The Grand Comeback of R&E

My dearest readers,

The rathandeconomics blog has completed 10 years since it was created. It will exactly complete 10 years in April 2019.

A series of articles on burning issues of today including a set of video sessions on key issues of current economic importance shall be released.

Formal collaboration of The Cafe Economics (TCE) with rathandeconomics (R&E) shall also be undertaken.

This blog will be overhauled soon.

I thank all of you for your impeccable support and for bearing my regular irregularity in updating the content here.

A freshly appointed team of young enthusiasts shall be introduced soon.

They will run the blogger handle for this blog, so that real-time and continuous updates can be supplied at infinite (price/cost/expectations) elasticity.

My Warm Regards,

Bhagirath Baria.
Contact: 09638376026.

Notes on the "Nominal vs. PPP exchange rates" debate

I. Introduction and Background:

Mr. Jayant Bhandari is an institutional investor and consultant, active in the mining industry, an international traveller and an avid socio-economic thinker. He has written an article titled “Purchasing Power Parity (PPP) or Nominal exchange rates” on his site acting-man.com (see here: http://www.acting-man.com/?p=52263) partially in response to the points raised by the author of this blog during his programme on “Indian Economy, Culture and Investing”. This was undertaken at the AURO University, Surat. The programme was quite good with considerable discussions and debates on several key issues of macro and micro economic importance. The speaker provided considerable anecdotal insights into various growth related issues with a special emphasis on the popular India vs. China debate. Given his vast international exposure, it was no surprise that his take on various issues was much more cosmopolitan and enriched compared to the uncritical “nationalist” propagandists.

   However, the conclusions that were reached (even if correct) were based on wrong and fundamentally incorrect methodologies and tools, which were employed to derive the speaker’s a priori beliefs. The author of this article found that the speaker was using arguments whose conclusions could not be reached from their premises without overhauling the very premises that were used. Mere tentative correctness of conclusions does not lend an argument, whether inductive, deductive or abductive, to logical truthfulness. The conclusion must logically flow from the premises employed.

   Keeping aside these matters, the author made three critical observations on the speaker’s approach and methodological strategies:
1. Use of nominal GDP was a very weak way of comparing any two nations, including India and China.

2. The speaker’s lack of full understanding about convergence dynamics, which has been an intensely debated area in Growth and Development Economics.

3. The unawareness of the speaker about some core and key economic issues in macro and growth economics.

   The speaker Mr. Bhandari, recently published an article as mentioned above and this post provides the view of this author on the same. It is not meant to be a criticism or refutation. Such exercises are generally futile. Given Mr. Jayant’s large international exposure, the author of this article is not in a position to criticize his conclusion that India lags behind China on many accounts and that the interaction between Indian culture, economy and investment practices are producing sub-optimal socio-economic outcomes. Hence, the discussion below will be confined to issues of theoretical and conceptual importance on which this author has some minimum understanding. The discussion is kept at as elementary and common-sense a level as possible so that others can jump in and provide their perspectives too. Names are given to each premise to make them easier to refer. These names are the author’s own choice and others can ignore them if needed.

II. Core Issues:

Underlying Mr. Bhandari’s article are some key premises, which might be stated as below:

1. There is something like “the nominal exchange rate” (The Ontological premise).

2. This is what the market has to offer and hence its discovery is subjected to the forces of price mechanism (The Representativeness premise).

3. Nominal exchange rates are better suited for growth-related comparisons and analysis (The Suitability premise).

4. PPP exchange rates are an alternative to Nominal exchange rates, and hence can be clearly differentiated (The Alternatives premise).

5. Qualitative differences between economies are better captured by Nominal bilateral exchange rates compared to PPP rates (The Qualitative premise).

6. Convergence is probably a wrong idea or at best not applicable to the current context of India vs. China debate that was touched in the said programme in Surat (The Convergence premise).

7. Price differences do not capture quality differences (The Price-Quality premise).

8. Comparison of GDP across a “nation” is a correct representative of the true economic space over which actual economic activities are undertaken (The Space premise).

   As is clear from above, the writer of the said article is undertaking an analysis on issues of great significance based on some questionable notions, concepts and theories. He was honest enough to accept his lack of exposure to formal Economics. But because he has written on a critical economic issue, now the discussion must be made clearer for all stakeholders involved. It is to be noted that the point of disagreement was on nominal vs. real per capita GDP. However, the speaker wrote an article on a quite different issue. Accordingly, the following section tries to clarify why the above held premises are probably not as correct as they seem prima facie.

1. The Ontological premise: There is something like “the nominal exchange rate”

In reality there are “bid” and “ask” rates as far as bilateral nominal foreign exchange rates are concerned. The so-called “the nominal exchange rate” is at best an average of the both. It is quite different from the purer market-given bilateral foreign exchange rates that embody at least two dimensions, one emerging from the buyer-dealer side of the foreign exchange market and second emerging from the seller-dealer side of the same. The kind of information content contained in such average values is also different than their constituents. Any average is characterized by information loss and appealing to an average value as a true representative of its constituents without having sufficient information/approximations about the underlying population is untenable. Using the average bilateral nominal exchange rate to analyze such profound issues as differential growth dynamics is highly questionable. In terms of Economic Ontology, the nominal bilateral exchange rate that is generally employed for economic analysis, including the conversion of the amount of domestic GDP into other currencies, is a representative notion and presuppose that the underlying reality is closely approximated by that representation. In case of bilateral exchange rates, holding such a belief for long-run and probably even short-run comparison without detailed research on the issue is highly questionable. More issues can be debated here but space does not allow it.

