By 1963- the year in which I was born- two things were clear to policy planners in India
1) There was extreme vulnerability to exogenous shocks- e.g. the Chinese invasion or a failure of the monsoons. This meant Soviet style Planning, with emphasis on highly capital intensive industries, was unworkable. There would have to be 'Plan holidays'. The Government could not survive widespread famine or a collapse of Army morale. This was because the ruling Party could not kill its opponents by the thousand or the million.
2) the 'license permit Raj' had bred economic stagnation. It artificially restricted the size of the market and thus prevented exploitation of scale and scope economies. The private sector could not absorb the 'jobless graduate' and a further expansion of the government bureaucracy would merely crowd out productive work.
Thus, if India was to industrialize, it has no choice but to abandon Stalinist planning and emulate South Korea, Taiwan etc. The alternative was to lurch to the Left and nationalize more and more of the economy in which case there would be bureaucratization without industrialization. Talent and Capital would flee the country.
Back in 1964, Amartya Sen, who hadn't yet decided to run away with his best friend's wife to England, wrote in the Statesman-
Two choices
Two questions in particular have been raised persistently in recent discussions. First, should we continue to accelerate our rate of investment, or go slower?
India did not have the resources to accelerate shit. The stock market was in the doldrums. The Government faced a balance of payments crisis and thus had introduced forex and gold controls.
the second question, not unrelated to the first, disputes the emphasis placed on physical capital investment., as opposed to what is now called "human capital", especially the development of knowledge, education and skills.
This question was foolish. Everybody could see that stuff taught at University was useless. Even if a guy studied Engineering or Medicine, his knowledge was useless to him because there were no jobs as engineers and starving people can't afford to buy medicine.
India needed to concentrate on labor intensive manufacturing. A few might need a bit of education to supervise those on the assembly line. But this did involve any great investment in 'human capital'.
Suggestions about toning down investment efforts seems to arise from two different attitudes that are poles apart. For some it arises from defeatism about our ability to grow fast without causing serious inflation (and the avoidance of inflation is obviously given top priority by this section in the scale of values).
Getting folk into factories avoids inflation because the supply of wage goods increases. 'Export pessimism' was not justified in this connection because India was poorer than Africa, or almost everywhere else, and so it could supply cheap wage goods in return for raw materials.
For others it arises from bouncing optimism about our ability to grow even in the absence of huge physical investments.
It was bleeding obvious that India had lots of very poor folk who would do boring and repetitive work in light industry in return for food and rudimentary shelter and heath services. No very big 'physical investment' is required in stitching shirts or cobbling shoes or whatever.
This miracle is to be performed by human resources, with physical capital given only a minor role.
Because labor intensive industries- by definition- are not capital intensive. It was easy to see that 'wage good' industries- i.e. making shirts or shoes- didn't need a lot of physical capital.
The latter view reflects the doubts raised by the second question, to which we might turn first.
That second question related to 'Human Capital' which Sen thought meant getting a PhD from Cambridge in shirt stitching. I mean to say, if you haven't written a dissertation on 'choice of techniques in threading needles' how would you be able to figure out how to get started? Clearly, India needs to first make breakthroughs in algebraic topology before it can get its people to learn how to use a sewing machine- preferably at MIT.
There are certain mystifying features about inflation in India.
Nonsense! Supply wasn't rising fast enough because the Government had fucked up industry. Demand was rising because people kept having babies like crazy. That's why prices went up. There was no mystery here at all.
Its rate has not been very fast if judged in terms of international comparison.
Because the quality of what was consumed had declined in relative terms. This was fucking obvious every time you went to the market. Only in India, in 1964, did the term 'pre-war inventory' still mean superior quality.
Many Latin American countries have a larger rise in prices each year
because inflation was a monetary phenomenon
than we have had in a whole decade, but at the same time the suffering arising from this seems more acute in India.
because it represented an absolute decline in the 'budget set'.
This cannot be dismissed as propaganda by the groups in opposition: there seem some genuine factors to consider. First, the Indian wage structure seems to be such that there is no redress for the rise in prices as has been evolved in latin American countries.
Because productivity had stagnated. This meant exogenous shocks had a downward ratchet effect.
This is partly connected with the weak bargaining power of labor.
If what you do is useless, your bargaining position is indeed weak. This is why I don't get paid for writing this dreck.
Also the low salaried employees in the Indian urban community are in a poorer position to keep up with the inflationary pressure.
Because their 'work product' was useless if not downright mischievous.
