial significance when dealing with societal matters. In one of my writings I have referred to these distinct, but related forms of reasoning as ‘formal or syntactic logic’ and ‘substantive logic’. Please note that when you deal with real life situations, there are instances where 10 – 1 = 0! Let me give you an example of substantive logic in application. Two strangers run into each other in an isolated desert area. Let me call them A and B. A says to B: “Are you by any chance looking for a lost camel?” “Yes”, replies B and also asks excitedly, “Have you seen it?” “No”, says A, “but tell me, is its right leg a little lame and the left eye almost blind?” “Sure enough, that’s my camel”, cries B, “please tell me where you saw it” 8 A answers, “Let me tell you once again that I have not seen your camel”. B loses his cool and shouts back at A, “Stop your nonsense! If you have not seen my camel, how do you know so much about it?” “Cool down my friend” says A, “I noticed the foot prints of a camel and a man in the sand for a long stretch of the desert. After a while only the footprints of a camel could be seen. So I inferred that the animal had been separated from the man. I noticed too that the footprints of the right hind leg were not very clear and that led me to think that it must be lame. I also observed that the camel had eaten leaves only from the right side of its path and I concluded that the vision of the animal on the left side must have been impaired.” The story illustrates what substantive logic is. I rely a great deal on substantive logic to take you through the economy using economics as the guide map. And you have rightly inferred that I am taking the second alternative mentioned above! My training, initially in Madras and subsequently at Stanford University, United States was via the first alternative, what has come to be known as ‘Neo-Classical Economics’. The Department of Economics of Stanford at that time (late 1950s and early 1960s) was arguably the best centre in the world rigorously expounding that tradition in economics. Kenneth Arrow whose mathematical exposition of the logical structure of Neo-Classical Economics at that time was a great novelty (and for which he received the Nobel Prize subsequently) was one of those from whom I learned the subject. Initially I was quite excited about the integrating power of that approach. On one occasion I raised the question about the relationship between the abstract logical system whose properties and claims one was intellectually appreciating and the practical issues that one comes across in any actual economy and the answer was that 9 mastery of the logic would make that possible. However, when I started using it to make sense of real life problems from the Indian context I began to see its limitations. I took up the matter with Arrow too. He admitted that the logical system was far removed from reality, but that an ideal system would enable one to see how far the real was from the ideal and thus help in initiating corrective action. I did not think that this was the best way to understand reality, but the priority at that time was to complete my doctoral work, which I did! Back home, while I was passing on the logic to undergraduates as “Principles of Economics” and to post-graduates as “Advanced Economic Theory”, but was also dealing at some depth with practical economic problems, I began to realize that at best the logical approach could only deal with what it recognized as economic problems. One of my earliest professional writings was bringing out the limitations of the Neo-classical tradition to provide rational explanations for the dominance of household production units in India. Subsequently I was at Yale University (in the late 1960s) which then had a ‘Growth Centre’ trying to apply economic theory to the development problems of underdeveloped countries. The ‘models’ that were being churned out there were based on assumptions whose validity was never seriously examined and I was not enthused about such exercises. Instead, I devoted the best part of the year to a careful study of the ‘classical’ writings in economics. I became convinced that what was required to deal with concrete economic problems was an appropriately modified approach of the classical writers whose basic concern was the practical economic problems of their times. From the early 1970s I started cultivating such an approach. Issues related to the measurement of poverty in the country were the widely discussed theme among economists at that time, but I worked on an adequate conceptualization of poverty as a societal aberration. My book on poverty written while I was a National Fellow of the University Grants Commission and which came out towards the end of the decade was 10