2. The Representativeness premise: Nominal bilateral exchange rate is what the market has to offer and hence its discovery is subjected to the forces of price mechanism

Markets don’t offer “a” nominal exchange rate. As pointed above, different rates are offered depending on the side of the market and the structure of the market being focused upon. Moreover, basic economics suggests that nominal values are also governed by underlying real forces and the foreign exchange markets offer bid and ask rates which continuously fluctuate (even vary throughout the day). Such variability and the fact that the bid-ask spread is also volatile make it difficult to rely on bilateral representatives for analysis beyond probably an immediate horizon. Moreover, it is not possible to locate the determination and offering of the nominal exchange rate purely to the market-price system. Distortions generated by central bank interventions and other external shocks also make it difficult to rely on just the observed bilateral rates. Literature in international macroeconomics suggests that the exchange rate determination process is very complex and simplistic measures such as bilateral exchange rates are not the best or true representatives of the actual underlying exchange rate. Better measures are available and can be used instead.

3. The Suitability premise: Nominal exchange rates are better suited for growth-related comparisons and analysis

Given that nominal exchange rates are marred by several fundamental problems as pointed above, they already are questionable for use in medium to long run comparisons. Discussions on economic growth related issues presuppose a stable long-run conversion factor that can be used to compare GDPs across different countries. Given that any two economies are governed by different underlying structural characteristics and, different real forces (e.g. real investments, savings, etc.) and nominal forces (e.g. general price determination process, inflation, monetary policies, etc.), the role of the conversion factor and hence the implicit weighting factor becomes critical in establishing some degree of similarity between the variables of interest (e.g. GDPs of China and India here). PPP rates were historically developed to address such concerns. By accounting for price differentials, at least one crucial differentiating factor between two countries (differences in cost of living and price-structures) could be tackled with. Establishing some degree of similarity between two structurally different economies is needed to avoid comparing apples and chairs. PPP rates are also representative measures and cannot be blindly relied upon. But avoiding them in growth analysis is at best a dangerous error.

4. The Alternatives premise: PPP exchange rates are an alternative to Nominal exchange rates, and hence can be clearly differentiated

Juxtaposing nominal bilateral and PPP rates as two different alternatives implies that both are based on different underlying determinants. However, PPP theory is also a theory of the long run equilibrium behaviour of nominal bilateral exchange rates and is also bilateral as well as nominal in nature. Considering them as two alternatives for the same problem is probably not correct. PPP rates are not real exchange rates. Real exchange rates are an alternative to nominal exchange rates. Moreover, the construction of PPP rates requires nominal exchange rate itself. For example converting a local price of a good into its foreign currency price to construct a PPP rate will require the use of nominal exchange rate (generally the spot rate). However, given that nominal bilateral rates are a component of PPP rates themselves, it is difficult to rule out something called a “two-way causality” at least statistically (what causes what?, do nominal rates cause PPP or it is the other way round or both cause each other simultaneously?). Economists do use them as alternatives but strict adherence to such beliefs has always been criticised. For long-run analysis including comparisons of GDPs and their growths, PPP rates provide more meaningful measures by accounting for “purchasing power” differences and to some extent tackling the problem of differences in local price structures and the aggregate cost of livings.

5. The Qualitative premise: Qualitative differences between economies are better captured by Nominal bilateral exchange rates

It is not possible to rely on nominal bilateral exchange rates to account for qualitative improvements and differences between two nations mainly because the behaviour of nominal rates is governed by many factors including randomness. It has been found to be erratic and accounting for qualitative improvements requires a stable trend in the proxy variable that is closely related to the slow and gradual evolution of an economy’s goods, services and human capital. On this account, even the PPP rates fail, and comparing the economic outputs of two economies by taking into account their qualitative differences requires much more sophisticated quality-adjustment models. Recent literature in International trade theory has taken up this issue intensely and it is at least clear that nominal or PPP rates are not even remotely qualified to do the task. They are not at all meaningful representatives of qualitative changes and thus separate indexes and other such tools are usually employed. Large amount of literature is available on the New Goods-related trade models which are generally analyzed in a dynamic framework. Full-sized articles are needed to explain these issues.

6. The Convergence premise: Convergence is probably a wrong idea or at best not applicable to the current context

Convergence is an inherently dynamic (i.e. time-dependent) phenomenon. Comparative-Static approaches such as comparison of two countries’ GDPs, per capita GDPs, etc. using any kind of exchange rate is not applicable to such a process. Every Indian, Chinese, etc. at least has an ambition or hope to have a better lifestyle both materially and otherwise. Generally, there are benchmarks that we all have to use in order to define what a “better” economic condition is assuming basic needs are met. These notions and belief about what is a “good”, superior” or “better” life are different across individuals and societies. Hence, when two economies are compared, two different underlying social preference functions and social welfare functions are compared. It is thus important to have an idea as to what extent and with how much time can the two economies be expected to have similar preference functions so that comparison becomes meaningful. Not only that, but having an idea on “how long will it take me and at what rate of growth to reach some desired level of well-being?” is also important to my economic decisions. Such logic can be inflated to whole nations too. Convergence does exactly that. It allows an analyst to understand the path, time and lags needed for an economy or some section of it to reach some desired level on an economic parameter. It does not imply simply the equalization of the growth rates of two nations. Rather, over a period of time, two nations might happen to reach similar paths of growths and not necessarily growth rates and hence the actual amount of GDPs for example might be expected to come nearer to each other say between India and China and probably become equal. Such equalization does happen and economies also often overtake each other in terms of GDPs, per capita GDPs, growth rates, etc. Now what path of convergence is focused upon depends on the context. For example, Economic literature talks of long run steady state of growth and convergence would imply the path required for a given economy to reach that steady state level.

