by Anjan Chakrabarti

Last time the Indian economy ran into a major systemic crisis was in the late 1980s. It was a result of and also the final nail in the coffin of state sponsored planned economy. Along with the collapse of Soviet style command economies, it signalled the unsustainability of an economic system built on absolute or near total control of the state over the economy. That crisis helped spread the philosophy of neoliberalism in India which led to this lesson from the experience of centralized planning: for the goals of rapid economic growth and poverty reduction, state control over the market economy does not work and hence should be abandoned. Since then, a structural adjustment program evolved as a gradual process of two decades, giving rise to a competitive market economy that is integrated into the global economy; as against the privileged position of planners, this new paradigm also protracted the supremacy of the mass of homoeconomicus (optimizing economic man, whether as consumers or producers) whose decision making transpiring in and through this global competitive market regime are supposed to generate the economy wide outcomes that are efficient.

A connection between microeconomics and macroeconomics is thus made whereby the macroeconomic outcomes were seen as result of microeconomic behaviour in a competitive market economy[1]; it was believed that such a connection would produce a high growth rate regime, stable and reasonable inflation and rapid employment in the industrialized sector (inclusive of manufacturing and services). Among the microeconomic decision makers were, of course, the global capitalist enterprises which, like the homoeconomicus as consumers, were taken as privileged for they were seen as essential instruments of generating high value and hence growth. Evidently, this competitive market economy helped create and facilitate global capitalism in the Indian economy. It is to this structural change that we move next.

Problem over sharing the Indian growth miracle

As it has evolved gradually through an assortment of reforms, this paradigm shift produced a structural remapping of Indian economy taking the shape of ‘circuits-camp of global capital’ qua global capitalism and its outside ‘world of the third’.[2] This changing map of the Indian economy was driven by, among other things, the primacy accorded to global capitalist performance, appropriation and distribution of surplus which, via high growth rate, resulted in the expansion of the ‘circuits-camp of global capital’; this expansion, not surprisingly, meant a war on, or primitive accumulation of, ‘world of the third’.[3] In other words, the process of primitive accumulation ensured that growth has been exclusionary (that is, devoid of trickle down effects), where the exclusion has taken two forms: first, by excluding a vast section of the population from the benefits of rising income growth, a phenomenon symbolized by a worsening Gini coefficient; and second, further exacerbating existing social inequities (based on caste, ethnicity, gender, etc.). In fact, the dual phenomena of income inequality and social inequity compensated, complemented and reinforced one another to exclude a large section of the Indian population (residing in the margins of the ‘circuits-camp of global capital’ and ‘world of the third’) from the benefits of economic growth. There is also, due to measurement problems, some controversy over the exact trend of income poverty, and there is a strong indication that non-income factors of poverty (captured by the statistics of malnutrition, health, education, etc.) may have stagnated or worsened.

The overall picture is that of a country of increased prosperity (concentrated in the hub of the ‘circuits-camp of global capital’) but with a growing divide as well. The event of exclusionary growth was acknowledged and internalized by the policy circle and many economists after the disaster of ‘Shining India’ in the 2004 elections; it was agreed that exclusionary growth must be tempered by an attempt to include the left out population through redistribution of benefits of economic growth; inclusive development aspires to become the new national trope supposedly uniting Indians, notwithstanding their other differences, into a single national project of development in which all are participants and beneficiaries.[4] Rather than being in conflict, this imagery sees growth and redistribution as complementarity; high growth (that is, a bigger pie) sustains greater redistribution and greater redistribution in the form of more productive investment among the poor is supposed to secure and propel further growth. Global capitalism (‘circuits-camp of global capital’), working via the competitive market economy, is thus not only good in itself because it rapidly expands growth. It also has instrumental value by delivering direct benefits of growth (the trickle-down effect) and indirect benefit of growth (through redistribution) to reduce poverty; the former will function through the market (which, in the Indian case, even the policy makers agree is weak), and the latter through the intervention of the state.

At another level we can interpret this imagery and its underlying policy paradigm as trying to combine the capitalist performance, appropriation, distribution and surplus in a global setting that is fundamentally private-centric and the domain of redistribution which is fundamentally state-centric. Thus, the Indian state now encapsulates two rationales, one liberal (minimal interference in the competitive market economy, that is, in the ‘circuits-camp of global capital’) and the other dirigiste (directly intervening and controlling the redistribution process to ‘world of the third’); it combines these to secure the modernization process via the expansion of global capitalism (or, ‘circuits-camp of global capital’). This is projected as a truly win-win situation which is a result of the gift of globalization and the benefits derived from it in the form of enhanced wealth creation that the integration of the Indian economy into a globalized world has enabled. Not only has the Indian growth miracle permanently arrived, but inclusive development enables the entire country – all of the population – to share and be a partner in this miracle. It is of course another matter that rulers at different times spare no effort in producing and disseminating pictures (in which nothing can seemingly go wrong) that in the end turn out to be delusional; previously, the picture of ‘Garibi Hatao’ and ‘Shining India’ were two such pictures. As in all case of delusional pictures that promise everything to everybody, this imagery is now in a state of crisis in more than one way. We discuss an axis of that crisis here.

