Markets, Morals and Development

Rethinking Economics from a Developing Country Perspective

Wahiduddin Mahmud

• Publisher: Routledge India
• Year: 2021
• Print ISBN: 9781032116822
• eBook ISBN: 9781000485080
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This book presents, or rather "re-presents", the intricacies of a developing economy in the light of recent theoretical developments in economics while also providing a fresh perspective on the perceived inadequacies of the discipline in addressing the discontents of the contemporary global economic order.

The book argues that there is scope for economics to be a more humane discipline and more relevant to contemporary economic problems by embracing new ideas, including those from other disciplines. It attempts to show how economic concepts and theories can be contextualised to help better understand real-life economic phenomena; how to rethink the ways in which the market economy can address the moral issues of human wellbeing and social justice; and, overall, how the study of economics and public discourses on economic issues can be made more engaging as well as more relevant to the problems of developing countries. Based on public lectures given by the author in Dhaka, and using illustrations from Bangladesh, India and other countries, the book offers an authoritative understanding of diverse economic realities by taking a fresh look at the familiar.

Comprehensive and accessible, the book will be of interest to students and researchers of economics, development economics and policy, sociology and business studies as well as to journalists, public intellectuals and policymakers in developing countries.

1 Introduction

DOI: 10.4324/9781003241775-1
 

Economics was once called “the dismal science” by Thomas Carlyle, an eighteenth-century Scottish writer and philosopher. Although the exact context of his using the phrase remains somewhat mythical, he was referring to the dire predictions made by the economists of his time, especially Thomas Malthus, about humanity trapped in a world of widespread misery and impoverishment. Today, when we hear the term “the dismal science”, it is typically in reference to the inadequacies of the discipline in addressing the discontents of the contemporary global economic order with its supremacy of the market – an economic order that is characterised by instability and unprecedented inequality amidst plenty. While the market economy has become the dominant model for our societies, it is regarded with widespread distrust, mixed with outrage or fatalism. The less developed countries feel all the more aggrieved because of the perceived unfairness of the global market system that is tilted against their interest due to their relative lack of power vis-à-vis the industrialised North. Economics is derided, rightly or wrongly, for seeming to lend legitimacy to this market system that lacks compassion and is prey to private corporate interest.

There is also a growing apathy towards economics among students because of a disconnect they feel between textbook economics and the real-life economic phenomena that they observe in their surroundings. Although economics is in large part the study of markets, the textbooks depict them abstractly and do not often provide enough guidance in understanding how markets may fail or thrive under various socio-cultural environments. While such an understanding of the functioning of the markets is of particular interest to the students in the less developed countries, they may feel frustrated by the fact that there is no developing country equivalent of Paul Samuelson’s Economics: An Introductory Analysis (1948), which is arguably the best-known textbook on introductory economics ever written. With its 19 editions, the book is replete with examples ranging from the US families, firms, labour unions and government activities to even the racial issues in that country. For the developing country students, this is certainly not the ideal way of relating textbook economics to real-life experience.

Yet, economics students in the developing countries have one advantage; they have the opportunity of applying the textbook market model to the actual functioning of markets in a whole range of institutional settings, from rural hats and bazaars to modern shopping malls. In the countless ways that they encounter economic dealings in their surroundings, there are always new insights to be gained from such dealings, if only they could take a fresh angle on the familiar. They may take heart from the fact that some of the recent theoretical advances in economics not only have deep practical content but also originated from observing markets in the less developed countries. For example, George Akerlof and Joseph Stiglitz both won the 2001 Nobel Prize in economics (along with Michael Spence) for laying the foundation of what is now called the theory of markets with imperfect information; of them, Stiglitz got his idea from the rural credit markets in South Asia and Akerlof’s theory is especially applicable in explaining why adulterated food items pervade markets in less developed countries, such as the market for fresh milk in the bazaars of Delhi and Dhaka (as discussed in Chapter 2 of this book). There may be more such ingredients or hidden gems in the institutions of markets in less developed countries that may potentially enrich our understanding of how markets can work better in some environments than in others and how well-functioning markets can be a vehicle for achieving economic development.

