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Growth models and analysis of development
World Development Vol. I, pp. 973-983 Pergamon Press Ltd. 1979. Printed in Great Britain
Growth Models and Analysis of Development GAUTAMMATHUR* University of Allahabad
Summary.
- This paper deals with remnants of neoclassical elements in Keynesian and postKeynesian thought, and attempts to demonstrate that the elimination of these elements from our modes of thinking would not impoverish economic analysis as a means of solving real problems. In the Keynesian analysis the causation from investment to savings is exhibited in terms of income determination. When put in terms of a capital theory model, the vector of savings is represented in two ways: firstly, real savings, and secondly, counterpart real savings. The former coincides with the investment vector and the latter with the vector of consumption goods foregone for diverting resources towards equipment making. Thus the Keynesian causation in capital theory terms makes the concept of national savings as an independent variable redundant. The Robinsonian causation in a golden age with full employment and its reversal of direction in a steady state with non-employment are then considered. But in each of these, variables like rate of savings and output-capital ratio are found to be dormant variables. They are termed as null variables which, being of no account in both full-employment and unemployment situations, could, without loss, be deleted from the repertory of analytical tools. The Harrod formula of warranted rate of growth, when put in causal form, thus becomes a redundant portion of economics of growth. The real determinants of the growth rate and real wage rate on which the analysis of growth or of development should be based, are also depicted.
1. INTRODUCTION This essay (presenting the analysis of the author during the last 15 yr teaching at Osmania University pertaining to this aspect of the subject) seeks to outline the logical difficulties of an economic nature encountered in the application of growth models to planned development of underdeveloped countries. This paper deals with the applicability of the essential aspects of Keynesian and Robinsonian analyses to development planning, and the inapplicability, for this purpose, of the rest of Keynesian analysis as well as neoclassical analysis (including the post-Keynesian elements in neoclassical thought). The matter requires treatment from two angles pertaining to the inapplicability of some models. The first one is ‘reversed causation’ and the second one is ‘insufficient disaggregation’. The question of insufficient disaggregation is a part of the theory of capital and has been dealt with by the present author elsewhere.’ This essay seeks to concentrate on the aspect of reversed causation in growth models. The analysis starts by singling out causation with respect to savings. Firstly, the role of savings
in the neoclassical models is discussed, as also confusion as to its role following from semantic usage., Then the nature of savings is analysed. After that the interpretation of real savings as the investment matrix and of counterpart real savings as a matrix of consumption foregone is given, and the causal connection of the latter with the former is indicated. The role of savings in Keynesian and post-Keynesian models is examined with reference to the concept of ‘determining’ and ‘determined’ variables. After that some of the determined variables are shown as null-variables which ought to be debarred permanently from acting as parameters of planning. Following that some abstract variables, used sometimes for moral choices in growth and development models, are shown to be dormant variables, and hence unsuitable for determining the framework of a plan. * Based upon a paper prepared for discussion at the Society for International Development, Eleventh World Conference on Challenges to Prevalent Ideas on Development (Delhi: November 1969). The author thanks Dr. Vaman Rao and Mr. H. Venkateshwar Rao for making comments on an earlier draft.
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2. REVERSED CAUSATION IN NEOCLASSICAL AND POST-KEYNESIAN MODELS (a) Semantic
confusion
regarding
savings
The neoclassical growth models put special emphasis on savings as the prime mover of investment programmes. However, the nature of the term ‘savings’ is not adequately comprehended by those who use the models based on it. The confusion in neoclassical analysis occurs on account of semantics. When the classical economist referred to refraining from consumption, he looked upon it in physical terms more corn for seed means less available for eating. But the classical economists were not content with the term ‘a community’s refraining from consumption’. They wanted a shorter term, and borrowed the word ‘savings’ from common language pertaining to households. Since the introduction of this term in analysis of national production, a verbal confusion has existed in the sense of the term ‘savings’ to the nation as accumulation of capital, and to the householder as putting by for the rainy day in the form of life insurance policies, provident funds, savings bank deposits, government securities, etc. To throw seed upon the ground instead of eating it, apart from enforcing an abstinence from consumption, is investment also in a physical sense; it yields production later, as a technological phenomenon. To store up corn, though a physical act, is not to invest it for future production, but is merely an act of hoarding. The classical economist’s meaning of refraining from consumption was coupled with a simultaneous act of investment. The householder’s meaning of savings is coupled with hoarding either in physical terms or money terms of purchasing paper assets. The confusion which occurs on account of the use of the term savings in the two senses firstly of ‘refraining from consumption combined with investing’ and secondly, of ‘hoarding’ _ makes it difficult for the correct economic policy for development to be formulated and communicated. When the public finance expert requires the public to consume less and to invest, he sends the abbreviated message: ‘save more’. For the District Commissioner, savings are confused with pieces of paper issued by government, bearing promise to repay. When asked to help in the process of development he understands the directives of government to increase savings only in this sense. So he interprets the message as an exhortation to people
to convert their cash into bonds or savings certificates. It is not taken to be an appeal to increase productive capacity and hence the expectation is that they will, after buying the bonds, continue to sit with folded hands doing no extra work. ‘Waiting’ in the expectation of future consumption by itself becomes the prime developmental virtue, and the words of Milton reverberate over the household wirelesssets and the public loud-speakers: ‘They also serve who only stand and wait’. Thus the term savings as connoting idle waiting makes the confused casual connection between ‘investment’ and ‘refraining from consumption’ more confounded, and serves to cloak the significance of those concepts. The political authorities who, on the advice of traditional public finance experts, think that government borrowings are less inflationary than creation of currency, have also a certain amount of misconception regarding the meaning of savings and the role of government borrowings. They do not realize that these gentlemen are in the habit of using refined language, for they prescribe ‘increase of savings is required’ when they mean ‘restraint on consumption is necessary’. When asked to clarify why the real meaning is being hidden, they explain that the latter is not a sugar-coated expression, and will be unpalatable to the public. They do not visualize that by means of this semantic dressing-up, they are trying to throw dust into their own eyes; for if the desire of the people to consume is so high that the very mention of ‘restraint on consumption’ calls forth their resentment, then its actual implementation by exhortations to increase voluntary savings would almost certainly be thwarted by popular indifference to the appeals.
(b) Nature
of real savings
In the technical sense, real savings is a vector of capital and consumption goods existing in excess of the last period. In valuation (which is possible in an unambiguous manner only under conditions of steady growth), only those goods which can be utilized at full capacity would be given the equilibrium value, the rest (including the proportion of each good having unutilized capacity) would have zero value during the next period. According to this view, the real savings vector coincides with the investment vector and is not only equal in value to it, but is the same thing. According to this interpretation, the second Keynesian equation Y = C f S could be compared with the equation Y = C + f. The
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT former equation serves no useful purpose in the Keynesian analysis which the latter cannot do equally well or better, and hence it is redundant. Moreover it is misleading, in as much as it purports to give a function to the former equation (and to the term saving) which it cannot perform without being thought to be coincident with the latter equation. It is a neoclassical element in Keynesian thought, and the whole equation along with the term national savings can be dispensed with, and hence these could be eliminated from macro-economic literature without any analytical loss. In the sense of the counterpart of real savings in the field of consumption, we have the concept of refraining from consumption. It is the opportunity cost of the extra investment denoting what has been foregone to make additional real savings come into existence. In the current period, it is a transfer of consumption goods (and possibly people along with them) from the sector for production of consumption goods to those who will be engaged in production of investment goods. But the aggregate consumption remains the same because the stocks already exist after the last harvest. Thus increase in investment is possible without depressing the standard of consumption in this period. But as resources have been diverted to investment from the consumptiongood industries, it is in the next period or still later, that the output matrix will show aggregate consumption in the nth period to be lower than what it would ordinarily be expected to be in that period (which would be the present period’s consumption multiplied by the nth power of the coefficient of growth which was ruling in the previous period before the higher rate of investment was undertaken). The aggregate consumption in the next period or later, though lower for some years than the corresponding quantity of expected consumption, is not necessarily lower in any period than consumption of this period. On the other hand, consumption foregone does not necessarily imply reduction of aggregate consumption below the present level, yet (as higher employment is created because of higher investment and consumy’ion goods produced are less than, while investment goods produced are more than, the last year’s output multiplied by the coefficient of growth ruling till now) for fullcapacity growth next period the consumption per man employed has to be lower than this period (assuming a constant consumption propensity of entrepreneurs out of profits). The amount by which goods in the consumption vector are lower in any period than
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what would have been ordinarily, indicates the savings in that period in terms of refraining from consumption, and may be called the ‘consumption foregone vector’ for that period. Counterpart real savings may be defined as the vector of consumption goods which shows the consumption foregone vector integrated or summed up over all the years until the aggregate consumption has been brought (through the extra production emanating from investment of this period) to the level of ordinary expectations of aggregate consumption per year. However, neither the value of additional capital accumulated over a period of n years as a result of this year’s additional effort at real saving continued in the future period, nor the value of increase in investment in the present year, need coincide with the value of counterpart real saving (although it is the opportunity cost). This is because firstly consumption foregone is possibly spread over many periods and the rate of discount is not unique as the rate of growth is not constant over all the period, and further because the real wage being different, the subeconomy has changed and the relative valuation of goods forming the real savings vector and the counterpart real savings vector changes according to the Wicksell structure2 of the technology. Thus savings in the sense of refraining from consumption is not necessarily equal in value to savings in the sense of increase of inventories (of capital and consumption goods), of which the latter is always equal to investment (when properly valued). No single monetary figure or value gives the information about these two different vectors of real savings and counterpart real savings.
