Draft: 09/28/18
From Economics to Action – DRAFT JUNE 1999
Dr. Sanjeev Sabhlok
* ISSUES TO BE COVERED: COLLECTIVE ACTION, ORGANIZATIONAL PROBLEMS, IMPOSSIBILITY THM, BIG BILLS (OLSON), COMPARITIVE PUBLIC ADMINISTRATION.
1.Introduction
There has been much progress in our understanding of various aspects of competitive production and distribution in an economy since Adam Smith wrote his seminal work on the process of creation of wealth by nations. Bastiat, Mill, Jevons, Bohm-Bewerk, von Mises, Hayek, and Friedman are a few of the eminent thinkers who have helped us understand the economy better. There has been a major, and simultaneous increase in our understanding of the role of political equality too, over this period, spearheaded by Voltaire, Locke, Jefferson, Madison and Gandhi, among others. What was enunciated in the U.S. Declaration of Independence is now widely accepted: “We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness.” It was frequently due to the non-existence or breakdown of these rights over the centuries that theorists of the socialist school of economics come into prominence, equating political equality with economic equality, confounding these two, clearly distinct, concepts.
Today, with political rights and equality widely accepted and better enforced than ever before in the past, the economic principles that govern a well-functioning economy are beginning to stand out distinctly. We are now able to see that the failure in eliminating poverty is not necessarily a consequence of faileds market forces, as socialists would have us believe, but a consequence of deeper, underlying political causes including the institutional structure of governance and society, which frequently need political cures,[1] which can include the dethroning of socialists. This is not to say that no dent has been made on poverty. Absolute poverty is now dramatically lower than ever before[2]. The (relatively) poor today live a life better than the poor of yesterday, in terms of longevity, health, education and food, even in developing countries. But this does not absolve us of the responsibility of relieving the frustration of those who continue to suffer needless hunger, pain and disease, apart from, in many cases, absence of equal opportunities.
Today the essential problem facing us as a species is this continuance of poverty, misery, and man-made calamities such as famine which occur at frequent intervals despite the availability of sufficient knowledge and abundant resources to ameliorate this unhappy situation.[3] There continues to be a large gap between what is feasible and what is on the ground.[4] Development economics, the economics of growth, and liberal economics have often failed to translate their key message for use by a policy or a law maker. We have therefore to give more attention to this problem of bridging the gap. The common view of our ability to overcome this gap is rather pessimistic, though. Robert Samuelson informed that “Despite his advocacy, Friedman doubts that intellectuals can initiate political change. The ‘tyranny’ of the status quo is too strong. ‘Only a crisis - actual or perceived - produces real change,’ he once wrote”.[5] This “throwing up of our hands” even by the best thinkers points to a fundamental weakness of theory that needs to be analysed and overcome. Do we have no more “powerful” instrument than catastrophe or crisis to bridge this vast gap? If something could be done to propel the desired change in the absence of crises, we would see a much more and powerful smooth transition toward a more equitable and prosperous society, worldwide.
In my view, as elaborated in this paper, this can be done. It requires the introduction of a managerial approach into economics which enables economists to help promote and even personally initiate change. This is definitely very ambitious. But the conversion of policy tools developed over the past few decades into body of “action-related” guidelines is a good place to begin with.
This paper outlines a process of determining the appropriate solution to a society’s problems, designing appropriate strategy, and initiating a challenge to the status quo. In Section 2, I re-visit the catch-up hypothesis and its implications. In Section 3, I review a few of the theoretical principles that might drive an actual “catch-up”. Section 4 outlines the role and strategy that economists can adopt in the speeding up, and indeed, in initiating this process, if they were so inclined.
2. Catch-up revisited
I suggest that deciding upon a vision is the fundamental task of a society, or at least for the one wishing to initiate change. One of the reasons why relatively less developed or “unsuccessful” countries have not achieved rapid growth is because they have not even set about defining their basic goals clearly. Often this is rooted in attitudes and problems of definition, rather than in the physical, capital, or knowledge, constraints of the society. Anyone who looks up to a very vast vision is apt to be considered an eccentric, rather than a visionary. But good CEOs first declare a vision in order to define exactly what they wish to do, before their firm can set out to achieve it. In most developing countries this larger vision is simply missing. In its place, there is talk of doing something this year or the next, but no sense of the overall magnitude or enormity of the task at hand.[6]
The first step I would like to suggest is for a change agent to make explicit a long-term vision for each nation or society. Developing countries have to bear in mind that the present lag between them and the developed world is a relatively recent phenomenon. About 250 years ago, real per capita incomes in the now “developing” and “developed” nations were of an equal order of magnitude (see Easterlin, 1996, for example, for a story of the Epochs of development). The following chart, taken from Heilbroner (1988) justifies this fact.