There may also be a growing apathy among policymakers in the less developed countries towards policy advice coming from academic economists in the West, often through the intermediation of the international financial institutions. Knowledge in development policy analysis, as in economics and other disciplines generally, originates from the rich-country institutions, with the academics in the elite institutions there playing the agenda-setting and gatekeeping role. This may create a mismatch between what is academically rewarding within those institutional cultures and what the policymakers in the Global South may actually need for practical purposes. For example, the Nobel Prize in economics in 2019 was awarded to Abhijit Banerjee, Esther Duflo and Michael Kremer for their pioneering experimental approach to impact evaluation, particularly in the case of interventions for poverty alleviation in developing countries. While this approach is now considered by many in the profession as the “gold standard” in terms of methodology, development practitioners may find it frustrating that such experiments, known in the literature as randomised control trials, are often not amenable to scaling up or that the research results may be of little relevance for devising policies that are not trivial.

The above concerns about the study and practice of economics are highlighted in the four chapters in this book. The chapters are the outcome of the public lectures the author gave in Dhaka during 2016–20 to an audience comprising of university students and young faculty of the economics departments and business schools as well as economic journalists and public intellectuals. The lectures represent an attempt to demonstrate in an engaging way the ever-relevant and fascinating nature of economics – how the concepts and toolkits of economics, when applied with imagination, can help one to better understand real-life economic phenomena, often with a fresh and insightful perspective. There is also an attempt to show that, in spite of the alleged lack of compassion and empathy in economics as a discipline, there is ample scope to rethink the ways in which the market economy can address the moral issues of human well-being and social justice. Overall, the chapters attempt to show, with real-life examples, how the study of economics and public discourses on economic issues can be made more accessible and engaging as well as more relevant from the perspective of the less developed countries. While there are threads of common or related themes woven into the chapters, the overlaps have been kept to the minimum in collating the original lectures into a book format.

The first chapter (Chapter 2) examines how economists are trained to look at economic issues differently than others. By using examples, it discusses the distinctive perspectives that can be gained from economic concepts such as counterfactuals, sunk cost or comparative vis-à-vis absolute advantage; it also illustrates how using the logic derived from abstract economic models can help clarify issues, identify causal relationships and avoid arguments at cross-purposes in public discourses. The chapter argues that, in spite of the attempts at grand narratives through universally applicable theoretical constructs, useful economics is necessarily eclectic, so that the students of economics in developing countries have much to gain by trying to relate textbook theories to their own socio-cultural settings. This is illustrated by discussing the characteristics of some typical market institutions in the less developed countries.

For example, the cobweb-type demand–supply model used in the textbook for explaining high annual price fluctuations in agricultural markets is shown to be more applicable in the case of high-value minor crops than for staple food crops. Other examples show why it may be wrong to blame businessmen on ethical grounds for price hikes of certain food items at times of religious festivity, while the moral responsibility must also partly lie with the relatively wealthy buyers who may choose to apply some moderation in consuming the items in limited supply relative to demand, or how in the seasonal markets for fresh fruits, the consumers end up buying fruits artificially ripened by harmful chemicals while the “invisible hand” of the market works through the self-seeking behaviour of thieves, fruit farmers, freight handlers and traders, albeit in an environment of lax law enforcement.

While some of the recent theoretical advances in economics, such as the theory of market with imperfect information, are of particular practical relevance for the less developed countries, knowledge of ground realities can provide further insights into the application of these theories. For example, Joseph Stiglitz formulated his theory of rural credit markets on the assumption that a poor borrower of a collateral-free business loan may use the loan inefficiently, such as by going for more profitable but riskier projects, since the risk of the failure of the business is borne by the lender (known in theory as the “ex ante moral hazard” problem). Stiglitz further theorised how the introduction of the Grameen Bank’s microcredit programme in Bangladesh sought to solve this problem through a system of group lending; the members of the group monitored one another’s use of loan because of the joint-liability for loan repayment.

While Stiglitz’s above theory has become part of textbook economics, the underlying logic of moral hazard – the key point of his theory – may not apply anymore to a mature microfinance system such as in Bangladesh, which has almost dispensed with joint-liability group lending. Because of the well-established culture of loan repayment and the social stigma attached to being branded as a defaulter, the cost of non-repayment in the mental calculation of the borrower can be high enough to ensure that she is not contemplating non-repayment regardless of the anticipated success or failure of her business – hence no moral hazard arising from the asymmetry of interest between the lender and the borrower. Ironically, while Stiglitz was theorising the problem of providing credit to the rural poor, the logic of his theory may apply more to the formal banking system in many less developed countries with poor enforcement of loan recovery. This also provides an example of how academic theorising about development policies may not always keep pace with the ground-level institutional innovations taking place through a learning-by-doing process.

The purpose of the second chapter (Chapter 3) is to review and rethink how and to what extent ethical considerations and the precepts of moral philosophy affect the theory and application of economics. In pursuing purely “objective” analyses and, thereby, attaining the status of science, neoclassical economic theory is constrained by self-imposed limitations in making value judgements about justice and fairness in a market economy. Adam Smith’s idea of the “invisible hand” guiding the market through self-interested behaviour has sometimes been interpreted, wrongly, as a kind of market fundamentalism that ignores many failures and brutalities of modern-day capitalism. While many ethical elements do go into economic policy analyses, these are still constrained by the discipline’s relative neglect of non-market activities and its tendency to undervalue the aspects of well-being which cannot be easily measured in monetary terms.

The chapter argues that economists may do better by improving their understanding of the complexity of human behaviour, for example, by drawing from new ideas developed in neuroscience and experimental psychology; they also need to allow more scope for ethical judgements in their choice of topics for inquiry, in their methodological approaches and in drawing policy conclusions. Even if the motivation for monetary gains may be the dominant behavioural trait in economic dealings, there are instances in which the separation of self-interest from other traits including ethical values is less than straightforward. Deep moral questions may also arise regarding the fairness or welfare-enhancing role of free market transactions between parties of unequal economic power, such as between the rich and the poor countries or between a landlord and his tenants in a peasant economy.

The third chapter (Chapter 4) discusses the broader theme of how economic development is accompanied by a process of institutional transformation in which traditional production technologies, local knowledge and informal behavioural norms are replaced or complemented by improved technologies, modern know-how and formal regulatory enforcement of business dealings. Of particular interest is how social norms of trust, reciprocity and cooperation evolve in ways not easily explained by the pursuit of self-interest only. Economists may prefer the so-called “Prisoner’s Dilemma”-type explanation of learning the benefit of cooperation from the experience of repeated interaction, while individualistic selfish behaviour may be the dominant strategy to start with. Other social scientists may prefer to find explanations in human traits like altruism, instinct, trust and various community-specific characteristics; some may even look for the historical roots of cooperative behaviour in the agricultural irrigation systems. It is argued that, whatever may be the historical origins of the social institutions and behavioural norms, these should be taken into account through community involvement in designing local development programmes; otherwise, such programmes may not yield the desired outcomes and may even be counterproductive.

The chapter also suggests that an understanding of how common values and ethical norms underlying the functioning of markets evolve may give economists better clues and insights in making policy analyses for economic development. In the contemporary literature on economic development, there is a new emphasis on “governance”, originating mostly from the Bretton Woods institutions; the usual policy advice is mainly to do with devising and enforcing appropriate administrative policy reforms and enforcing regulatory laws aimed at building market-friendly institutions. Such a technocratic approach to reforms, it is argued, is unlikely to succeed without an understanding of how incentives for deviant behaviour arise and how legal and regulatory enforcement mechanisms interact with the evolution of behavioural norms and moral standards in a society.