Besides, few Indians have a margin over subsistence.
Because their productivity was shit.
Given all this, inflation succeeds in affecting India more sharply than in Latin America.
Because India's population was growing faster than productivity.
It should be remembered, however, that it is only a small group of "essential commodities" that are crucial.
To the Government staying in power or else its being replaced by some other bunch of equally shitty nutters till they too fell after an exogenous shock.
Negative Policy
The avoidance of inflation is, however, a negative kind of policy, and at its worst amounts to no more than keeping prices low for those who can afford to pay more, by denying to others sufficient income for certain essential goods.
What was the positive kind of policy? Sen doesn't know or won't tell us. The answer is 'raise productivity'. Only the Supply side matters in a very poor country. You don't have to hire Madison Avenue to persuade emaciated people to eat more.
Take the case of food prices. Given the supply of food, which will not be raised by cutting down the size of investment,
Yes it will if that investment is crowding out the production of productivity enhancing agricultural inputs.
the only way a "small plan" as opposed to a big one can keep prices down is through
reduced crowding out which increases supply
preventing many people from having the necessary purchasing power to demand more food that they might otherwise buy.
Sen is assuming that investment is financed by lumpsum taxes on the population. This was not the case. Investment was financed through borrowing and aid money. The problem was that this still had a crowding out effect and thus inflation was a supply side phenomenon.
Why did inflation disappear in the Nineties? China. Everybody could buy more and more, ever cheaper relative to quality, 'wage goods'.
The people concerned are the poor, because it is their capacity to buy food that is most sensitive to changes in their incomes,
Most had no fucking incomes to speak of. They were trapped in involuted Malthusian agriculture or virtually zero-marginal product service industries e.g. being a servant in a family itself little above the subsistence level.
since the rich succeed in any case in buying as much food as they want,
No. The rich may want to buy enough food to feed a vast retinue of servants.
There are, so to speak, two methods of keeping food prices down.
Lying that food prices are down on the basis that shops aren't supposed to sell at market clearing prices and shooting people till prices actually fall.
One is to keep the supply up, for which a big rather than a small plan seems to be required.
Not if that big plan is doing stupid Sen-tentious shite like investing in steel plants which will end up running at a loss or adding negative value to iron ore
Another is to keep demand down, which a small plan achieves by the brutal method of denying a huge section of the population the purchasing power to buy more food.
Sen is pretending that very very poor Indian peasants and illiterate menials of the servant class derive a large part of their income as metallurgists for steel plants or aeronautic experts for airplane factories. No wonder he thought Nalanda International University wasn't a fucking White Elephant money-pit. After all, the money spent setting it up must have gone to the poor peasants of Bihar right? I mean, when thousands of dollars are spent organizing a steering committee meeting at a ritzy 5 star hotel, that money goes straight into the pockets of starving peasants because they own 5 star hotels. The Hilton family are actually Bihari. Just look at Paris Hilton. She is clearly a small brown man from Rajgir.
The second method is a purely redistributive one, and the redistribution of the food supply it achieves is not always particularly laudable.
No. Rationing is laudable if there is a supply shock. During the first days of the lockdown, it was sensible for shops to ration the number of loo rolls people wanted to buy. I may mention, I was already fully stocked up because of a mistake I made in an Amazon order. Thus once I started shitting myself from fear of COVID, I was well provided for.
The fear of inflation and the hardship that is caused by it is only a symptom of a much bigger problem - that a great many people in our country live on the border line of subsistence and eat a great deal less than they would like to.
Why? Because of low productivity. Tackle the problem at its source by encouraging, not penalizing, employers in labor intensive industries.
A small conservative plan will hardly contribute to the solution of this basic problem.
Yes it will. There will be less crowding out. Furthermore smart peeps won't want jobs on the Planning Commission. They will want private sector jobs in rapidly growing industries. Instead of only getting to stay in a 5 star hotel when it is your turn to attend an International junket, you could be jet-setting across the globe getting export orders. You'd earn enough to spend your holidays in exotic locations.
The methods of keeping prices down by denying the people the ability to buy more food by keeping their income down
is a fantasy of Sen's. If the Government has the power to 'keep incomes down' it can also keep prices down because incomes come from prices.
may seem sound economics to some,
Even sixty years ago, Sen only tilted at windmills and belaboired strawmen of his own invention.
but it is not as civilized a method as some of its champions seem to think.
There is nothing civilized about Sen's stupidity.
I do not wish to enter into a full-scale discussion on the right size of the fourth Five Year Plan.