Microfoundation of macroeconomics: A recipe to end depression or to begin one

Critical to this imagery is the assumption of high growth; an assumption bolstered no doubt by the actual realization of a high growth rate regime which in turn is traced to the creation of a competitive market economy. This in turn has led to a sacrosanct belief and robust defence of the competitive market economy as against state intervention/control, and global capitalism as against national capitalism. However, since 2007, that growth story is in serious danger which in turn forces our attention to areas taken thus far as immune from discussion. In fact, the Indian economy’s trouble expands well beyond the faltering growth story. In the last five years, the Indian economy has slowly moved into a terrain of a deep crisis, perhaps in the same scale as the earlier one; in the sense that it is threatening to take the semblance of a systemic crisis. This time though, with a drastically truncated role of the state vis-a-vis market and weak trade union opposition, the blame for this crisis can only fall on the combined effects of neoliberal globalization and global capitalism or the mechanism of global capitalist centred production, distribution and consumption of goods and services functioning through the conduit of a competitive market economy. Is it then the case that the source of the systemic crisis resides in the illness of a competitive market economy? This though is not the accepted position; nor is it yet the point of debate in India.

Prime Minister Manmohan Singh insists that the Indian economy’s fundamentals are robust, and hence its growth story, while faltering in the short run, is protected in the long run. If we accept Keynes’ dictum that ‘in the long run we are all dead’ (by the way, five years is not a very short period either) which in no small part is substantiated by the overdetermined and contradictory processes pulling and pushing the Indian economy into who knows where, then a question crops up — What is meant by saying that the fundamentals of the economy are strong?

Now, surely the prime minister is not referring to the macroeconomic fundamentals. A cursory glance at the basic indicators tells a sorry story on that front: the growth rate is falling, inflation rate is resiliently high (transpiring, says the Reserve Bank of India, mostly from supply side factors which keep exacerbating the problem), falling private saving and investment, growing current account deficit driven mainly by a worsening trade deficit, pressure on the capital account, declining rupee value and at times volatile exchange rate movement, and increasing fiscal deficit. This is indeed a case of fundamentals gone haywire and which seem to be resiliently invariant to policy changes (pertaining to fiscal, monetary and exchange rate regimes), that are transpiring rapidly, being fired from all possible directions; this trouble is in fact finding further fodder through the global inter-linkages that is exporting the global problems into India in plentiful forms (the deleterious effects from Europe being the latest addition) thereby aggravating an already difficult situation.

The trouble is not merely that the economy is faltering, but that the process is transpiring in a dynamic environment that is private (competitive market economy) and global, in which many processes/variables are not under the control of the policy makers if they are at all known to them in the first place. So much has been talked about the benefits India has garnered from its integration into the global economy; and our mainstream friends would like us to be held captive by that picture. Yet, the last five years have shown that there is a cost to this integration too which now can hardly be left unquestioned. A lesson: there is no win-win harvesting from globalization. Like all other entities, the process of globalization is beset with overdetermination and contradiction, throwing up unpredictable outcomes and harbouring unknown possibilities, and for a competitive market economy integrated into a globalized world also suggests the existence and the need to not only accept the possibility of business cycles, but also of breakdowns.[5]

If not macroeconomics, it then appeals to reason that the prime minister must be referring to the strong fundamentals pertaining to the microeconomic environment; this can only mean the competitive market economy materializing from the liberalization policies of the last two decades. The suggestion here is that creating such an economy has succeeded in producing a level effect meaning that the minimum bar on the growth rate has been permanently raised as compared to that of the planning era. As a justification of this position, the high growth rate in the previous decade is presented as a proof. If this is accepted then it follows that the neoliberal policies by creating this competitive market economy have done a service to India. Because of the level of high growth rate, India stands a better chance not only to become richer but also reduce its poverty sharply.[6] But then, if we are to accept this, how do we reconcile a sound microeconomic environment with a disturbing macroeconomic picture? How could the two sets of fundamentals be moving in opposite directions? Can they in the first place do so? This leads to a deeper issue as the following argues. Let us begin by positing the position of neoliberal economics.

