I was flabbergasted to read the following summary of Kaushik Basu's latest book, Beyond the Invisible Hand: Groundwork for a New Economics in The Journal of Economic Literature, March 2011:
Presents a critique of mainstream economics and Adam Smith's idea of the invisible hand, arguing for collective action and a shifting of focus from efficiency to fairness in societies. Discusses speaking in praise of dissent; the theory of the invisible hand; the limits of orthodoxy; the economy according to law; markets and discrimination; the chemistry of groups; contract, coercion, and intervention; poverty, inequality, and globalization; globalization and the retreat of democracy; and what is to be done.
What! Et tu Basu? A social democrat? An enemy of liberty?
At one time Kaushik Basu and I had corresponded a fair bit and I took his permission to publish the only copy on the internet of his article, “Markets, Governments and Laws” which was originally published in Bimal Jalan’s book, The Indian Economy: The Anatomy of a Crisis in 1992 (I published it on the India Policy Institute website).
Professor Jeff Nugent, the chair of my dissertation committee had gifted me Basu's book, Analytical Development Economics in May 1999. I examined this book fairly closely later and found nothing alarming in it, although I did write "Shocking! Does not cite Hayek or Easterlin" on the cover page, since his name index cited neither of them.
It was disappointing that Basu did not talk about big picture issues like liberty, like Deepak Lal does (one of the few Indian economists I still admire). But I didn't think something was wrong with Basu. Indeed, just a few months ago I listed Basu as part of my list of GOOD Indian economists (this list gets a fair number of hits every week from google search).
But the title of his new book, and its short summary in JEL is absolutely alarming!
Does Mr Basu think he can re-invent economics? Does he even understand THE BASICS of Adam Smith or Hayek?
It seems likely that Basu has been increasingly influenced by Amartya Sen. That's a shame. One more good Indian economist down the drain. The social democratic confusion being created by Sen is spreading further. What good is all the technique in the world without STRONG foundations of liberty?
Recently, on Marginal Revolution, I had occasion to comment adversely about Basu's suggestion that bribe givers be de-criminalised. That was an example, to me, of someone who neither knows the laws in India nor about the gaming that occurs at the highest level in India. It seemed to me that India's Chief Economist is losing his touch. That was the first inkling I had of Basu's potential derailment.
But this new book seems to take the cake. If you have any detailed information on this book, or a view on it, please let me know as soon as possible. Alarm bells are ringing in my mind. I've removed Basu's name from the list of good Indian economists.
Let's hope I'm wrong on this.
I just checked and found that Basu has cited Amartya Sen 14 times in Analytical Development Economics. Maybe I simply didn't care to understand Basu well enough earlier. Maybe he was a lost cause long ago.
In my draft manuscript, DOF, I discuss the meaning of freedom in some detail (see chapter 2). After discussing what freedom is, I outline what it is not. The following extract, which discusses what freedom is not, shows clearly how ideas like those of Amartya Sen can harm societies.
WHAT FREEDOM IS NOT
Professor Shenoy's brilliant note of dissent from Nehruvian socialism was published in India's Second Five Year Plan (1956-57 to 1960-61), as part of Basic Considerations Relating to the Plan Frame, a Memorandum prepared by the Panel of Economists, Planning Commission (April 1955).
I scanned his note some years ago from a publication by the Economics Research Centre (ERC), 1998 (with permission), and placed it on the India Policy Institute website (PDF).
Today I accidentally found the the ERC booklet again in a pile of books I was flipping through. I noted that I have scribbled the word: “phenomenal!” on the margin of this booklet – and it is a truly magnificent piece of work. Had Nehru listened to Shenoy, India would have been a superpower long ago, far bigger and more powerful than China. But it was not to be. We got stuck with Nehru and his totally confused socialist allies. And then came the equally confused BJP with their swadeshi. They refused to remove the world 'socialism' from India's constitution, and did not shut down the Planning Commission when they came to power.
This booklet contains many other articles by Shenoy. You can obtain it by writing to S.V. Raju. I urge you to read the original note that I’ve linked above. On this post I’m providing only some extracts.Note that I don't endorse all his comments. However, for his times, he was way ahead of his time.
I am unable to subscribe wholly to the views of my colleagues on (1) the Size of the Plan, (2) Deficit Financing as a means of raising real resources for the Plan, and (3) certain Policy and Institutional Implications of the Plan Frame.