7. The Price-Quality premise: Price differences do not capture quality differences

Prices are not pure measures of quality. Qualitative changes in economies require a lot more information and sole reliance on price is incorrect. However, when higher degrees of aggregation are used, there are hardly any measures of quality differences and given the law of central tendency (meaning actual values tend to converge to their mean values as observations become infinitely larger) so that nominal variations in prices cancel out each other (such assumption is open to further debate and research), aggregate price indexes are the only simple measures available to understand the changes in qualities of life, goods and services between two nations. A higher price in one country implies, among other things, a better quality of product, given that the goods are homogenous. If two goods such as a bus trip in India vs. a bus trip in U.S. are not homogenous (one can refer literature in the choice-theoretic tradition), then many other factors could be causing these observed price differences. Quality differences are only one component. Despite these problems, however, removing relative aggregate price dimension from GDPs is needed to locate the changes in the quality and competitiveness of outputs between two nations. Otherwise the price movements will dominate the behaviour of GDP. Hence, nominal bilateral exchange rates fail on this account too.

8. The Space premise: Comparison of GDP across a “nation” is a correct representative of the true economic space over which actual economic activities are undertaken

Increasingly, there has been utter dissatisfaction with the very concept of State and its corresponding measures of economic actives primarily on account of the breakdown of the traditional economic spaces and increased integrations of erstwhile national boundaries in the economic realm (Harvey, 2001: Globalization and the “Spatial Fix”). Economic geographers in particular are discontent with the way macroeconomists treat economic spaces and hence there has been a burgeoning literature in the field of Geographical Economics. It is now no more possible to use GDPs as produced by nation-states given that economic activities are increasingly becoming inter-dependent. This inter-dependency dictates the need for better measures of aggregate outputs. Such developments are making the use of national GDPs unreliable, no matter how much adjustment is done for international linkages, because the underlying concept of space (the “nation”) is based on the notion of a state and it no more encompasses the full proportion of aggregate economic activities that societies undertake today.

III. Conclusion:

Alfred Marshall conceived of Economics as the science of the ordinary business of life of humans. What is less known is that he was interested not only in the economic dimensions but also the sociological dimensions of day-to-day life. He stressed on the need to incorporate dynamic economics in common-sense understanding. Yet, people in general use a lot of static and comparative-static concepts to understand essentially dynamic processes going around them. The above article has stressed on the need to move beyond traditional measures of economic activities as generated by the state. If it is the state that is the problem, then the factual repertoire produced by it either needs to be complemented with better measures of economic lives of societies or must be adjusted accordingly. It is quite clear that adjustment of the existing database on economic activities is a much more realistic exercise. It is hoped that some meaningful and mutually beneficial ideas come out of this rough write-up for all readers.

   Please feel free to criticize, reject, question, discuss or even appreciate what is written, but do think on the matters discussed and share an opinion.

   With warm regards.

The Consumption of Time

Time posits interesting possibilities. On the one hand it implies a forward-accelerating reality. On the other hand it exemplifies the cumulative burden of the past. All entities, living or not, appear to pass through and experience time. In the process of our experience of time, we consume it. We allocate it. 

It so happens that this allocation is undertaken across our desires and demands. The purification of reality that we undertake so as to realize time is succinct. Production of time is unknown. Throughout epistemological inquiries, knowledge about how and why time is produced is yet unclear and probably unknown. Yet, we humans are accustomed to a near-alcoholic addiction to believing in “time”. Emotions, evolution and energy flow so crushingly throughout our intellectual veins that we forget to realize that past, present and future might merely be an illusion. 

This illusion ceases to be a truth, when we consume it. Even though production of time is yet unknown, consumption of time is a critical element in economic theorizing. The so-called dynamism of economics emerges from the evolution of stock variables across time, thus generating flows. Time is a scarce resource and hence requires preferential allocation across our desires so as to produce demands.

(This is a partial work and more will be added. Please share your comments on the above content so as to further improve it.)

Economics as Technology: Rough notes

Economics as Technology

Economic ideas can evolve over space and over time. This evolution is evidently non-linear. The paths of spatial and temporal evolution taken by economic ideas are diverse and there exists no single unified theory to explain this dynamic behavior of economic theories. 

Ideas are many and some of them produce meaningful insights into the workings of the chunks of reality one is trying to understand. Some don’t. One may adhere to a certain idea of how the world works because of several motivations, particularly because one feels that that’s the way things should work and a given idea gives hopes of such a world. A normative outlook is evident in this argument. One may also believe in a particular idea because she feels that it explains how the world actually works. This is a positivist belief in an existing or a potential economic idea. 

Such an argument can most correctly be applied to not only social sciences but to the yet-to-be-discovered sections of perceived physical reality. There too one may have strong notions of how the unknown reality would be once it is discovered. Of course, this would mount to metaphysical speculations but nonetheless they hold some degree of authenticity at least for the believer.

Economic speculations become more refined as time passes by. Subjecting the ideas to more and more “prediction tests” as stated by several writers such as Friedman (See for example Milton Friedman’s “Essays on Positive Economics”) results into a body of knowledge that we now call Economics. 

These scientific collections of interrelated notions, theorems and behavioural realizations about the economic sphere of existence culminate into an exotic tool that can shift the ability and efficiency of production of commodities across households, firms and their macro aggregates. Economics becomes a technology.

The idea that ideas are technologies is perhaps not new on the intellectual landscape of human curiosity. Among many, J .S. Mill was probably one of the first theorists who could capture the benefits of economies of scale and scope that trading of ideas could produce. We now see the remnants of such theorizing in the large scale transfers of technologies across nations not only in their physical forms, but also in the form of technical knowledge flowing across borders.  Knowledge is now produced, distributed, exchanged and consumed at scales never imagined before. 

The embodiment, in our shared experiences, of the fact that Economics as an organic body of ways of thinking about the world, helps shift our production capabilities to larger levels than before despite our efforts remaining the same, may elicit the role of economic thinking in increasing welfares of people who utilize it as well those who are reap the gains from positive externalities of knowledge.

The core of this theme is to point out that by learning and applying the kind of behaviour that Economics teaches, all economic agents can improve their capacity to extract maximum possible benefits from the given means that they possess in order to achieve their various ends.