That a sound microeconomic picture can co-exist with a systemic failure at the macro level is contrary to the neoliberal dictum which theorizes a picture of macro economy emanating from microeconomics; this is now the consensus of mainstream neo-classical economics. In addition to this frame as being methodologically robust in the sense of capturing the concrete reality, it is further held that a competitive market economy functioning with a supporting but non-intervening state will produce better macroeconomic outcomes than otherwise.[7] And, to cap it all, such an economic system rules out systemic failures such as depression; any state interference here will produce an inferior outcome or worse; the role of the state is only to ensure that a competitive market economy is created, facilitated and secured from outside interference (such as anti-competitive practices, trade union activities, expropriation, etc.) and its own discretionary behaviour (following rules is better than discretionary policies). The confidence entrusted in this new paradigm can be gauged from the following quote in a Nobel Prize acceptable speech by Robert Lucas:

Macroeconomics was born as a distinct field in the 1940’s, as part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with better incentives to work and save, not from better fine-tuning of spending flows. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from between long-run, supply-side policies exceed by far the potential from further improvements in short-run demand management. (Robert E. Lucas, JR. 2003)

Coming from arguably the chief architect of modern macroeconomics and the economist principally responsible for demolishing Keynesian macroeconomics, the claim that depression – the term mainstream economics uses to signify economic breakdown as opposed to business cycle or fluctuations around trend which is regular – is over was a colossal claim[8]; colossal but also one which fell flat with the appearance of the global economic crisis. It showed that macroeconomics has still not solved its self-proclaimed central problem of depression and by corollary that what some such as Paul Krugman calls the ‘voodoo’ economics of supply-side is, to put it mildly, deeply problematical. Paraphrasing Lucas from our vantage point it appears that Marx’s observation of a capitalist economic system containing the seeds of its breakdown was true in the 1940s as it is now. The trouble is that the ‘voodoo’ economics continues to be the dominant economics, whereby its influence is deeply rooted in the current policy making circles; even as depression can no longer be denied, the theoretical consensus that had resulted from the anti-Keynesian revolution enacted by supply side macroeconomics continues to hold considerable sway. And this theoretical consensus presents a deeper trouble. It lies in the inherent claim that a global capitalist regime under the conditions of free agents functioning in a competitive market economy with minimal state interference will lead to the disappearance of systemic failure such as that epitomized by depression.

If evidence is any proof (and economists revel in it), then we can conclude that there must be something fundamentally wrong with the axiom of Cartesian methodological individualism in a competitive market economy producing a depression free system. This hypothesis evidently rules out any autonomy to the economic structure which is specified in neoclassical economics as general equilibrium economy. If autonomy of structure is granted then that could carry the possibility of effects and outcomes irreducible exclusively to the optimising behaviour of the agents interacting through the market.[9] However, unless we agree that this autonomy exists, it becomes difficult to locate and explain the appearance of the current economic crisis that is now global. That being the case, one of the central hypotheses of neoliberal economics – if individuals are free decision-makers, markets are self-regulating and hence sufficient for the system – becomes moot. Markets do have unique features and effects, but to enable a depression free economy is certainly not its forte. In short, the framework of neo-liberalism or its economic discipline of neoclassical economics cannot explain systemic collapse.

In contrast, Keynes and Marx, in their own different ways, insisted on the relative autonomy of the structure, a relative autonomy that can be traced to the structure and, at times, the non-optimising behaviour of the agents. It has also been suggested by others that parts do not add up to the whole; that the whole also needs to be specified and analysed in terms of its unique features and effects.[10] This is not to say that individual decisions and markets do not influence the structure (we believe that they certainly do), but that structure cannot be seen as mere sum total of individual decisions.

If, in contrast, we accept that indeed microeconomic foundations produce macro economy or even go with our milder proposition that microeconomics do partially, but not totally, influence macroeconomics, then one must confer some quarter of blame (and if we are to follow the framework of neoclassical economics) to the kind of basic economy that constitutes microeconomics. Merely blaming the Indian economic crisis on the global economic crisis (a common refrain among Indian policy makers now) sidesteps the issue we are raising here[11]. Since the 1980s, the neo-liberalization of the global economy has produced a transformation towards a competitive market economy, a move that was propelled by developed countries (Harvey 2007). But it is precisely in the latter that the global nature of the current crisis originated and spread[12]. If indeed we accept that macroeconomic outcomes are a result of agents’ decision-action in a competitive market economy, then surely it is that economy which must be held accountable for the outcome. In other words, instead of the fundamentals of microeconomics being good, they must be seen as deeply problematical and could be held as containing seeds of instability and destruction at a broader level.

