Equity over efficiency: An Indian preference MARGINAL UTILITY

Afew days ago someone tweeted a 1977 Columbia lecture by Kenneth Arrow, who died last week, titled “A Cautious Case for Socialism”. The most important political economy point made by him in it was that capitalism was, or could be, inconsistent with democracy and freedom, while socialism wasn’t and couldn’t be. For a variety of reasons, he thought this was a superior alternative to American-style capitalism which, from time to time, allowed all resources to lie idle, causing great hardship to people. Political power also got concentrated in a very few hands.

Similar thoughts had occurred to India’s economic thinkers about 40 years previously. They hadn’t come to this conclusion via Karl Marx, though. They had done so intuitively.

The intuition was based on India’s cultural bias against businessmen and their tendency to kowtow to the current rulers while privately forming mutually beneficial cosy arrangements with them — such as when the traders of Surat helped the British grab the port and the hinterland.

Private commercial interest, Indians tend to believe, often trumps social interest. Indian culture, regardless of religion, warns against it. It places group interests before individual ones. We are different Thus, unlike the Protestant ethic, which, after Adam Smith, elevated private economic freedoms to a divinely ordained status, Indian thinking on economic arrangements has always been based on equity rather efficiency, cooperation rather than competition, and a finely tuned sense of multivariate social balance that sought, in theory at least, to minimise huge disparities in the distribution of productive assets.

The one huge exception and blemish in all this was the space assigned to people who are now called Dalits. Their role in the economy was in direct opposition to their role in society. There is no rational explanation for this.

This ingrained and implicit social view can be seen in the writings of all the Indian economists from Dadabhai Naoroji down to B R Ambedkar, V K R V Rao, Radhakamal Mukherjee and others of the second quarter of the 20th century. But after 1947 they all gave way to Western models with, as we have seen, disastrous consequences.

This was in sharp contrast to China, which, from 1978 onwards, got “socialism with Chinese characteristics” whose key feature is group interests overriding individual interests. In India we have adopted the opposite model because of the political beliefs of the intellectual elites, which views the ordering of economic activity separately from Indian social and cultural norms.

Ask any IAS officer who has run a district about how things actually work and you will learn about the interface of culture and economics. Ignored warnings Not everyone was happy with Jawaharlal Nehru’s preferences. The Economic Weekly of the 1950s and 1960s is full of articles by noted economists expressing their discomfort with his approach.

I quote one of them below. Professor A K Dasgupta (190392) was an impeccable economist. He was also the father of Partha Dasgupta and father-in-law of I G Patel.

Writing anxiously in the issue of December 5, 1959, he wrote: “One word of caution to our ‘model-builders’... Let them not, in their intoxication with ‘model-building’, forget that if they are to be economic practitioners — as they may need to be — they must know the character of the social environment into which the models are proposed to be projected.

“Here is the occasion for the economist to take assistance from other disciplines. I would not expect the economist to cultivate these other disciplines himself... the economist, if he is to be of use to society, must not divorce himself from what is happening outside his own field. Do the more ‘brilliant’ among our younger Indian economists need this warning? I wonder.”

As it turned out they did need that warning. In the end, though, they ignored it.

One very important thing they ignored while modelling was Rao’s diagnosis regarding disguised unemployment. He had written in 1938 about people who contributed nothing to output — sshhh, no, not bureaucrats — but farmers who could be removed from farms without affecting output. So far as I know, this disguised unemployment has not been factored into any of the investment planning since 1957.

One early political consequence of this was the Mandalisation of India’s economic activity. It is aimed precisely at solving the problem of disguised unemployment — handing out government jobs which delink output from employment.

The next article in this series will be about the man who wrote about disguised unemployment in 1918, well before Joan Robinson did in 1936.

His name? Wait till next month. (This is the third of a six-part series)