As an illustration, the understanding that an equal distribution of production time devoted between market and home goods among the male and female members of a household can help it shift its production possibility frontier to larger levels emerges from a careful analysis of social/institutional economic ideas about household behaviour. Here, the total production time devoted remains the same as before, only the change in distribution of total work time induces such gains.

At an aggregate level, the policy makers can increase their output (in terms of achieving successful and socially useful macro and sub-macro outcomes) with a given amount of input (time resource devoted in policy making and public funds utilized in the process) by better appreciating the insights derived from Macroeconomics and its various branches. Monetary ideas for illustration, that are embedded in major theories and empirical works, can and do help policy-makers to shift the production function of their output to higher levels with inputs constrained to the previous levels.

It thus emerges from our elementary approximations that Economics as an amalgamation of complex and heterogeneous ideas is not merely a discipline meant for consumption to participate and survive in the labour market. It is an organic entity, in all its diverse forms, that helps us make better consumption of our scarce means to produce more means and also to achieve more ends.

It might appear that the same argument can be applied to other branches of the social sciences such as Sociology, Political science, etcetera. Yet, it remains open to debate as to what advantages do these other brilliant disciplines directly supply to help choice-making entities increase their capabilities in achieving more outputs in terms measurable in an economic sense. It is to be borne in our understandings that the concept of technology depends critically on the concept of productivity and to be able to relate the benefits from ideas of other social sciences to this economic concept of productivity will require further detailed scholarly analysis. 

These modest and rough speculations presented in this article can only hope to motivate further analysis of such issues and nothing more. This is a rough version and further changes will be made with time.

- Bhagirath Baria.

Microeconomics, Macroeconomics and Consciousness.

Please Note:

The author of this article takes no credit for the ideas mentioned though there are his own ideas involved too. The exact work where the fundamental idea behind this article was present, is not in possession of the author, it shall be duly acknowledged as and when the author finds it or recalls about it.

Economic theorizing (except for some heterodox schools), follows the empirical method of investigation, primarily subjected to the principles of logical consistency and empirical falsification. In such a methodological set up, it’s imperative to understand the definitional categories of Economics so as to understand the subject and the ongoing research properly.

The definitions of Macroeconomics and Microeconomics are one such area. Historical developments and the contribution of numerous Economists have helped develop a particular definition of these terms. It is possible to understand them in one more way- as the results of conscious and unconscious individual decision making.

In Microeconomic analysis, an economy is essentially disaggregated into individual units, at the most being grouped into a non-aggregate group- such as industry, market, etc. The individuals are assumed to follow certain behavioural assumptions such as rationality, transitivity, etc. and are expected to do so under certain environmental settings such as under a particular market structure, under particular macroeconomic environment.

Methodological individualism thus considers an individual consumer or a producer as the fundamental unit of analysis. The results of this rationalized individual’s decision making through her interaction with other similar individuals produces Microeconomic outcomes. These outcomes are mainly in terms of Price, Demand and Supply generated in a market (whether labour, product or factor). What is to be noted here is that these economic outcomes are the result of conscious decision making by these individuals. The individuals consciously act and react in a particular manner which gives rise to their anticipated results. For e.g. when buyers and sellers negotiate over price, the outcome is something that is a result of their conscious efforts to reach that result- otherwise they wouldn’t get into it in the first place.

Contrast this with aggregated outcomes- as analyzed by Macroeconomics. Numerous individuals are aggregated into broad units of analyses- such as Households, Firms, Government and Foreign sector or in terms of markets- such as labour, goods, money and assets markets. The interaction of ‘aggregated’ individuals in these markets cuts across a hugely heterogeneous set of objective functions of individuals- all undertaking conscious rationalized decision making to achieve their desired economic outcomes.

Yet, what is surprising is that the macroeconomic outcomes produced by individual decision making units through their interactions in these aggregated markets are not at all produced by any conscious efforts to achieve these outcomes. Macroeconomic outcomes are primarily in terms of Output, inflation, unemployment, interest rate, exchange rate, price level, etc. None of these macroeconomic outcomes (produced by the macroeconomy) is a part of a microeconomic unit’s objective function, yet the diverse and theoretically infinite objective functions (due to subjective, non-comparable preference rankings of individuals) somehow fulfil the macroeconomic objective function- viz. of price and output stability and other such macro-policy objectives.

Macroeconomic outcomes are thus an unconscious result of conscious individual decision making and economic activity. This difference of the type of human consciousness that is associated with macroeconomics and microeconomics may open up new doors of understanding the role that Analytical Philosophy (and especially ontology) can play in appreciating better the beauty and breadth of the discipline of economics.

'Output per Worker' as the Opportunity cost of Unemployment: Rough notes

ALP (Average Labour Productivity) or OPW (Output Per Worker) as an Opportunity cost of Unemployment to society

It is very much plausible to look at Output Per Worker (OPW) or Average Labour Productivity (ALP) as a measure of Opportunity Cost of Unemployment to society. Unemployment theories and the theory of natural rate of unemployment [probably the Classical theory of Labour markets], talk about Unemployment and its related costs (in long-run & very long-run). So does the Keynesian theory of Output determination (in short-run).

Opportunity Cost means:

The cost of the next best alternative forgone is the Opportunity cost of the chosen alternative.

In Microeconomic theory, Consumer Behaviour theories like indifference preference theory, revealed preference theory; Production theories like Optimization behaviour of firms regarding their output under various market structures, etc.; Cost theories like Optimization behaviour by firms regarding their costs, etc. utilize this concept extensively.

In Macroeconomic theory too, Opportunity cost concept is utilized in various theories- for e.g. the Aggregate Labour Supply theory uses it in deriving the Aggregate Labour Supply curve from Individual labour supply curves. This is done by the means of the Microeconomic theory of Leisure-Income trade-off. Many other applications of this concept exist in Macroeconomics such as Production Possibilities frontiers, etc.

