Rethinking priorities

Print edition : December 20, 2019

Labourers waiting to be picked up for work in Bhopal on April 9. The objective of public policy must be to move towards universal basic income as has been happening in Denmark and other such countries. Photo: Getty Images

Families with mixed immigration status seen before a brief reunification meeting for relatives separated by deportation and immigration, called “Hugs, Not Walls”, on the U.S.-Mexico border on the banks of the Rio Bravo in Ciudad Juarez, Mexico, on October 26. The authors argue that ways to help and encourage immigrants to feel at home in the host country may make them more acceptable and thus reduce the suspicions about the impact of immigration. Photo: JOSE LUIS GONZALEZ/REUTERS

The Nobel-winning economists have ignored the deeper issues that affect the lives of ordinary people in this otherwise informative and policy-oriented book.

“IS opening up to international trade good for everybody? Do immigrants from poorer countries take away jobs from low-income native workers? Why is inequality exploding everywhere? Does redistribution actually undermine incentives? Should we worry about the rise of artificial intelligence or celebrate it? How do we manage the trade off between growth and climate change? Is economic growth over in the West? Should we care? Figuring out how to deal with today’s critical economic problems is the great challenge of our time.”

According to the blurb these and many more questions of this kind are the themes dealt with in the book. And, as everyone knows by this time, the authors, Abhijit V. Banerjee and Esther Duflo (husband and wife), professors in the Massachusetts Institute of Technology, are the joint winners of the Nobel Prize in Economics, 2019, along with Michael Kremer.

They state: “Restoring human dignity to its central place, we argue in this book, sets off a profound rethinking of economic priorities and the ways in which societies care for their members, particularly when they are in need.”

Pre-publication endorsements are by Thomas Piketty, Raghuram Rajan, Robert Solow and other celebrities in the profession. The authors critically examine the vast body of published material—books, journal articles, official publications, PhD theses of obscure scholars, and field studies by public agencies and research scholars, including themselves. Raghuram Rajan states that the writing is “witty and irreverent” (among the chapter titles are “From the Mouth of Sharks” and “In Hot Water”) but never dull.

It will be impossible in this review to examine in detail all the topics dealt with in the book. I shall deal with some of them and shall offer a critical assessment. What will be the impact of immigration on the economy of the host country? Will it depress wages and make the condition of native workers more difficult as is often argued on the basis of simple supply-demand analysis? The authors examine the evidence available of the large influx of European immigrants into the United States during the age of the great immigration, 1910-1930, and conclude that there was little adverse effect on the local population. On the contrary, it enabled the natives to become foremen and mechanics and increased industrial production. In general, low-skilled natives and immigrants do not have to compete directly, with immigrants specialising in tasks that require less communication skills and natives in tasks that do. It is also the case that immigrants go in for jobs such as lawn mowing that natives avoid. The authors go on to argue that ways to help and encourage immigrants to feel at home in the host country may make them more acceptable and thus reduce the suspicions about the impact of immigration.

Related, but more complicated, is the issue of trade. International trade is not only a matter of transaction of goods. It involves a relationship between currencies, tariffs imposed by governments; decision to locate production, which is a major consideration for multinational corporations; product differentiation (the Chinese are said to go in for cheaper versions of many goods that they wish to export); and much more, and these keep changing. While standard theories of international trade favour free trade, in practice there are many limitations. For instance, gains from international trade are fairly small for large economies while for small countries it is crucial. Also, removing trade barriers by itself does not result in the free movement of goods.

The authors conclude: “[T]he exchange of goods, people, ideas and culture made the world much richer. Those lucky enough to be in the right place at the right time, with the right skills or the right ideas, grew wealthy…. For the rest, the experience has been mixed.”

Treatment of growth

Central in the book and the basis of the authors’ argument is their treatment of growth. It is set against the background of the significant period of growth in the major economies of the world from the end of the Second World War until about the middle of the 1990s with short periods of slow growth in the 1970s. The growth of the period was the result of many innovations that resulted in the increase in productivity of labour and capital. From the 1980s, the nature of growth changed. “Between 1980 and 2016, the incomes of the bottom 50 per cent grew much faster than the next 49 per cent.” That is the good news. However, the top 1 per cent, the rich in the already rich countries and the super-rich in the developing countries, captured 27 per cent of total growth. The authors find consolation in the fact that the poor were not left behind either. The absolute poverty rates (the fraction of those living under the globally recognised poverty line) have been halved since 1990.