Table 1: Changes in per capita GNP of developed (capitalist) and less developed
(noncapitalist) countries over the past 250 years (GNP per capita in 1960 dollars)
Presently developedPresently less developed
countriescountries
Around 1750180180-190
Around 1930780190
Around 19803000410
Source: Heilbroner, Robert L. (1988). Behind the Veil of Economics: Essays in the Worldly Philosophy. New York: W.W. Norton & Company, p. 54.
Take the case of India, an economically backward country today. In 1830, India’s share in world’s manufacture was 17.6% against the U.K. share of 9.5% and U.S. share of 2.4%. By 1900, India’s share (of a much larger global manufactured output) was down to 1.7% while the U.K. share went up to 18.5% and the U.S. share to 23.6% (Kennedy: 149). Clearly something happened during 1830-1900 which did not reach India’s borders. The challenge India faces now is to revert back to ratios that prevailed 200 years ago; not merely to “catch-up”, but to reverse the trend of relative shares in manufacture, trade, and wealth.
Now, “catch-up” or “absolute convergence” has not been found to be taking place in most cases in the world (Barro), and particularly between developing and developed nations. It is one thing to acknowledge that there were Epochs in the past when ‘catch-up’ did take place, over large expanses of time, but quite another to realize that this phenomenon might now not take place on its own, since complexity and organisation, which drives differences across nations, has become almost unfathomable to the less developed.[7]
3.Cross Over Point as the Key Vision
A crossover point is that point in the time and per capita income, at which two moving national trajectories coincide. For developing countries, crossover is the point in time when their per capita incomes finally catch up with those of the developed nations.[8] The continual observation of the distance of a nation from this hypothetical point should be the single most important policy target for developing nations. I calculate this point in the illustrative case of India in Table 2.
Given that India has a per capita GNP of $1 today compared with the USA per capita of $20 (based on PPP calculations), the following holds true.
Table 2: Alternate Growth Rates of Per Capita Income needed by India to Cross-Over the USA
Assumed US growth rate / Years needed to cross over the USA50 / 100 / 150 / 200 / 250
1.5 / 7.8 / 4.6 / 3.6 / 3 / 2.7
2.0 / 8.3 / 5.1 / 4.1 / 3.5 / 3.2
2.5 / 8.8 / 5.6 / 4.6 / 4 / 3.7
3.0 / 9.4 / 6.1 / 5.1 / 4.5 / 4.2
Thus, {1.5, 7.8, 50} is one such cross-over point. We therefore see that if India could grow at 9.4% p.a. for only 50 years, it would be able to cross over the USA, even if the latter were growing at 3% p.a. This is not feasible, though, based on historical experience. The USA is unlikely to grow at more than 2.5% p.a. for the next 50 years, and sustained growth in per capita of 9.4% for India is untenable for 50 years. Therefore, the target growth rate that makes most sense for India, for catching up with USA in a hundred years, if the US grows at 2.5%, is 5.6%. Experience tells us that this rate is also unsustainable for one hundred years at a stretch. Therefore, India must target very high growth rates of per capita income initially, at over 10% for around 20 years, and then allow for a tapering off in growth to around 2% p.a. in the end, in line with developed country growth rates. India’s policy makers cannot be satisfied with less than this.
4.A lot of hot air?
Are these target rates feasible or merely a lot of hot air? That is our next step to examine. I suggest that there is sufficient knowledge available today[9] to systematically move toward such an explicit cross-over. We know, for example, that we have to set up minimally regulated markets, and encourage free enterprise, trade, and competition; we have of course to Banish Bureaucracy (cite) and directly eliminate poverty; we have to provide high quality infrastructure and honest democracy. China’s success in the past 20 years or so, in achieving rates of over 9% p.a. for sustained periods indicates that even large economies like India can actually do it. Indeed, countries such as South Korea have achieved growth rates as high as 6.7% for long periods of time, up to 30 years, and I suspect India can do much better. We do need to understand first, and agree upon, the essential mechanism that will lead to the desired change.
Policy-makers in developing nations - for reasons rooted in the history of economic and political development of these nations, often find the concept of markets difficult to understand.[10] Markets tend to be clubbed with the actual and often ill-functioning marketplace which is vitiated by varieties of political and other interventions.
The citizens of a free nation, when voluntarily exchanging goods and services, and valuing these goods and services through their interaction can be said to constitute a market. In this mode of interaction, individual choice is accorded full respect. Thus a market is not a mere economic concept but also a political one The fact that we often did not have freedom, voluntarism or choice in interaction during the past 200 years, has frequently hidden power of the market economy.
To make a market comprehensible to a layman, we can compare this continuous interaction of billions of human brains, reflected by the price system, with the Heisenberg’s Uncertainty Principle. The uncertainty principle states that one can never measure both the momentum and the exact position of a sub-atomic particle[11].