A simple model for Output Per Worker:

If the Production function is:
Y = A*f[K, N]
then OPW = Y/N.

This is but per labourer output in the economy.

OPW as such a measure:

OPW as above [at macroeconomic level] can be thought of as one such cost that the society has to forgo on account of there being people who cannot find work/do not want to work. Were they employed, we would have gained at least that much amount of output per labourer as produced by the current labour force of an economy [country]

Some Assumptions required here are:

Indeed, many qualifications arise here as below:

1. We need to assume that the Production function [Y = A*f(K, N)] remains the same even if the currently unemployed labourers become employed. It means even if N increases on account of increased labour force, Y changes in such a manner so as to keep ALP constant as before the unemployed became employed.
2. Technological parameter [A] remains constant. 
3. Production function continues to exhibit the same returns to scale as it did before the unemployed become employed. Probably a restatement of Assumption 1.
4. No change in Marginal Productivity of the inputs including labour [as well as others].  This means that the slopes of Total Product curves of Labour and Capital remain constant. In other words the partial derivatives of Total Product curves of Labour and Capital remain the same as they were before the unemployed become employed. Some other assumptions may be needed too.

Empirical research possibilities:

If above assumptions are satisfied, then OPW can be a proxy measure of the Output per unemployed labourer forgone by society on account of their unemployment. Data on Aggregate Output and Labour statistics, at least in the case of the U.S., where Labour statistics are available to some extent can be extensively used. As for India, proxy variables can be used. More on this later.

P.S.: Couldn't add mathematical equations I wanted to as such a feature isn't available here.

-Regards.

An Introduction to Multiplicity in Economics

Dear readers, I have prepared a paper on an issue that I consider of primordial importance for theoretical economics. Especially important is its implication for young students of Economics who are introduced to the subject of Economics in a particular manner that systematically blurs the existence of alternative methods and schools. It juxtaposes neo-classical and Keynesian as Economics per se. Moreover, the textbooks of G.S.E.B. and C.B.S.E. do not even admit that they're teaching a particular type of Economic theory and not Economics. Ignorance of such a simple fact leads to what I call 'confusing an epistemological fact for an ontological fact'. Though this paper does not delve in detail on this issue, it still touches upon it to sensitize our young students about the controversial and pluralistic character of the subject.

Kindly find it for download here:

Click on this: Academia.edu page
If that doesn't work, click here:
https://www.academia.edu/6480773/An_Introduction_to_Multiplicity_in_Economics
Critical commentaries, Constructive criticisms, suggestions and feedbacks are open-heartedly welcomed. Do write me about your understanding- whether supportive or critical. Do provide me at least 4 days to reply.

- Warm Regards,
- Bhagirath Baria.

Simple Regression, 'I' and 'A' in the IPAT model, Indian economy

This was a regression analysis of two variables of the IPAT model of effects of human activity on environment. It was submitted as a short empirical study, as apart of my assignment in an online course offered by The University of Edinburgh in critical reasoning[informal logic]. I'll put online all the regression output in Excel soon. This short analysis showed some interesting facts about the effects of Affluence factor on Environmental degradation. I had to use proxy variables as data availability was a critical issue here. Anyway, have a look. Let me know if more detailed study interests you on this topic.

Submitted material:

Hello. The homework section gives following instructions:

"For this week's homework, we would like you to do some research for yourselves and find one or more examples, in your own global context, where the environmental impact is being (or can be) mitigated through changes in A or T. Post a brief summary of what you have found, with references (e.g. links to websites), on the Homework/Population/Case Studies forum thread. Once you have done that, read and comment on the other submissions from fellow students, and upvote the examples that you think illustrate this principle best."

I’ve tried to do the following in context of Indian Economy[my nation of residency]. Hope I got it right. I understood it as giving one's own example. A simple empirical illustration too shall be admissible is what I've assumed here.

1.    Find a numerical value of the degree of relationship between the variables I[Environmental  degradation] and A[Affluence factor].

2.    Fit a regression line through the available data and predict the future behaviour of I with reference to a particular value of ‘A’.

3.    Also find out how much part of the variation in I is explained by A with the given data set. In short calculate the r-squared measure[coefficient of determination].

4.    All this using Microsoft Excel only. No use of advanced statistical packages has been done.

Proxy variables used:

1.    For ‘I’ [Environmental degradation], I used the Annual carbon dioxide emissions in tonnes per capita as a proxy variable.

2.    For ‘A’ [Affluence factor], I used GDP per capita in India at constant price [base year 2004-05]

3.    Isolated the data analysis to a statistical relation between ‘I’ and ‘A’ because the data was readily available.

Data used:

1.    For the variable ‘I’ {year 1990 to 2010}-http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions_per_capita

Please look at the row showing India’s data.

2.    For the variable ‘A’ {year 1990 to 2010}, in INR-

Handbook of Statistics on Indian Economy, 2012-2013, published by RBI. The section on ‘Macroeconomic aggregates at constant prices’ includes data on GDP per capital at constant price, base year being 2004-2005. Available here: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/002T_BST130913.pdf

3.    Data series used: Year 1990-91 to 2010-2011 for both I and A as explained above.

Results:

1. Correlation between 'I' and 'A' as per the data series is 0.978224 or 0.98[approx.]. This shows a strong degree of linear relation between both the variables in context of India.

2. Regression line produced: I = 0.612619153 + 1.98157E-05[A] 

3. r-squared comes out to be 0.9569 or 0.96[approx.]. Approximately 95% of the variation in I is explained by A.'I' being Environmental degradation measured by CO2 emissions, tonnes per capita in India between 1990-91 upto 2010-2011. And 'A' being GDP per capita at constant price, base year- 2004-05, from 1990-91 to 2010-2011.2.