Although the authors say that “it may be time to abandon our profession’s obsession with growth”, they do not seem to have succeeded in it as this chapter is the longest in the book. They have not adequately assessed the changing nature of growth, and their treatment of the relationship between inequality and poverty is misleading. “Growth” for the economists, of course, is the change that comes in the gross domestic product (GDP) between two periods, the year being the standard norm. It is generally accepted that “product” consists of the outputs of three major sectors of the economy, agriculture (A), manufacturing (M) and services (S), each one of these being an aggregate of a variety of specific items. Until recently, the A and M sectors accounted for a major part of the total output of the economy and also of its change over time. Of late, however, and in many parts of the world (the West and many parts of the developing world, including India), the main contributor to GDP, exceeding the total of the other two sectors, is the S sector. The authors recognise that this is partly due to the increasing role of finance in the economy.

A related aspect that they fail to recognise is that the financialisation of the economy leads to a downgrading of production with attention turning increasingly to transaction. These have a bearing on the concept of income and, more so, of wealth. Wealth once consisted of physically identifiable items, household goods, precious metals and, above all, property or real estate. The significance of property may not have diminished, but increasingly wealth consists of claims to shares on profits and on profits made through transactions in shares—“proxy wealth” as these may be referred to.

An important implication of these growing tendencies is that inequalities, especially of the share of the top 1 per cent, more so of the top 0.1 per cent, will continue to accelerate. That, in turn, will have its impact on aggregate demand, physical capital formation and many other aspects of the economy and society.

After dealing with growth, the authors move on to a discussion of the impact of growth on global warming and atmospheric pollution. The global body on climate change has indicated that to limit global warming to 2° Celsius, carbon emissions resulting largely from industrial activity (briefly “growth”) will have to be reduced drastically, by 25 per cent by 2030.

Overall, 10 per cent of the global population, obviously the richest 10 per cent, are the highest polluters contributing roughly 50 per cent of the carbon emissions. If the same phenomenon is viewed according to geographical territories and political entities, the biggest polluters are the U.S., China and India, the latter two because of their high levels of growth. Hence, agreements to reduce global warming are not easy to arrive at, and if arrived at, not easy to implement.

A further theme dealt with by the authors is that of technical change, especially that of automation, robots and artificial intelligence (AI) in particular. Robots can, and increasingly do, take over many tasks of a routine nature, thus replacing workers. One estimate has it that already close to 50 per cent of U.S. jobs are at risk of being automated. “Robots won’t demand maternity leave or protest a wage cut,” say the authors. The threat of AI is even more fundamental, that innovations, too, do not require any human agency.

In these circumstances, what is the way forward? It is well known that the authors are champions of universal basic income (UBI). This is not to deny that other social welfare measures, such as employment guarantee schemes and subsidised foodgrains, do not have a place. If well administered, each one of these has its contextual validity. But the objective of public policy must be to move towards UBI as it has been happening in Denmark and other such countries. Will a guaranteed income make people lazy and should the aim of social policy be for the state to withdraw as much as possible from the economic sphere as leaders like Ronald Reagan in the U.S. and Margaret Thatcher in the United Kingdom had argued? It is not easy to provide a definitive answer because even in Denmark, where income guarantees have been partially tried out, they are in the experimental stage: people can be laid off whenever they are not needed, but workers receive a decent subsidy. This ensures that job loss is not a tragedy, but a normal phase of life. Even that has its problems. The authors conclude: “The goal of social policy, in these times of change and anxiety, is to help people absorb the shocks that affect them without allowing those shocks to affect their sense of themselves.”

The approach of the authors may be described as analytical pragmatism—informative and policy-oriented. However, they have chosen to ignore deeper issues that affect the lives of ordinary people, especially the weaker sections of society. For instance, one does not find any discussion on ownership of assets, of landed property in India, although it is widely known that a large proportion of the poor consists of the landless. Data relating to asset distribution in the country are readily available but have no place in this otherwise informative volume.

The book concludes with the observation: “Economics is too important to be left to economists”, even to Nobel laureates, one must add.