Updated: July 5, 2011 12:03 IST

A critique of free market economics

Narendar Pani
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This undoubtedly is Kaushik Basu's most ambitious work. The scale of this ambition may not be apparent as it is hidden under an easy style that makes the book as enjoyable as any in economics can get. But what Basu seeks here are not the occasional theoretical insights at the frontiers of economics but the very rationale for what economists do.

The obvious starting point is the idea of an ‘invisible hand' reflected in the most quoted line of Adam Smith: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” Or its more formal statement arrived at two centuries later: in a competitive economy, where all individuals choose freely according to their respective rational self-interest, there will be an optimal equilibrium under certain technical conditions.

Basu endorses the validity of this proposition and then goes on, with rigorous elegance, to draw out the many assumptions that are made when economists use this argument indiscriminately. He makes a distinction between technical understanding and intuitive understanding.

With mainstream theoretical economics ensconced firmly in the realm of technical understanding, economists are able to treat individual human beings as the “foundation from which we must build up in order to understand the functioning of society, economy, and polity,” or what is referred to as methodological individualism. But this leads to a major failing of neo-classical economics since the individual is often willing to take some personal losses in the interest of his group or community. To avoid this failing, Basu recognises the importance of understanding what he calls “the chemistry or group”, which takes him into the realm of identity.

Internal rebel

In building this critique, he takes on the mantle of internal rebel, sticking largely to the language and method of mainstream economics. This approach will probably ensure that his critique is not dismissed as just another rant of the opponents of neo-classical economics. But this form of criticism is not without its limitations. It may be effective in drawing the assumptions out of the woodwork of economics, but once the problems are exposed there is much less clarity on what is to be done.

Philosophers could argue, and Basu would probably agree, that the problems he has so neatly delineated in economicspeak have been known to them. Take, for instance, the distinction between technical understanding and intuitive understanding. This is not very different from the one between ‘science' and ‘non-science'. But that brings us to the problems of demarcation.

A question economists are bound to face, given their preference for precision, is: where exactly should the dividing line be drawn? The more rigorous the norms we set for defining what is ‘science' or ‘technical understanding' the less are our chances of accepting something that is false. It will also result in the rejection of much of what is true.

Whether or not one knows precisely where to draw the dividing line, it will still be necessary for him to determine the relationship between technical understanding and intuitive understanding. While Basu does not address this issue explicitly, the book suggests that he will be comfortable reaching out to ‘intuitive understanding' only where ‘technical understanding' is not available. But the more rigorous he gets he will have less technical understanding available to him. While the academic economist could confine himself to this narrow realm, the policymaker cannot.

As policymakers delve into the realm of intuitive understanding, a number of questions arise; questions that Basu does not quite go into. Can we be sure that this intuition is not simply what is expedient for the policymaker or that there are no ideological, cultural or other biases built into his intuition?

Basu acknowledges that the book may disappoint the reader as it “lays the groundwork for a manifesto but cannot pass for one”. But I suspect he does not quite get the magnitude of the reader's disappointment since his absolute mastery in the realm of technical understanding is not matched in his explorations in the field of intuitive understanding.

At the end of it all, one is left with the impression of watching a world class magician spin a web, only to be told to come again tomorrow for seeing the trick performed.

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