4. Using the above Regression line, I found the following expected level of CO2 emissions[representing 'I'] for the year 2011-12 with GDP per capital being 55054.37 INR to be 1.70355 tonnes per capita per year

Data series:

The units have been stated above already.

Regression Output has been stated already above.

> Thus, it can be seen that in India, between 1990 to 2010, there has been a high correlation between I and A as stated here. The expected amount of environmental degradation[proxy- CO2 emissions in India] based on the data available for 2011 come out to be 1.70 tonnes per capita per year in India. More interpretations can be found out here.

Limitations of this analysis:

1. Proxy variables chosen might not be sufficient to explain all that needs to be explained. Also the isolated effect of one of the variable in the IPAT model, on 'I' has been explained. This was mainly due to data inavailability.

2. p-value, standard error, etc. has been ignored here. There's no autocorrelation[Error terms lacked linear correlation].

3. Data series might not be sufficient to explain the phenomenon satisfactorily.

4. High correlation does not imply causation. Hence this remains to be explained here.
5. Y variable has repetitive[same] values. Might be an issue.

Please let me know if this short analysis gave some insights to you. Your suggestions/criticisms/feedback are always welcomed.

- Thank you.

- Bhagirath Baria, Surat, Gujarat, India.

Note on Absolutist vs. Relativist interpretation of Economic History

Two works of History of Economic Thought provide very authoritative viewpoint of looking at the History of Economic thought. They are:

1. Economic Theory in Retrospect by Mark Blaug, and;
2  History of Economic Thought by E.K. Hunt and Mark Lautsienheiser.

The fomer work classifies History of Economic thought into two competing Interpretative frameworks:

1. Absolutist interpretation.
2. Relativist interpretation.

Absolutist interpretation abstracts away from Historical conditions- primarily concerned with the development of theoretical systems of various Economists, their criticism and emergence of better theories. It is therefore, it appears, is concerned with the development of economic principles irrespective of the ideological elements affecting them. Mark Blaug also explains that it is possible to refine the various economic theories and focus on the non-ideological aspects of the theory.

Hence, each theoretical system by an Economist will have at least following two elements:

1. Ideological- reflecting the Social reality around- Politics, Culture, Science & Technology, and other such variables. Hence, the theorist would have been affected by such variables around her which her theory would inevitably express.

2. Scientific- reflecting the maxim- 'Knowledge for Knowledge's sake'. These elements of the theorist would be focused solely on developing previous theories, criticising them if required, and proposing better, much more real theories- nearer to truth. These aspects woukd be solely scientific and shall be independent of the historical conditions.

The former of the above listed works follows this methodology of interpreting Economic History.

In the next post we'll see how the latter work- by Hunt and Lautsenheiser interprets the history of economic thought.

Bajaj Chakan plant strike and Theory of Value

Recent strike at Bajaj's Auto plant at Chakan brings out the need to understand such issues through the concept of Value, distinct from that of Price. Students of Mainstream neo-classical microeconomics would not make a distinction between Value and Price. Both are used interchangeably and more often than not in very casual sense. Yet, it is possible to understand this issue through the Labour Theory of Value of Classical Economists in general and Marx's Labour Theory of value in particular.

Marx's Theory of Value has the Theory of Commodity fetishism as its foundation, without the grasp of which Marx's analysis cannot be grasped. It is very much possible to apply the Marxist LTV[Labour Theory of Value] to Bajaj Auto plant strike, which can open up newer vistas of understanding Capital-Labour relations, not as Technical means of production but as Social Production relations specific to the currently prevailing Economy: Commodity-capitalist economy.

Marx's LTV is mostly perceived as a tailor-made radical tool of revealing the inner contradictions of Capitalism. Yet, the theory is perceived in a mechanistic way, addressing the question "What is Value?" in a simplistic manner. The foundation of the theory of Commodity fetishism is generally put aside or appealed to when explaining the surface appearances of a Capitalist society.

The next post will examine How can Marxist Value theory help to understand such events as also the ways in which it can be deployed to analyze such contradictions of everyday life in Capitalism.

Expanded model of Absolute Surplus Value

Synopsis:

This post adds a given aspect to the Absolute Surplus Value{1} model of Ben Fine and Alfredo Saad-Filho, given in their book "Marx's Capital". Kindly note that the author of this post is only adding a particular aspect[already mentioned in the book] but not included in the given model[diagrammatic representation].

The Given Model:



Source courtesy: Marx's Capital, 4th ed., Fine and Filho, Page no. 41, Viva Books.



Expansion of the given model:

Adding the variable- 'Labour Intensity' to the above model refines and makes the representation much more dynamic. Hence, following analyses are possible using the expanded model.

Prepared by: Bhagirath Baria, based on the model by Fine and Silho

Absolute Value:

 

Lengthening the working day or increasing the intensity of work[measurable by productivity per hour per labourer] or both results in increased surplus value[s] accrued to the firm owner/organizer/capitalist. The given model[as in 'Marx's Capital'] focuses on the working day variable while mentions in theory about the possibility of increasing the surplus value through increased intensity of work.

 

"There are other ways of producing absolute surplus value. For example, if work becomes more intense during a given working day more labour would be performed in the same period, and absolute surplus value would be produced. The same result can be achieved through making work continuous without breaks either of limited duration or even for rest and refreshment."{2}

 

Hence, when both the possibilities are included- 1). Lengthening of the working day and 2). Increased intensity of work during given hours; 3 possible situations may arise. Note, we are not here dealing with an Equilibrium/Disequilibrium situation. This model depicts the possible changes in order to increase the production of surplus value, and hence increase the rate of exploitation.

 

Lets understand each of the three possibilities:

 

Point E0: The given state of working day and labour intensity. Following a change in any of the two variables- working day or labour intensity, surplus value increases.

