Utsa Patnaik's bizarre theory of trade

Utsa Patnaik is a Marxist economist from India. However she received her Doctorate from Oxford- not an Indian university. Why did she do so? PhDs were available within the country. What special attraction did Britain have? Was it really a suitable place for an Indian to study Economics? Britain may have been ahead in Science and Finance but it was wholly ignorant of the problems of a subsistence peasant economy featuring widespread illiteracy.

Consider the following passage extracted from an essay where Dr. Patnaik denies that peasants would be better off in the long run if the country industrialized.

The reason industrialization could proceed (in England) without being hampered by agricultural failure, lay in colonial imports which did not have to be paid for by Britain in the sense that these imports created no external liability for the British economy since local producers were ‘paid’ out of taxes they themselves contributed to the state.

Utsa forgets that Britain had a great navy- if it didn't, it would have been conquered. Ships are expensive. To pay for its Navy, Britain first engaged in piracy- but there are diminishing returns to predation- and then emerged as a great trading nation. It turned out, much to its own surprise, that it could make a profit exporting 'invisibles' to India. These 'invisible' services including administering territories or providing protection against aggressors.

Britain had to expend 'blood and treasure' to protect its trade routes and colonial revenues. However, because the Brits were smart, they were able to do so profitably. Moreover, British people liked living in Britain. They may have made a lot of money in India but didn't want to settle there. Many died while abroad but their thoughts were always with their families back home. They sent what money they could.

This inflow of money boosted the market for not just services but also manufactured goods. But Britain was already innovative- it could scarcely have gained maritime hegemony if this were not the case. Initially The Flag followed Trade but a point was reached where Trade followed the Flag. This in turn created new markets and opportunities. Scottish people working in Bengal saw that jute could be mechanically processed. Dundee became the center of jute manufacture just as Lancashire became the center for cotton. Indians emulated the cotton manufacturers of England and some became rich. Scots set up Jute mills in Bengal and, at a later date, Indians emulated them or took over their enterprises. However, unlike Japan, India imported technology but did little innovation of its own.

Bearing all this in mind, let us see what a truthful and intelligent person- not Dr. Patnaik- would have written

The reason industrialization could proceed (in England) without being hampered by agricultural failure, lay in 

the use of new technology- including coal burning steam engines- which enhanced productivity. This meant fewer workers- eating less in total- producing a greater quantity of manufactured goods.

However, agricultural productivity was also rising because of the use of new scientific techniques. Furthermore, improved storage and distribution meant that less food was wasted.

The bad news was that the inefficient manufacturer or farmer went to the wall. The successful ones expanded.

Where did the capital come from to invest in new machines or canals or railways? Part of it came from the profits made by the British merchant Navy (which thus more than paid for the cost of the Royal Navy which was essential for the defense of the island).

Britain was the greatest sea-faring nation in the world. It 'ruled the Waves'. British manufacturers could easily ship their products from a nearby port to almost anywhere in the world. British people went out across the globe seeking new commercial opportunities. They were innovative and enterprising. Yet, if it had not been for the courage and patriotism of British sailors, the country would have been hard put to defend itself- let alone rise up to a pre-eminent position.

Utsa ignores all this. She thinks Britain had a magic wand. It used it to get the Indians to send them valuable stuff for free. Rather strangely, the Brits who got hold of this valuable stuff didn't just enrich themselves. For some mysterious reason, they used this free gift to feed the peasants who- on a whim- they employed in factories.

Why were the Brits so crazy? What great pleasure did they gain from seeing peasants working in factories? Utsa won't tell us.

In India the colonial state guided and operated from Britain, extracted taxes from peasants and artisans, and used a portion of tax revenues to purchase their products including exported crops like wheat. Even when wheat was purchased from temperate lands like the European Continent and USA, in the earlier period – the 18th century- direct re-exports of tropical colonial goods paid for a large part of these imports.

But why did the Brits want wheat? Why not gold or ivory? What caused this obsession with getting peasants to work in factories in return for some bread?

Later from the 19th century onwards, the exchange earnings of colonies which exported to these lands were appropriated and used to pay for a large part of temperate imports into the metropolis through a continuation of the so-called multilateral payments system (Saul 1960), which in essence functioned on the basis of colonial transfers.

Why all this bother? Why not just take gold and diamonds and silver and so forth? Why did Brits have this obsession with building factories and railways?

There is little doubt that other European countries would show a similar failure of their agricultural revolution and a similar dependence on their colonies, particularly the Netherlands which controlled Java and which had even larger dependence on re-exports of tropical goods to pay for its temperate imports, than did Britain (Maddison 2006). 

There is little doubt that countries with great Navies and highly enterprising merchants will profit more from trade. Agricultural revolutions occur if effective demand for agricultural produce is booming. They may not be sustainable- Saudi Arabia was exporting wheat and water-melons in the Eighties but this depleted its aquifers. So it has given up that foolishness. But England and Holland are well watered and fertile. The latter is a net agricultural exporter to the tune of a thousand dollars per head. Why? It is highly innovative and enterprising and possesses superlative transport connections.

Utsa's Marxist blinkers means she can see no role at all for Epistemic and Entrepreneurial superiority as giving rise to innovation and new patterns of production, consumption and trade. All Value is the product of sweated labor.

Global patterns of specialization of production were deliberately engineered, were maintained by force exercised through direct political control under colonialism, and were very far from the model of voluntary specialization and exchange leading to mutual benefit, expounded in David Ricardo’s fallacious theory of comparative advantage.

If this were true, why did the 'Global South' continue to export primary products after Colonialism ended? Some countries- like South Korea and then China did move up the value chain. But they also invested heavily in ship building and the development of Ports and transport infrastructure.

Ricardo’s theory using a two-country, two commodity model, said that trade takes place because even when the cost of production of both goods is lower in one country than the other, provided the relative cost of production is different, both trading parties benefit from specialization and exchange in the sense of consuming more of one good for no lower consumption of the other good. Relative cost is the number of units of a good which a country can produce by withdrawing labour from the production of one unit of the other good. I have pointed out elsewhere that the fallacy in this theory arises from the assumption ‘both countries produce both goods’. This assumption is essential for defining relative cost at all, but the assumption is not true, since a temperate country has never produced and cannot ever produce tropical crops.

The temperate country can produce tropical crops in heated greenhouses. Utsa may have visited Kew Gardens in London. She would have seen this for herself. However, the opportunity cost of growing rice or tea in England is higher than in India.

Say Britain or Germany import Indian rice/ tea/cane sugar and export spinning machines. The relative cost, namely number of units of rice/tea/cane sugar producible by reducing machine output by one unit and diverting the labour released to these goods, can be obtained for India. But such relative cost does not exist for Britain and Germany which have zero output of rice/tea/cane sugar since these simply cannot be produced at all.

Nonsense! They can be produced in hot houses with controlled humidity, UV lighting etc. Cannabis- being a high value to weight commodity- is indeed produced in this manner in cold and dreary England.

Where the assumption is not true, there is no mutual benefit from trade.

Completely false! Currently, it is not possible for the people of Bhutan to produce sophisticated Computers. Nevertheless, there is a big benefit to them for buying such computers from big technologically advanced countries. It may be that the new generation of educated young Bhutanese are setting up a software or BSO industry which may well thrive and permit them to purchase state of the art hardware. However, given Bhutan's small size, it probably could not become a hardware exporter. This does not mean that there are no gains from trade for the Bhutanese.

Trade did take place in which cold temperate lands imported tropical products and exported machine made goods, but such trade had nothing to do with comparative advantage and mutual benefit.

No. There was an acquired absolute advantage in capital goods which it was mutually beneficial to export in return for primary goods.

It had to do with the fact that tropical lands are highly bio-diverse and can produce crops which are desired by temperate advanced countries for consumption or as raw material, which they could never produce, and which they sought to acquire through establishing political control.

Political control is expensive. It has to pay for itself by developing new markets. This meant introducing new crops or finding new uses for old ones. However, after Colonialism ended, this pattern continued. One unfortunate result was that the terms of trade shifted against primary producers. They then had to find ways to shift up the value chain. One method which had only mixed success, was to exploit the primary sector so as to invest in the capital goods sector.  The problem with this approach was that Government appointed bureaucrats often lacked entrepreneurial skills or were unable to fend off political interference. By contrast, the South Koreans surged ahead by leaving heavy industry in the hands of private conglomerates.

Utsa has a bizarre belief. She thinks you shouldn't import anything you can't produce yourself. This idea has a long and disastrous history in India. 'Import Substitution' based on 'Export pessimism' led to dependence on American food aid. It was finally abandoned when the Indians realized that 'begging bowl diplomacy' was inflationary and could lead to mass starvation. The 'Green Revolution' meant some peasants became prosperous. Politically, this meant that the Communist party began to lose salience. Its influence has now reached a nadir. In that context, Utsa is fighting a courageous rear guard action- blaming all India's woes, not on 'Durbari' intellectuals like herself, but those nasty Imperialists who vanished from India before she was born.