The above underscores that microeconomic environment constituted by the competitive market economy populated by free agents can and does produce economic and social disasters, as it has; far from being self-regulating, markets may produce, as it has, self-annihilation leaving people, regions and even nations struggling to survive. Therefore, not only do we get the insufficiency of the neoliberal qua neoclassical framework in locating and explaining depression (as we argued earlier), but we additionally also find its chief logical conduit of explaining the functioning of economic systems faltering. Surely, there is something wrong with this microeconomic environment which in turn calls for a rethinking of the basic economic system itself, the way production, distribution and consumption of goods and services materialize under capitalist form. One the other hand, if one still maintains that microeconomic fundamentals are sound, then one will have to concede that there is a dissonance between micro and macro, that macro economy has relative autonomy including possibilities of structural failure. This realization entails the role of the state including active policy ones pertaining to control of the economy, if prevention of economic crisis or disaster (or, what Lucas called depression) is considered a desirable objective.

Perhaps, the current economic crisis in India shows that both the aspects are true: there is a problem with the basic economic system produced by global capitalism functioning through a competitive market economy and that a role of the state as an active and intervening player in the economy is necessitated. The importance of the first was argued for by Marx whereby he related the macroeconomic crisis (the crisis of capitalism as such) to the contradiction, convulsion and failure of the competitive market economy functioning through capitalist organization of surplus and suggested the abortion of capitalism as a recipe for resolving the macro crisis. He thus favoured a systemic transformation. The second issue was taken up by Keynes when he suggested the role of the state in overcoming recession and ensuring smoothening of business cycles by actively intervening in and influencing the market economic outcomes — a point we saw was fiercely opposed by Lucas and his acolytes.

This also shows that while both Marx and Keynes appreciated the relation between macro and micro (albeit in very different ways), Marx argued that systemic instability and disaster cannot be averted except by replacing capitalism as a system and Keynes suggested that the same can be averted, that is, capitalism saved with the active role of the state preventing business cycles from turning into possible depression. Not surprisingly, neoliberalism as an economic-politico philosophy is not just hostile to Marxism, but also to Keynesianism (even as Keynes’ objective was to save capitalism). Leaving aside their differences, it is perhaps more pertinent to realize that the current economic crisis has demonstrated that the suggestions of both Marx and Keynes, in tandem, need to be taken seriously. Notwithstanding the prime minister’s allusion to strong microeconomic fundamentals which is tantamount to taking the competitive market economy as sacrosanct that in turn demands a thin role of the state, it is perhaps time to seriously question this conjecture and begin a debate on both the nature of the economic system and the state; to debate them not distinctly, but in tandem as in overdetermination. It is my position that in the current climate of India, this is not happening, either from the Right or Left.

Conclusion

Policy paralysis appears in a different way here. The policy paralysis is a paralysis of thinking that shuts out any solution other than what is the ‘consensus.’ A competitive market economy with capitalist appropriation and distribution of surplus in a global setting is the consensus in this historical episode that, however, also continues to burden us with a growing set of changes or ‘reforms’ that deepen the very processes and system which are responsible for this crisis. How and in what manner these so-called ‘reforms’ are going to put the Indian economy back on track are issues not touched upon. How they are going to put some sanity into our present unstable and volatile systemic regime is left untouched. Indeed, in a scenario where the malaise is a systemic encompassing both the micro and macro, it is hardly surprisingly that the policies are not working. The debate from the Radical side is disturbing too, being stuck on the need for the enhanced role of the state which is, at times, combined with the nationalist trope of self-reliance. There is hardly any questioning of, and debate on, the issue of systemic transformation and the politics of producing it. Well, we have moved from a state sponsored development paradigm to a private market economy driven paradigm, and found both to be wanting. Changing the role of the state (say moving towards a strong state) without challenging the economic system is unsustainable as history has shown us; in fact, both must be addressed together. To put it somewhat differently, both the micro and macro, in tandem, must be made the object of questioning and transformation.

References

Chakrabarti, A and Dhar, A. K. 2009. Dislocation and Resettlement in Development: From Third World to ‘world of the third’. Routledge: London.

Chakrabarti, A and A. K. Dhar. 2012. “Gravel in the Shoe: Nationalism and ‘world of the third’,” Rethinking Marxism, 24 (1).

Chakrabarti A, A. K. Dhar and Cullenberg, S. 2012. Global Capitalism and ‘world of the third’, World View Press: New Delhi.

Harvey, D. 2007. A Brief History of Neoliberalism. Oxford University Press, USA.

Lucas, Robert, JR. 1976. “Econometric policy evaluation: A critique”. Carnegie-Rochester Conference Series on Public Policy 1 (1): 19-46.

Lucas, Robert, JR. 2003. “Macroeconomics Priorities”, American Economic Review, Vol. 93, No.1.

Resnick, S. and R, Wolff. 2010. “The Economic Crisis: A Marxian Interpretation”, Rethinking Marxism, 22 (2). [This can be found on this site at: link]

End notes: