Category Archives: economic history

Did Keynes get it wrong?

In an earlier post, I argued that the newclassical framework may be the right one for macroeconomic analysis. This was because recent microeconomic evidence suggests that prices are actually quite flexible. It means that market responds to clear the shelves! Were markets responsive even during the Great Depression? Obviously not- otherwise we would not have had a severe and prolonged depression in the first place. In fact Lord Keynes famously argued that prices and wages were rigid downwards and hence markets could not clear causing the great depression. An important question is was this rigidity a result of optimizing decisions or was caused because of something else?

If we decide  to believe Prof. Ohanian of UCLA, then this rigidity was not because markets did not respond but it was more of a case where they were not allowed respond. To support this claim, he develops a theory of labor market failure for the Depression based on Herbert Hoover’s industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. He finds that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation/low nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.

You can watch this video in case you don’t want to read the paper.

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A Farewell to Alms by Gregory Clark

I came across this interesting book on world economic history titled, “A Farewell to Alms” by Gregory Clark. Whenever, I open such a book my first impulse is to flip through pages and see what the author has to say about India. Most of the times, unfortunately, I am not surprised. A book that displays brilliance in its analysis and coverage otherwise, usually completely breaks down when talking about societies like India. It is almost always a typical representation of the Anglo-Saxon view of history and evolution of societies, invariably betraying the “winners write the history” syndrome. So while Clark talks about how England compares in different aspects of social sophistication to India on the eve of industrial revolution, he shows that India lagged behind England in terms of its data availability on real wages. This lack is somehow to constitute a judgment on England being a better candidate for industrial revolution than India.

Unfortunately, one of the aspects of being a poor country is that it is pretty difficult to have a sophisticated database system to meet your current needs, let alone historical ones. I am sure there is data available in scattered sources but is not yet compiled. I was told of a huge collection of manuscripts in now extinct modi script which has not been even touched by any historian till date.

In arguing that average English worker around 1800 ACE was relatively well off and hence well, he uses the Engles’s law to show how food consumption behaves with income. Obviously, as income increases people eat more meat and this is indeed true for the English workers. How does an average Indian compare to this? Based on a 1950 Government of India survey, he shows that an average Indian did not consume as much meat as an English worker in 1800 ACE for comparable income levels. A thing to note about this is that he does not control for cultural influences while talking about nature of food consumption and its relation to income. Unless you control for that, especially in case of India, an average Indian even today can be shown to consume less meat compared to its counterpart in China or United States. This is because India has a strong historical bias towards vegetarianism that has its origins in the rise of Buddhism. I am sure there is similar explanation for lack of milk consumption in China. But I will let the Chinese speak for themselves. The point is that if you do not put historical data in proper context you are bound to be lead astray. Unfortunately Clark engages in such out of context quantitative economic history.

Clark’s analysis also has some examples of selective empiricism. The case in point is that of the architecture of the Vijayanagar empire. He accepts that it is grand but concedes that it is no way closer in terms of engineering feat to the Roman pantheon and hence that reflects the technological backwardness of India and probably its ill-preparedness for industrial revolution compared to England. I am invariably always baffled by this insatiable urge of measuring every civilization against the Roman without considering the fact that most aspects of civilization respond to necessitates of time, availability of resources, political needs and even compulsions of weather conditions! For example, would it be correct to say that Romans were backward because they could only carve on a soft stone like marble or because they could never even imagine carving a monolithic stone marvel like the Kailas temple?  This will sound plain simple absurd even to Greg Clark and yet he does not even take a step back and think before making this comparison.

Indian architecture varies across time and space so much that it is difficult to pick any one example and deem it representative of backwardness or advancement and that too only against achievements of one civilization. We have examples of sophisticated planned cities with water ways and drainage systems dating back to 3000 BCE ( Mohen jo Daro & Harappa for example) to brilliant temple complexes displaying grandiose stone carvings and advanced design implementations. If only for once Clark and likes care to look at the world without the condescending Anglo-Saxon glasses!

As an aside, I would like to point out that India ranks pretty high in terms of intellectual achievements in philosophy, logic and mathematics.  Please refer to my earlier post on Indians and Maths to get a glimpse of the impressive work Indians did on this front. Same is the story about logic. These all achievements were realized well before England had anything close to a civilization!

How will these kinds of factors play out in Greg Clark’s story? Talking about context, how does caste system factor in the dissemination of such knowledge contributing to a general rise in human capital? A pure quantitative approach to economic history is lost on such puzzling specificities and Clark’s book is no exception to this.

So is there anything right in Clark’s book? Fortunately the answer is yes. His take on fertility being a defining factor for preconditions of industrial revolution has a substantial grain of truth. For example, until recently India experienced stagnation because of increase in life expectancy along with little change in fertility and little or no technological progress. His exposition of Malthusian model is superb and would serve as a good antidote to anyone who pines to reclaim the past material glory for his country as such a thing did not ever exist in the Malthusian economies of the world.

By making this review of Clark’s book on world economic history India centric, I don’t want to sound jingoist and imply that India had all the potential for industrial revolution or India had achieved everything West claims its own. However, I do object to conclusions based on half baked and ill-informed theories, especially from otherwise first rate academics.

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