Futuristic Economics

Anyone with little knowledge of economic theories and analyses is likely to have encountered atleast one laughter inducing (usually unintentional on the part of the author) piece of research. However, Prof. Paul Krugman is one economist who stands out for his grasp over the subject, and his intentional comedy.

 His paper “The Theory of Interstellar Trade” may be intellectually valuable in the present and practically useful in the future, but according to me, is a beautiful criticism of economic analysis and research in general. By Krugman’s own admission, the paper involves a “serious analysis of a ridiculous subject, the opposite of what is usual in economics.”

The paper analyses the problem of interest rate determination when trade takes place between humans and aliens from a planet outside the solar system. The topic of analysis is itself quite humorous, but what follows forces the reader to acknowledge the hilarity of the discipline in general. Starting with a framework of physics, Krugman proves two “Fundamental Theorems of Interstellar Trade” by assuming negligible transport costs in inter-galactic trade and perfect competition in the spaceship industry, which are the usual assumptions underlying much of economic analyses. In a brazen fashion, Krugman calls it a “special case”, and then claims that it is generally applicable. As a proof for the general case (non-perfect competition), he refers to his own yet unwritten paper, “Theory Capital and Travel-Light-than-Faster.” This targets the mindless extension of perfect competition results to anywhere and everywhere. Another priceless part of the paper is the “imaginary” diagram put forth to explain the velocity of the spaceship. One can’t help feeling that Economics is way too futuristic a discipline by the virtue of its assumptions, even if we disregard Krugman’s contribution to the development of a “universal trade theory”. We are equipped to handle the future, but remain clueless about the present.

You can read the entire paper at: www.princeton.edu/~pkrugman/interstellar.pdf

 Krugman admitted at having written the paper during a time when he was an “oppressed” assistant professor, caught in the academic rat race. The analysis provided in the paper is absolutely methodical and scientific. It should therefore, be taken very seriously.

“The picture of the world- or, rather, of the universe- which emerges is not a lunatic vision; stellar, maybe, but not lunatic.” –Prof. Paul Krugman.

 (Note to readers: The above article, like much of the discipline of economics, is not ideologically neutral. Hence, readers are advised to exercise their own preferred biases)


Adam Smith: On Civilisation and “savage” nations

A very interesting observation made by Smith is that in civilised societies, there will exist a significant proportion of people who are not employed.  These people, however often consume in large quantities. Smith views this phenomenon wherein a society is able to carry on a stock of “not employed” persons as a symbol of great opulence, as the society as a whole must be producing in abundance to be able to provide more than what is required for the subsistence of its working population. Notice that this is not necessarily unemployment, as he refrains from describing whether the people he’s refering to are actively seeking employment or not.

In a “savage” nation, on the other hand, everyone engages in work for his own sustenance. “Savage” nations, according to Smith are those that remain largely untouched by trade, and are therefore, underdeveloped. The lack of availability of means of subsistence in such nations is reflected, according to Smith, in the fact that several societies have been known to destroy or abandon their infants, old and/or sick people. “Savage” nations may consist of “hunters and fishers“.

The “not employed” persons essentially consume part of the produce of those who are employed and are producing in excess. By refering to this state as one of opulence, Smith justifies the existence of a section of society which enjoys a situation of no-work but high levels of consumption. Why would such a section in society exist?  They may be traditional womenfolk who refrain from engaging from active work outside the household, children, the elderly, warriors and kings, etc. Share your ideas and interpretations on\f the nature of these “not employed” persons.

Coming up next: The reason behind Opulence in Civilised Nations: Division of Labour and Geography


Demystifying Adam Smith’s “Wealth of Nations”

Over 200 years ago, Adam Smith published a bulky volume with a bulky title: “An inquiry into the nature and causes of Wealth of Nations”. This mega book elevated Mr. Smith to the status of the “Father” of Economics, as he had laboriously described almost everything that could concern thinkers and decisionmakers in the area of economics in his time. It is true that modern day economists have several new musings that Smith never envisaged, but let’s not allow this fact (or is it an assumption?) to distract us from celebrating our Big Daddy. At least, yet.

This post is first in a series dedicated to the monumental work of Adam Smith, where we will be analysing every word (well, almost) that Smith wrote in Wealth of Nations and other books. The wonderful thing about Smith’s work is the fact that it provides a starting point for several schools of economic thought. Today, we’ll just focus on the contradictory theoretical offshoots that Wealth of Nations pools together.

Smith sets the ground for economic analysis by providing a somewhat vague definition of what we might like to refer as GDP  in modern times. He calls it Annual Labour: “The fund which supplies all necessaries and conveniences of life which is annually consumed.” Smith equates this to the product of the same labour, and to the produce of other countries that own country’s produce can purchase. 

What is remarkable is the fact that even though the technical definition used in national income accounts may have changed, we still apply the same concept. Smith’s definition essentially excludes any work that is not bought/sold by equating Annual labour to  “produce purchased from other nations”. Today, nations are still looking for an effective way to include the services that are not bought/sold in marketplaces in GDP, such as services provided by housewives within the family, vegetables grown in backyards that are consumed instead of sold, etc. Though we today recognise that Smith omitted a few useful things from his definition, we are pretty much at the same place where we were 200 years ago when it comes to including the same in our account books.

Smith also mentions that this Annual Labour will be proportionate to the number of consumers in a nation. Further, this proportion is dependent on the “skill, dexterity and judgement” of the labourers, and on the proportion of people who are employed in “useful labour” to those who are not. Smith attaches greater importance to “skill, dexterity and judgement”. This forms the basis of his huge discourse on division of labour. The noticeable aspect here is that his concept of Division of Labour was later popularised in a new avatar by Henry Ford with some added components. It led to the development of concepts of “Fordism” or “Americanism” and also “Consumerism”. The other determinant of Annual labour, namely proportion of “useful labour”, perhaps a term that Smith used repeatedly but loosely to refer to any activity that generates useful products or services, was stressed upon by Karl Marx. Marx chose to attach a strong but different definition to the term “useful labour” His description of “useful labour” focused on specialised skills, but contrary to Smith’s focus, he relegates them as unimportant for analytical purposes, and pays attention to the homogeneous component of labour instead. The root of a much debated divide in economic thought emerges right on the first page of Smith’s masterpiece.

Coming up soon: Smith’s description of “savage” nations- the origin of the concept of development and underdevelopment.

In the meanwhile, share your views on Smith’s work and Fordism with us, or ask us if you have any queries.