Because you are lazy and stupid.
That discussion is proceeding at the moment as it did for the the second and third Five Year Plans. I would like however to point out that the "anything-but-inflation" argument for a small plan is rather less convincing than it looks on the surface.
No argument summarized by Sen is convincing at any level because he is as stupid as shit. The only connection between investment and inflation is via crowding out. Sensible investments don't crowd out. The rich voluntarily postpone consumption so as to get even richer. We could call this 'Ricardian equivalence'.
The problem also concerns the ability of the government to execute an effective system for repressing inflation through rationing, control and other means. We are facing today much the same crisis that Britain faced after World War II, and there is every reason for us to consider whether we should not, like Britain, repress inflation through rationing in a big way, if inflation is the inevitable result of the required rate of investment.
This cretin does not get that Adenauer's Germany did well by scrapping rationing faster than Atlee's England. However, once Churchill was back in Number 10, Labor got the message and went in a 'Butskellite' direction. Did Sen really learn nothing at Cambridge?
We have been arguing so far from the premise that a big plan
of the stupid type Bengali mathematical economists were enamored of
must mean inflation, open or repressed.
but only if there was monetary accommodation.
This need not necessarily be the case, but much will depend on the performance of the agricultural sector.
Nonsense! A sound investment pays for itself in raised productivity or higher and higher value addition regardless of what any other sector did. A supporter of Sen may say 'but you can only eat food grown in your own country. The Americans and Australians and Argentinians and so forth refuse to sell their food to foreigners.' Our reply is 'you can only eat dog turds. Fuck off.'
This question of agriculture is integrally related to education and human capital,
Only in the sense that every question is. But that's not saying much.
though champions of human capital seem to concentrate on rather different areas of the Indian economy.
Sen would soon find it paid better to do this type of championing in England or America.
Studies in USA
The current interest in the role of human capital in the process of economic growth originates in a number of studies that have recently been completed in the USA suggesting that accumulation of education and knowledge have played a much bigger part in the US economic growth than the accumulation of physical capital.
Because the US was not doing 'low lying fruit' type 'catch up' growth. It was ahead of the innovation curve. It created new industries or else showed how they could fully exploit economies of scale and scope.
The works of Edward Denison, for example, are often quoted in this context.
Denison was saying growth in capital played less role than education in the period after 1929. There was an obvious reason for this- viz the Great Depression. However, Denison did not point out the bleeding obvious. The Second World war is what laid the foundation for the 'affluent society'.
It is however, dangerous to draw any lessons about India from these studies. First of all, they are specifically related to the US economic situation, and do not pretend to say anything about the rest of the world.
The fact is economically successful countries are one's which responded to an exogenous military shock. Why is Singapore so rich? Well, during the Japanese occupation, Lee Kuan Yew realized that only conscription and a military sense of discipline could keep his country- if not safe then at least not a fucking Triad run bordello.
Secondly, even about the USA, there are wide gaps of analysis.
Of which Sen was ignorant.
There is also a more fundamental drawback. These studies systematically underestimate the contribution of physical capital because they overlook that new technical knowledge has to be embodied in new machines, and new knowledge requires fresh investment to be effective.
But the guys with that technical knowledge could live ten thousand miles away!
Also, the progress of knowledge and of skill depends not only on formal education, but also on actual industrial experience.
Which can be gained in a plant attached to the Tech School in some lovely Ivy League Campus.
Indications are that "learning by doing" is at least as important as learning from schools.
Not unless you can buy the machine you are learning to operate and set up on your own. Otherwise, you are a monkey getting paid peanuts. If India used public funds, or borrowed money, to buy super-expensive stuff then the scope for 'capital-widening' and thus employment growth, external economies, etc was greatly curtailed. All you ended up with was increasingly obsolete plants making losses and adding negative value to inputs.
And in providing this opportunity for learning by doing, a big plan must be credited with a reasonable role.
No. Even in 1964, it was obvious that you might get 'capital deepening' if the Government continued to waste money on White Elephants, but there would be no capital-widening or 'Marshallian industrial districts'. Indeed, the brain drain had already begun. Guys who got their start in the Public Sector found they could do better for themselves by emigrating. At home, sooner of later, some stupid IAS officer would shit on your head and put you firmly in your place.
The importance attached to human capital in recent years is a very welcome change, but one should not take too light a view of the accumulation of knowledge and skill.
Which is also classed as Human Capital. Sen became senile even before he reached the age of 30.