Theoretically, a planner can measure both the demand and the supply of a particular commodity by capturing, empirically, the elasticities, input-output coefficients (a la’ Leonteif), and other macro-variables. On this principle, the entire concept of planning rests. Unfortunately, this is an extremely uncertain measurement of a highly dynamic process. The human mind behaves much more randomly than a sub-atomic particle in terms of its dimensions of movement. Demand and supply are both continuously shifting imperceptibly each moment, in each individual. A thing which was desirable yesterday may no longer be desired today, and vice versa. It is thus impossible to use past data to make future predictions of the economy.[12] In fact, till today economists are completely foxed by this impossibility, and yet, like Don Quixotes, many of them keep trying to predict business cycles, and so on. If they can’t, they simply write the whole thing off as an ‘external shock,’ blaming their personal lack of understanding of the dynamics of an economy to our lack of understanding of the economy. This is not true. There is an excellent history of writers who have demonstrated the futility of trying to predict the growth path of economy at the sectoral level.
In this context, it is worth remembering that somewhere in the range of 90% of the workers today depend on and use technology that was not even in existence fifty years ago. Similarly, human demand (“need”) has always stepped in to fulfil the increased incomes that people have acquired over the years. An economist working on the input output coefficients of 1940 would fail comprehensively in predicting the pattern of consumption of 2000. No one can therefore even remotely hope to measure, by any static means, the mechanics of the human mind, which is what markets arise from. Markets are a place where all kinds of needs are expressed and an infinite variety of solutions are thrown up each day in the minds of human beings, of which a small fraction fructify and yield actual products and services. A market is in effect a vast human brain, an organism, a creature of man’s special attributes. Its other animal has created markets.
On the other hand, billions of people interacting with each other, can and do determine the instantaneous price of any particular commodity. Hayek (1945) did not in any way say that markets are complete or perfect. He merely should that there is no human being in the world who can even closely approximate the ability of the price system operating through minimally regulated markets, to arive at a locally optimal solution. Therefore we cannot plan prices, and do not want planners. Substituting a single planner for a completely dynamic organic process is completely fool hardy. We want, instead, people who will create the institutions needed for markets to function properly.
The six billion people on earth resemble chaos rather even more than sub-atomic particles discussed above. The reason why we cannot predict weather clearly in the long run (beyond 2 days or so) is because of the Brownian motion of particles caused by their infinite interactions each moment. One cannot ever get hold of the ‘local knowledge’ of each interaction. Thus, in a very remote case, it is possible for a butterfly fluttering its wings in Waltham, USA, to “cause” a rain storm in New Zealand. The point is that while the future is completely “determined” by these infinite interactions, science will never be able to plan (not simply predict with a margin of error) the next year’s weather on the 18th of June in Down Town Los Angeles based on data they have collected.
Markets are a far “worse” case of chaos than this, since apart from all possible natural factors (such as weather, butterflies, and the sun) which impact the supply of many commodities, there is this human mind which generates thoughts and plans and commitments and opportunism at an amazingly rapid rate. In other words, what you and I do and even think, impacts everyone else today and in the future, in ways completely “determined” but unknown to anyone through inductive or deductive logic or empirical observation.
Due to historical factors as well as random, chance factors, coupled with human volition, we might or might not see the emergence of a Ramanujam or a Bill Gates or a Voltaire, people who change the world in dramatic ways. But these are only the larger ‘cloud’ formations emerging from chaotic conglomerations; there are ordinary mortals who change their mind whether to eat cereal or fruit for breakfast, and who suddenly become smarter or have a surge of brilliance by which a Benzene molecule is created out of a mixture of dreams and sleep. Thus we all, taken together, are randomly changing the supply and demand both of commodities and of resources, in the world. This then, is the ‘local information’ that Hayek talks about; something that is as local as the way we use our toothbrush, and the amount of milk we put in our tea. Determinism does not imply the ability to plan.
In economics one would say that since no planner can know either the Social Welfare function (or social utility function) nor the production function, the social planner who tries to solve the alleged “social planner’s problem” is a fool at best and a charlaton at worst. It is the unfortunate fate of such folks to get perennially surprised by ‘the East Asian Miracle’ one day and the ‘East Asian debacle’ the next, by the ‘great success of Russian planning’ one day and ‘the sudden collapse of the USSR the next.’ Bounded rationality of a severe nature afflicts man. How can planners solve the market’s problem? Even arrogance should have some limits.
The essential point then is this: that no one, but no one, can replace the task of our interacting with each other and doing what we want to do, to solve our joint problem of optimal allocation of a society’s resources. We can even generalize this to the problem of existence. Nobody can know what is best for me, in the ultimate analysis, than myself. I can take everyone’s advice, but I will have to take my decisions (like brush my teeth or take up a particular job) myself. A market is this vast creation of our free choice. The goal of the economist looking for change is to persuade the large majority of the benefit of free markets.