Excessive deficit financing opposed
In a democratic community where the masses of the people live close to the margin of subsistence, uncontrolled inflation may prove to be explosive and might undermine the existing order of society. … one cannot subsidise communism better than through inflationary deficit financing. …if appropriate “physical measures”, familiar to a communist economy, were adopted (in an effort to prevent inflation) we would be writing off, gradually or rapidly, depending upon the exigencies, of the plan, individual liberty and democratic institutions by administrative or legislative action. We should be, therefore, forewarned of the dangers of an over-ambitious plan.
A wide gap between targets and achievements as has been hither to the case with the first plan was a third possibility This depended, however, upon the rigour with which we may resist temptations for inflationary finance, and the pressure to encroach upon the liberty of the individual. Such resistance may prove to be difficult under the natural enthusiasm to reach the targets. It may entail, moreover, some wastage incidental to a revision (to match in the available resources) of a plan in progress which had been based on a larger blue print.
As no plan can be bigger or bolder than the available resources, the size of the investment programme should be reviewed periodically to ensure that it keeps within the limits of savings. If such a review should reveal a shortage of resources it would be short-sighted to fill the gap by credit creation or deficit financing as this will be self-defeating. A deficiency of total real resources for development will get manifested, in the sphere of finance, by a failure to secure finance otherwise than through an excessive creation of credit, or deficit financing. Economic development is not merely a matter of credit creation or deficit financing. Deficit financing does not create real resources. Together with the issue of loans, collection of Small Savings, etc., it is one of the devices of appropriating, for the public sector, the real resources which exist in the economy.
Deficit financing is essential in an under-developed economy to permit full use of the scarce real resources. By the same token, deficit financing should stop severely short of the point at which inflation begins. Inflation …diverts an undue proportion of savings into urban property and real estate, into gold hoards and jewellery, and into foreign exchange, as a result of the effort of the savers to protect the value of their savings. Inflation tends to be self-perpetuating. Once inflation begins, it tends to gather momentum, and while it runs its course we are apt to be more or less helpless witnesses. The best protection against inflation is to prevent it by keeping the investment programmes within the available real resources.
I presume that planning in India would be consistent with democracy and democratic institutions. Amendments to the constitution which should be rare, should much rather be in the direction of adding to the liberties, privileges and rights of the common man than otherwise.
I would oppose general extension of nationalisation on principle. Nationalisation should be ordinarily limited to public utility concerns and to concerns, involving national security. Otherwise, State intervention should be concerned with the prevention of monopolies or quasimonopolies.
Efficient management of business and industrial concerns in a competitive market economy is a highly specialised function and demands qualities which a civil servant is not required to, and in the ordinary course of his training may not, acquire. This function is best left to private entrepreneurs, in the prevailing socio-economic order, which is dominated by the market economy and the pricing system.
I do not feel convinced of the economic importance of continuing the remnants of controls. Decontrols have proved a noteworthy success. Controls and physical allocations are not a necessary adjunct to planning. There are great advantages in allowing freedom to the economy, and to the price system in the use and distribution of the needs of production. I am unable to agree with my colleagues that a case exists for continuing what controls now remain. Steps should be taken to remove controls as early as may be possible. Controls and allocations are an essential characteristic of communist planning. They do not very well fit in, under planning in a free enterprise market economy.
Against agricultural price support
In theory it may be possible to distinguish between seasonal price movements from the long-term price trends, and to prescribe that seasonal fluctuations should be smoothed out by State purchases in times of harvest and sales between harvests. In practice, however, such distinctions may prove to be difficult and seasonal interventions may turn into long-term price support operations. Price support of agricultural produce in India is a risky venture and we should be forewarned of the inherent dangers of it.
A policy of price support is, in essence, a subsidy, by the rest of the community to the producers of the price supported commodity. Even in the United States, where agriculture is a minor sector of the national economy, price support has only survived. It has not succeeded. It has led to undue stockpiling of agricultural commodities and, in the past, had involved a great deal of wastage of stocks through deterioration. Selective price support policy is a poor answer to this difficulty. The distinction between crops would be invidious, the relief provided may prove to be a token, and it might cause a distortion in the pattern of agricultural production and economic instability.
The price situation in India today was too complex to be resolved by price support of agricultural commodities or other inflationary measures such as a deficit financing. Price support and deficit financing were no remedies to individual over-production, and to export difficulties which are attributable to quality and to domestic costs or exchange overvaluation. Price support and deficit financing might, in fact, aggravate these maladies.
The complex problems of the prevailing price situation emphasise the importance of economic rationalisation, for progress with stability, whereby the fiscal, the investment, the monetary, the interest rate, the tariff, and the exchange rate policies are rendered mutually consistent and harmonious.