Economist with a difference

Print edition : May 25, 2018

Ashok Mitra (sitting) with Sitaram Yechury and former West Bengal Chief Minister Buddhadeb Bhattacharjee, at the golden jubilee celebrations of the Bengali weekly 'Deshhitaishee' in Kolkata on August 2012. Photo: SUSHANTA PATRONOBISH

The broad perspective within which Ashok Mitra saw questions of pricing, terms of trade and income distribution will always remain both powerful and relevant.

ASHOK MITRA wrote insightfully on so many different subjects in his columns and articles that his specific and very significant contribution to economics is often lost sight of. I am talking here not about his contribution to practical issues of the day such as Centre-State relations, land redistribution, or the devolution of resources to panchayats; these no doubt were crucial, but my focus here is on his contribution to the body of economic theory proper.

This contribution is contained in two outstanding books: The Share of Wages in National Income, which was based on his PhD thesis written under the supervision of Jan Tinbergen, the renowned Dutch economist and the first recipient of the Nobel Prize in Economics, and Terms of Trade and Class Relations, which he wrote on a fellowship from the Indian Council of Social Science Research in the early 1970s after resigning from the Indira Gandhi government in protest against the semi-fascist terror being let loose on the Left in West Bengal.

The latter book, which took over many insights of the former, visualised the economy as a site where different social classes were engaged in a struggle over distributive shares, with each trying to shift the terms of trade in its own favour. “Terms of trade” here did not just mean the inter-sectoral terms of trade, which typically refer to the relative prices between agriculture and industry; they rather meant something more comprehensive, namely, the inter- class terms of trade, i.e. the relative “effective price” (inclusive of all net subsidies) which any particular class charges for the commodity that it supplies on the market, of which inter- sectoral terms of trade in the usual sense are only a component part.

This struggle over distributive shares does not merely relate to pricing-behaviour in the narrow sense, i.e. to the issue of how oligopolists collude to fix prices. In fact, Ashok Mitra’s criticism of the theory of distribution propounded by the renowned Polish Marxist economist Michal Kalecki, which had been the core of his PhD thesis and his first book, had dwelt precisely on this point.

Kalecki had argued that oligopolists usually colluded explicitly or implicitly to charge a price which was a certain mark-up over the unit prime cost of the commodity they produce. In such a case, however, a 10 per cent increase in the money wage rate, which would give rise to a 10 per cent increase in the unit prime cost, would be “passed on” as a 10 per cent increase in the final good price. And if this happened over the economy as a whole, then the real wage rate would remain unchanged.

Since the original 10 per cent increase in the money wage rate had come about because of trade union action by the workers (otherwise capitalists would not voluntarily increase wages), this meant that trade union action was ineffective in raising the real wage and hence the share of workers. But if such was the case, then why was there so much opposition on the part of capitalists to the existence of trade unions?

One answer to this which Kalecki himself had given, and which would be generally accepted, is that in addition to workers and capitalists there are a whole lot of unorganised primary commodity producers whose products are also used as inputs in the capitalist sector. Trade union action can succeed in raising real wages at their expense, not consciously of course but through the working of oligopoly pricing. In the above example if unit raw material costs and unit wage cost are in the ratio of 50:50 to start with, then a 10 per cent rise in money wages increases the unit prime cost by only 5 per cent. And if this is passed on as a 5 per cent price increase, then the workers’ real wages increase, but not at the expense of the capitalists.

Kalecki’s theory had provided for this by saying that there were two determinants of the share of wages in the national income for any given commodity composition of it: the mark-up margin (which depended on what he called “the degree of monopoly”) and the ratio of unit wage cost to the raw material prices (which in our example do not change when money wages rise).

But is that all one can say? Would trade unions become ineffective if there were no primary producers to squeeze? Mitra’s argument was that the mark-up margin itself was not independent of the strength of trade unions (a point accepted by Kalecki).

Bowley’s Law

The work of the English statistician Arthur Bowley had suggested that the share of wages in the national income in England had remained constant from the late nineteenth century to the Second World War. (This was sometimes called “Bowley’s Law”). Kalecki had explained this constancy as a consequence of the interaction between two opposite forces: a rise in the “degree of monopoly” which pushed up the mark-up margin, and a fall in raw material prices relative to unit wage costs which expressed itself through a shift in the terms of trade against primary producers.

Ashok Mitra showed through an analysis of that period’s data that there was no tendency for the “degree of monopoly” to rise and that this was because of the strength of trade unions which kept the mark-up in check. Trade union action, in other words, affected real wages not just at the expense of the primary producers but also by keeping the “degree of monopoly” in check, which is why capitalists hated trade unions.

Mitra’s first book had thus argued that pricing behaviour was not simply a technical matter (having to do with elasticity of demand and such like things) but was dependent upon a host of socio-economic factors, such as the strength of trade unions. This insight was carried forward in his second book, Terms of Trade and Class Relations, which also incidentally drew on his experience as Chairman of the Agricultural Prices Commission.