 

Point E1: Labour intensity remaining constant, working day lengthens. Hence the area E0E1X1X0 represents the increased exploitation of labour by capital, hence an increase in surplus value. This increase in Working time driven.

 

Point E2: Working day remaining constant, Labour intensity increases. Hence, increased surplus value as depicted by the area RNE0E2. Here, some further modifications and debate is required.

 

Point E3: Both Working day and Labour intensity increase. Hence increase in surplus value by the sum of areas- RNE0E2 + E2E0E1E3 + EOE1X1XO = RE3X1X0E0N

Conclusion:

Thus we see that the expanded model provides a much more dynamic analysis of the capitalist reality. It does not explain abstract ideas divorced from political realities. Most of Marx's works were a part and parcel of his political project of overthrowing capitalism, hence, his works aim to explain realities of the society and economy around. This helps his analyses to be much more realistic and provides a radical alternative to all sorts of heterodoxy as well as mainstream understanding about Socio-economic reality.

Notes & References:

1). As in Marx's Capital, 4th ed., Fine and Filho, Page no. 41, Viva Books.
2). ibid.
3). 'v' refers to variable capital in Marx's terminology- the amount of money in the form of capital whose value labour transfers to finished commodities in the production activity. 's' refers to surplus value- the amount of value created by labour in excess of variable capital[raw materials, etc]. s' refers to the increased surplus value due to above explained measures.

R & E crosses the 3000 mark, thank you, again!

 

R & E crosses the 3000 mark. Just recently in April 2012, this site had crossed the 2000 mark in terms of number of visits. Within 8 months, it has seen an increase of 1000 visits, which is a commendable milestone in terms of reach of the site. Thank you dearest visitors, for your support & consistent participation on this blog. Your comments, visits and participation are the most valuable motivations for running and maintaining this site. Keep visiting.

 

--- Read. Share. Enlighten.

 

--- Bhagirath Baria.

Knowledge: An Epistemological Inquiry

"For any way of thought to become dominant, a conceptual apparatus has to be advanced that appeals to our intuitions and instincts, to our values and our desires, as well as to the possibilities inherent in the social world we inhabit."

--- Harvey, A Brief History of Neoliberalism

Knowledge is a very important issue in the current days of rise of concepts such as 'Knowledge Economy', 'Information Economy' and 'Intellectual Economy'. The increasing importance of Knowledge makes it a subject matter of great interest. Since thousands of years[1], humans have struggled to define Knowledge and the various issues related to it. Epistemology, as a branch of Philosophy, still does not have a proper, completely agreed upon definition of Knowledge. This is inevitable because this concept is as broad as the magnificent Universe, and cannot be encompassed within a few words. 

This post is a brief analysis of some aspects of Epistemology, viz. the subject of Knowledge. It presents a particular viewpoint about Knowledge in modern times, its Production, Distribution, Consumption and even Exchange. Increasingly, we as a Global society are moving towards an era of increasing Privatization. Knowledge, too is quickly becoming such a commodity, once it enters the realms of exchange-relations. This post is inspired by works of various Marxists and non-Marxists writers who wish to bring positive changes in the present form of Society, and hence its mode of Production. For simplicity's sake, this post will be presented in four parts- each dealing with one of the four aspects of Knowledge.

Part I:

Production of Knowledge:

Knowledge, as it is, is produced in Human minds. In turn, this production reflects the material reality around it. The culture, infrastructure, social condition, economic condition, politics, inter-personal relations, subjective desires and perceptions, and so many more constitute the material reality that helps produce Knowledge. It thus becomes clearly visible that Knowledge, as Idea, is a reflection of the World around us, and the constant Dynamics it possesses. 

Formal Knowledge[2]  is produced in Academics- Universities, Institutions of Learning and other such Organizations. The individuals and the groups of individuals that produce it, do so with what we may call a particular mindset. This is nothing but the Ideology that the given human/s possess. A particular model of World is prepared in an individual's mind[3]. Based on this model, information is consumed, which at last forms the sum total of what she knows- her Knowledge.

Production of Knowledge may not always be consumer-demand oriented. It may be for its own sake. But we are here concerned with a particular species of Knowledge- namely that of Economics. "Political Economy incites the cruelest emotions of the human breast", once proclaimed Marx[4]. And it is true. It does. When we enter the realms of Economics, all sorts of human emotions come into play. These are not limited to the "rationality" and "marginal utility maximizing" emotions. These are a great number of emotions that undertake a complex interplay to create a particular viewpoint of an individual.

When Knowledge is produced, it is produced with a given mindset. We may call it Producer's Ideology. This is then to be distributed and consumed. Production of Knowledge is not a material reality- independent process. Rather it is based on it and in turn shapes it. This is important to recognize as it signifies a mutually dependent process at work. 

When Knowledge is produced, it has to be tested scientifically. Here, we are not bringing into question the types or methods of Knowledge production which tend more towards non-falsifiable ideas[5]. We are solely concerned with ordinary form of knowledge that is produced and distributed through mainstream institutions. Here, Knowledge is produced through a particular ideological-set. This then becomes the backbone of all further testing, inquiry and analysis of produced knowledge. Thus, the knowledge that is produced and distributed in Economics, is wide with a variety of Ideological-sets producing their own types of knowledges[6]. 

When Institutions of Knowledge produce a given knowledge and distribute it, it is not 'Knowledge' per se. Rather, it is a particular kind/species of Knowledge. This knowledge may be presented as the sole form, but that is not the case, as we now understand it. Due to presence of a varied forms of Ideological-sets, any kind of Knowledge has to confirm to one or the other Ideology. It may be a hybrid form, in the sense that it derives its production to more than one ideology. Thus, the Knowledge that is produced and consumed in Institutions, Organizations, etc. in Economics, is a particular kind of Knowledge, a particular idea. 

