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Updated: September 15, 2009 09:13 IST

Economic theory: a critique

C. T. Kurien
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In the early 1960s, Stephen Marglin was part of a group of young, bright economists from the United States who came to India, as “missionaries,” he says, bringing the “gospel of economic development” to what was then one of the poorest countries in the world. Their message of salvation consisted of rigorous economic theory, elegant models, and the mantra of mathematics. They were advisers to the Planning Commission.

Wrong doctrines

Marglin felt that, as part of his missionary calling, he should understand the belief systems and ways of living of the heathens. So he went out to a village close to Delhi and along with missionaries of another order — The Ford Foundation advisers — he interacted with farmers and discovered that they were not against using fertilizers or adopting new technologies. But, to quote his words, “I learned something infinitely more valuable: an entirely different way of knowing and being in the world from anything I had ever imagined? I experienced something very different? not that people acted without rational deliberation, but that people lived their lives in deep connection with others — in short, in community.” The missionary who was taught to believe that self-interest was the only true rationality and that the market (actually the Market) was its manifestation had something of a conversion experience.

This volume is his confessions of the wrong doctrines he had learned and his search for an understanding of the mystery — community — that he had stumbled into in the East.

The central issue he ponders over is “How do we know?” He identifies two forms of knowledge — algorithmic knowledge and experiential knowledge. The Dismal Science of Economics, he contends, is of the former kind, a logical corpus derived from a set of axioms; chief among them are: self-interest, individual preferences that can be ordered, unlimited wants, limited resources to satisfy them, and maximisation of utility.

It is of little concern whether these axioms have any validity; all that matters is whether empirically testable hypotheses can be derived from them through logical exercise. Empirical knowledge, by contrast, is “characterised by its dependence both on authority and on intuition, insight and hunch — in short, knowledge based on experience.” The poverty of economics, according to Marglin, is that while it may produce an internally consistent theory, it leads to inconsistencies when confronted with real life situations.

Marglin illustrates the point. Economic theory (currently its most widely accepted version, neo-classical theory) is based on the assumption that all participants have complete knowledge to make decisions. However, as far as investment decisions that involve the future are concerned, knowledge cannot be complete and certain. Similarly, that theory recognises only individuals as decision makers, but the moment real life situations are brought in at least the nation as a collective decision-making body has to be accepted.

I go along with these criticisms of neo-classical economics. I also share Marglin’s argument that neo-classical theory can pretend to be concerned with the “value free” notion of efficiency in production because it has decided that issues of distribution are not particularly significant.

Weakness

But I see two major weaknesses in Marglin’s treatise. First, Marglin does not recognise that neo-classical economics that champions individualism is only a theoretical veneer of the capitalist economic order. If he were to look beneath the surface, he would have seen that the motive of profit maximisation attributed to the producer in that theory is nothing but the “accumulate, accumulate” creed of the capitalist.

The cover-up is cleverly done. Let us not take time into account and concentrate on timeless equilibrium conditions; let us not have messy concepts like class, but deal only with decent categories like consumers and producers, all of whom can be considered as maximisers; above all, let us not be concerned with the “political” issue of distribution and simply accept the obvious fact that when the cake grows larger everyone can have (not will have) more.

The second is a related matter. Marglin’s critique of economic theory is essentially along the path of algorithmic knowledge. That he embellishes it with historical (that is experiential) anecdotes does not take it into the sphere of experiential knowledge. This problem, which Marglin is not even aware of, arises from his failure to grasp that economic theory has to be anchored in the experiential reality of the economy — the fact that human beings survive by interacting with nature; that the pattern of that interaction changes over time manifesting itself as changing organisations of production; that at some stage exchange enters as part of the organisation of production; that those who once produced all that they required come to acquire through exchange that which they need, but do not produce; that all this also changes the unavoidable interaction between individuals and the communities or societies that they are part of; and that the present is only a passing phase of that process of change.

Complex entity

If these experiential aspects are recognised, a sound critique of economic theory of any given era will have to be anchored first in an understanding that the economy at all times is embedded in society through a wide range of units (communities) and is carved out only for analytical purposes. Secondly, the economy has to be conceptualised as an evolving complex entity. The test of economic theory is whether it can be a fair representation of such a real life economy and not a neat logical substitute for it.

Economists in India have been moving into these areas of fundamental research. It is a little strange that Marglin who claims to have received enlightenment in India has not been aware of these contributions.

THE DISMAL SCIENCE — How Thinking like an Economist Undermines Community: Stephen A. Marglin; Oxford University Press, YMCA Library Building, Jai Singh Road, New Delhi-110001. Rs. 795.

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