This book, containing a rich exposition of the ideas of a host of writers, from Marx and Lenin to Rosa Luxemburg, Nikolai Bukharin, Yevgeni Preobrazhensky and Michal Kalecki, advanced a general position, and also raised a specific query regarding the Indian situation. The general position was that class struggle over distributive shares occurs no doubt through the relative prices charged, but not only through prices, as it also involves fiscal and other sops; and that it uses an array of instruments both economic and political.

Several important conclusions followed from this, which went against the grain of received doctrines in economics. First, the prices that prevail on the market in a capitalist economy are the outcome of class struggle, and not just thrown up by supply and demand, as economics traditionally believes.

To be sure, following the Italian economist Pierro Sraffa’s work, it would be generally accepted that the “prices of production”, which prevail when supply has had time to adjust to demand, depend on distribution; and since distribution depends upon the balance of class forces, the prices of production are the outcome of class struggle. And since market prices represent movements around prices of production, they, too, ultimately, are the outcome of class struggle. But Mitra’s argument relates not just to such mediated determination; it suggests that the actual prices we find in the market, which are typically administered prices by oligopolists, are themselves the direct, unmediated outcome of class struggle.

Remarkable departure

Secondly, we cannot separate the economy from the polity. Class struggle encompasses both these realms: there is no separate exclusive determination of economic variables in a particular realm, called the realm of the economy. Terms of Trade and Class Relations therefore took a position that was a remarkable departure from what one usually finds in economics.

The book also raised a question about the Indian economy. Metropolitan capitalist countries had stabilised themselves by turning the terms of trade against the primary producers. Whether the degree of monopoly in those economies had increased (as Kalecki believed) or not (as Mitra argued), class struggle between the workers and the capitalists there could be kept in check through an adverse shift in the terms of trade against the primary producers. But such a stabilising device was not available in the Indian economy.

The Indian political arrangement was based on an alliance between the rural rich, consisting of landlords and rich farmers, and the urban capitalists. The rural rich, because of their influence in the countryside, delivered the votes in elections, which ensured that capitalism continued to flourish even within an electoral democracy. In return for this they demanded a shifting of the terms of trade in their favour which took the form of an inter-sectoral shift in favour of agriculture and against industry. Since wage goods of the industrial workers were mainly of agricultural origin, such an inter-sectoral shift meant that if the real wages were to even remain constant, then the product wages of the industrial workers (i.e. money wages in industry deflated by industrial prices) had to increase, i.e. the industrial profit-margin, and hence the profit-rate, had to fall. This necessarily meant an unacceptable situation for industrial capitalists and the unleashing of an industrial stagnation.

The fact that such a stagnation reduced the demand for agricultural goods did not make any difference to the argument, since prices of agricultural goods could still be kept up despite stock accumulation, as the government bought up these stocks through public procurement that had been introduced after the mid 1960s.

Post-mid-1950s shift

The shift in the terms of trade in favour of agriculture had occurred even earlier, since the mid 1950s; but it was not noticed as such because prior to the mid 1950s there had been an opposite movement, an adverse terms of trade shift for this sector, which the post-mid-1950s movement was seen to be rectifying. Ashok Mitra provided for this entire post-mid-1950s shift a political explanation, which he first outlined in an essay in a Festschrift for D.P. Mukherji, the person who had marked the Essay paper in his MA examination, and had been so impressed by young Mitra’s essay that he took the trouble of finding out the identity of its student-author, and offered him his first job at Lucknow University as a lecturer.

The question Mitra posed about India was the following: the shift in the terms of trade in favour of agriculture had squeezed both the real wages of the workers, urban and rural, and industrial profit margins, while causing high inflation which was the modus operandi of the real wage squeeze. This squeeze on real wages, in protest against which the Railway Strike of 1974 had taken place, could not go on within a framework of electoral democracy. How was India going to extricate itself from this predicament?

The real-life answer to this question was given within almost days of the manuscript of the book being completed, and long before it was published, when Indira Gandhi, having lost her electoral appeal precisely for the reasons Mitra had elaborated, declared an Emergency in the country.

The incompatibility between a rise in the share of surplus, spearheaded by the demands of the rural rich, and parliamentary democracy, which Mitra had warned about, was practically demonstrated.

Mitra was not the only person to have highlighted this problem. Sukhamoy Chakravarty too had in a well-known article, titled “Some Reflections on the Growth-Process of the Indian Economy”, attributed the constraint upon India’s growth-process at that time to the politically dictated shift in the terms of trade in favour of agriculture. Mitra, while advancing a similar proposition, had placed his argument within a much broader canvas.

The nature of the contradictions of the Indian economy have changed since those days, especially with the country being drawn into the vortex of globalisation, so that Mitra’s analysis in Terms of Trade and Class Relations can now be seen as referring only to a particular phase of India’s development.

But while that may be true of his specific analysis of the Indian situation, the broader perspective within which he saw questions of pricing, terms of trade and income distribution, will always remain both powerful and relevant.

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