The process of economic development can be regarded as much a process of learning as it may be viewed as a process of capital accumulation.
But it is neither. Economic development only occurs if productivity, or value added, rises. It doesn't matter how this happens. If oil prices go up, then value added in the petro sector goes up and this may be enough to cause economic development of the type already becoming visible in the Gulf, Saudi Arabia etc. That's why in 1962, on Naipaul's first visit to India, he took note that Jeddah had more modern infrastructure than Bombay. Also, you couldn't get cheese in Bombay. Naipaul meets an engineer with a foreign degree who is classed, socially, below the IAS officer. That's a guy who would emigrate and get rich while India turned into more and more of a shithole.
But the two processes are integrally related to each other.
There is no such 'integral relation'. Development means either marginal product or relative price or both have risen so value adding has risen and so you have state of the art ports and airports and bullet trains and 50 varieties of cheese in the market.
It has been shown in a number of economic calculations that, if physical capital were the only bottleneck, an economy could raise its income many times in a very short time.
Everybody could see during the Fifties and Sixties and Seventies etc, that this was perfectly true. If you went to Kuwait in 1950, you would have considered it a fishing village compared to Bombay. By 1960, it was showing signs of a very different trajectory. By 1968- when I first saw it- Indians knew it was the place to emigrate to. By 1978 it was wholly unrecognizable as a place once as poor as Karachi.
The reason why this does not work is the relatively slow process of accumulation of human skills compared with that of physical capital.
Nonsense! It takes less time to train a metallurgist than to put up a steel plant. Indeed, by 1964, there was an oversupply of nuclear physicists.
When all the skills are present, and only physical capital is lacking, as in war-destroyed Japan and German economies, growth can indeed be very fast.
But this is even more true of places where no fucking skills are present. If you pay enough, the skilled will come.
When, however, skills have to be bred, growth resulting from capital accumulation is tempered by the more sluggish accumulation of skills.
Sen came from Bengal- a country ruled by a tiny number of Brits. When he was born, the ADC in his District was a young white dude a couple of years out of college who may have just passed his Bengali proficiency test and was swotting up for the Sanskrit test so as to get his salary increment. If these young whites could so quickly gain the skills needed to run vast Districts, then it was obvious that skill accumulation is only sluggish if you are Bengali or as thick as shit.
The same machine when transferred from an advanced to a backward country becomes much less efficient.
If managed by Bengalis- sure. But the Japs did not have this problem, nor the Koreans or the Malaysians or even the Gujjus or Tamils.
To surmount this obstacle is perhaps the most difficult step in economic development, and it depends crucially on education.
Sen's own solution was to use his education to run away from India along with his best-friend's wife whose parents, however, were connected to both Gramsci and Sraffa.
But the education that is needed here, as should be clear from the nature of the problem, is not of a general kind alone. What is needed most is working experience, and this depends on rates of investment.
Nope. You can send your guys to do industrial apprenticeships in advanced economies who will be grateful for the cheap labor.
The massive physical investments that were undertaken in economies like those of Russia and Japan to break down the barrier of under-development contributed perhaps as much through their indirect effects on skill formation as through their direct effects on physical capacities.
Both Russia and Japan were happy to bring in foreign experts and pay them very well. Sen thinks people in a country can only eat food grown in their own country, they can only learn in their own country, they can only gain practical knowledge in their own country- but, for some reason, they can't use their own money to buy technology from abroad. Only the Government can do so as part of a Five Year plan. Yet the Tatas had shown that the private sector could do this perfectly well thirty years before the First Five Year Plan.
It is reasonable to argue that the big hurdle to cross in the process of economic development is skill formation rather than capital accumulation,
If so, India should have been sending tens of thousands of their smartest eighteen years olds to work on low wages in high tech industries. Indeed, Sanjay Gandhi was supposed to be one such apprentice at Rolls Royce.
but, since the former depends on the latter, this does not amount to arguing for a small and conservative plan of physical investment.
If Sen says x depends on y, we can be sure there is no fucking connection between them of any sort. Capital accumulation can occur without any domestic skill formation- just bring in foreign guest-workers- and vice versa. A country can live off remittances from young people it trains in various ways. Thus, the Brits had a training college in Haileybury where a few kids were taught a little about India. They then received on the job training and did such a good job that the British Empire kept expanding and Indian troops helped change the outcome of battles on European soil. Sen himself soon escaped to England and provided comic relief as a Bengali monkey who could imitate but could not comprehend an elite type of Paideia meant to handicap the cognitive functioning of its future leaders.
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