The fourth chapter (Chapter 5) discusses the ideas of Nobel laureate economist Amartya Sen in the context of understanding the socio-economic progress achieved in Bangladesh and the challenges that lie ahead. Sen is one of the great economist-philosophers of the contemporary world, and the overriding concerns in his writings are about how to promote public action towards achieving an equitable and just society, which particularly addresses the needs of the underprivileged. While his ideas are of great relevance for all developing countries, this is more so for India and Bangladesh – the two countries that provide the socio-economic settings for much of his empirical works. Sen has praised the remarkable progress in many social development indicators that Bangladesh has achieved compared to India, despite having a much lower per capita income and suffering from the same, or even much worse, institutional and policy failures. The case study of Bangladesh is of particular interest to test some of Sen’s ideas, such as regarding famines, pathways of human development and the democratic space for what he calls “public reasoning”. By applying Sen’s ideas for understanding Bangladesh’s socio-economic progress, the chapter also examines the relevance of these ideas in the varying socio-political settings across developing countries.

The fifth and final chapter (Chapter 6) looks at how the idea of socially oriented business enterprises can be made conceptually compatible with the mainstream theory and practice of economics, and it also examines the potential of such experiments to be a moderating force against the excesses committed by the purely profit-motivated market economy. Within the broad genre of socially oriented enterprises, the chapter particularly focuses on the so-called “social business”, as advocated by Nobel Peace laureate Muhammad Yunus. His idea of social business has drawn considerable attention from the global business community and many business schools around the world, but curiously, there has been little response so far from the mainstream economic profession. The chapter explores the reasons for this apathy and the ways in which the concept of social business, and socially oriented enterprises generally, could be reconciled with economic theorising. It also argues that a rigid definition of social business may leave a grey area in between such businesses and the purely profit-motivated ones, particularly since the “social” element may exist in various shades in the running of a business. Although the chapter primarily looks at the analytical aspects of the concept of social business, it does examine some of the risks and pitfalls involved in the actual implementation of such a business idea.

2 Thinking like an economist

DOI: 10.4324/9781003241775-2

Introduction: the study and practice of economics

Maynard Keynes once said that economics is a difficult subject, but nobody will believe it; it seems an easy subject compared to the high branches of philosophy or pure science, yet very few excel in it. In his view, the paradox may perhaps be explained by the fact that a good economist must possess a rare combination of gifts: he must be a mathematician, historian, statesman and philosopher in some degree. He needs the analytical mind “to contemplate the particular in terms of the general”, and he has to be at the same time “as aloof and incorruptible as an artist, and yet as near the earth as a politician”.¹ That is a tall order of things, and if it is true, it may be worth pondering over how economists view things and approach a problem differently than others.

The above view of Keynes suggests that useful economics is necessarily eclectic and that economic issues may be deceivingly complex. In spite of elegant theoretical constructs, such as the neoclassical general equilibrium theory, economists have increasingly come to realise that there are no grand narratives or universal theories of such generality as the laws of science. This is also how Alfred Marshall, known as the founder of neoclassical economics, approached economic theorising by emphasising the need for deductive logic, while also asserting: “I do not assign any universality to economic dogmas” (Pigou 1925, p. 89). Maynard Keynes interpreted this approach by saying that Marshall employed “deductive political economy guided by observation” (Keynes 1972, p. 164). Economic theories are thus best understood by trying to apply those to real-life situations. For example, the abstract lifeless demand–supply model of the market taught in introductory economics starts getting both exciting and complex when one tries to apply the model to explain the actual behaviour o...

Table of contents

• Cover
• Half-Title
• Endorsement
• Title
• Copyright
• Dedication
• Contents
• Acknowledgements
• 1 Introduction
• 2 Thinking like an economist
• 3 The ethical basis of economic theory and practice
• 4 Institutions, morality norms and development
• 5 Amartya Sen’s ideas and the Bangladesh story
• 6 Is there an economics of social business?
• Index