Here comes the role of building of a conceptual apparatus[7] that instantly gets the approval of masses, their emotions, beliefs, etc. Hence, when a particular species of Knowledge becomes dominant, it requires a rigorous propaganda, distribution and consumption of it to spread horizontally and vertically in Geographical boundaries. Harvey very beautifully brings out how a particular kind of knowledge- called Neoliberalism- with its specific set of ideas, emotions, perceptions, etc. has become dominant and is now deeply embedded in our 'common senses'. But, as we saw above, it is only a specific kind of Knowledge, not Knowledge per se. Appreciating this fact will help people realize the existence of other forms of Knowledge, independent and different than Mainstream Knowledge.

In the next post we shall analyse the Distribution aspect. How a particular kind of Knowledge is disseminated to masses, how it is popularized and how it becomes dominant. The various related aspects too will be discussed.

Notes and References:

1). Eg. Plato, Socrates, Aristotle and so many more who have been writing on this subject.

2). That which is distributed in Mainstream institutions of Education world-wide.

3). More on this can be found out by referring to Stephen Resnick's lecture series on youtube and Stephen Hawking's work- A Brief History of Time.

4). Within the first few chapters of Capital by Karl Marx.

5). Eg. School of thoughts based on purely Deductive logic, etc.

6). Plural made deliberately

7). Harvey's work- A Brief History of Neoliberalism, discusses on this issue in detail- Refer especially Chapter I.

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Cooperation and the Modern Organization

Image source:  http://europamedia.files.wordpress.com/2011/05/cooperation-international2.jpg

This post is a brief analysis of Modern Organizations- the molecules of Economic Production. It aims at bringing out the inherent co-operative nature of traditional[orthodox]{1} organizations of Modern Economies. It thus attempts to bring to people's conscience that Cooperation and Cooperative Management are highly relevant concepts, not only to understand cooperative Organizations but also to enrich one's knowledge of modern Organization realities.

Cooperation: 

To undertake production in a modern Capitalist Organization{2}, medium or large sized, strict cooperation{3} is at the heart of harmonious economic activity, the smooth running of the economy. It is not that people had not cooperated to produce Commodities{4} in previous forms of societies- eg. under ancient communism, slave, feudal, and others. There too, cooperation was the ultimate necessity facilitating production. But, it is only under the modern mode of production[called Capitalist mode] where a comparatively large number of labourers are required to cooperate and produce.

A modern form of organization pre-supposes: 1). A highly specialized and complex division of labour within the Organization itself, 2). A complex division of labour in society, and 3). Cooperation of the labourers involved in the process of production.

It is this third aspect that is very essential to understand the concept of Cooperative method of Organizing and its inherent existence in every form of Production organization. We thus see, that Cooperation of labour is evident in every modern 'firms'{5}- be it Microsoft, Google, a Textile unit or any other production site{6}. Harmonious acceptance of each other and of the method of production along with the acceptance of the way it is organized, the political-legal back up it has in terms of property relations, the structure and content of labour-process, is what helps in daily reproduction of the given society in its current form.

Cooperation: Heart of the economic molecules

Every firm{7} that exists today, exists only because the labour force employed under it obeys the larger social-economic categories that create and sustain the modern forms of production. For eg. Suppose a strike occurs{8}. News of workers' strikes are common. At these moments do we realize how important the mutual cooperation of labour-force is. Whenever there is a disequilibrium in this set-up, in the uninterrupted flow of cooperative work within a traditional organization; the importance of this element is seen, naked in front of our eyes. 

It is very important to protect this mutual harmonious work-flow in order to sustain healthy economic activity, failing on which the economic system in dominance can come to a stand-still{9}. Many different processes have to be undertaken, outside the firms in order to sustain the given form of mode{10}.

Cooperative Organizations: A different class-structure

Hence, we see that any form of firm needs cooperation at its heart in order to reproduce itself profitably, daily. Still, we do have a completely separate discipline of study that confines itself only to Cooperative forms of Organizations. Such organizations, though rest on the same fundamental element{11}, still differs from traditional organizations in one very important way- the difference of internal class structure{12}.

In private or public organizations, the produce of the firm is a property of a particular individual or a group of individuals, but not of the direct producers. While in a Cooperative organization the produce of the firm is under ownership of the direct producers- the decisions regarding which are taken by the direct producers themselves. Hence, the need to undertake a separate study of this concept.

Conclusion:

Cooperation is at the heart and profit-chart of modern market-based profit-oriented firms. Lack of mutual harmony among themselves and with the larger social-economic variables around them, results only in disruption and crisis in the Economy- given a relatively labour-dominated industry/economy. The belief that Cooperation and Cooperative Organizations are alien and different than traditional Organizational set-ups is incorrect. As we saw, every firm, be it under any social-economic system, is a cooperative firm, where labourers work under complete harmony. Any disequilibrium to this fact results in interruption in the production process and hence in the entire economy. 

In modern times, we have separate disciplines such as Motivation, Leadership, Human Resource Management and a plethora of others whose ultimate aim, it seems, is the sustaining of Cooperation of the labour-force, both within the firm and within the Society at large. 

Notes:

1). Here referred in reference to modern private/public enterprises.

2). Medium or Large scaled, employing many labourers.

3). Cooperation that is a must, for working in a given firm, to which every employee must obey. This is based on Company's rules/regulations/etc.

4). Here referred to as simply any Good or Service produce for selling to others.

5). Used in the sense as in microeconomics

6). Irrespective of its produce- Goods or Services.

7). As in point 5

8). Any event or issue that stops the production process can be equally used here

9). Not to suggest that only this particular reason can cause crisis

10). For eg. Ideological, political, intellectual propaganda

11). i.e. Cooperation of labourers

12). More on this concept- refer Richard Wolff's website and Books

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