(c) Association of consumption and investment Even if we interpret savings only as refraining from consumption rather than purchase of savings certificates, some of the doubts as to its efficacy as an instrument of growth still remain. The models of neoclassical economics lay stress on refraining from consumption as the prime element of capital accumulation in various forms. For instance, it was put in the classical form that out of given income either one can consume or invest and the more one consumes the less is left for investment. In another form this is expressed as capital accumulation being the reward of waiting or of postponing consumption. In yet another way it is exhibited as the marginal rate of time preference being
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lowered, the future income discounted to the present appears to be not so lacking in value. The conflict between consumption now and consumption in future also appears in economic analysis in the non-neoclassical models. Thus, in the Keynesian model applied to a full-capacity situation (war or boom or war-devastated countries or countries lacking capital ab inifio), the conflict appears sharply as the capacity to refrain from consumption as limiting the investment. In the Robinsonian analysis it was carried over as the inflation-barrier wage3 limiting the rate of accumulation in a situation of nonemployment but full capacity. In the application of Robinsonian analysis to the Neumann System it occurs as the demonstration of higher growth rates for lowering of the consumption technology remaining the intake per man, same.4 In the Sen model it appears through of techniques, viz. less-mechanized choice techniques maximizing output per unit of capital give high present consumption with a low rate of growth, and middle degrees of mechanization maximizing the rate of surplus give less of the present consumption and a very much higher future one.5 The conflict is more pronounced at high wages, for the degree of mechanization of the profit-maximizing technique diverges a lot in that case from the output-maximizing technique.6 In planned Soviet growth it was manifested through stress upon control of consumption for priority to heavy investment. In modern growth economics this appears as the classical conflict between economic growth and social justice. There is a certain element of truth in the basis of this conflict, but its application has to be watched with caution. Thus, in a situation of unemployment, for the sake of future conone could certainly refrain from sumption, recommending that real wages of the employed population may rise now (through money wage increasing), for by this action not only the rate of accumulation would fall, and consequently the rate of growth of employment (thus hitting at the poorest section of the population), but also the price increases following increase of money-wage costs, would hit at the unorganized labour and decrease its standard of living. This action would increase the present consumption of organized labour, and not only decrease the realization of potential future consumption of the same section, but also the present consumption of the unorganized workers and the expectancy of higher present consumption (through employment) of the non-employed workers. Hence, it neither results in growth, nor in distributive justice to the least advantaged and in
this respect the two effects of increasing the real wage do not conflict with each other, but move in the same direction. Conversely, if the real wage were quite a bit above subsistence, a decline in it - efficiency remaining constant would result in allowing a higher rate of accumulation as well as yielding distributive justice to the least advantaged, in which case also the conflict is replaced by compatibility. Of course, for an excess capacity and unemployment situation, the Keynesian prescription itself is a demonstration of the compatibility of increases in consumption and investment, as they go up together. However, one can formulate examples of prescriptions where the protection of the future does not entail a sacrifice of the present even in full-capacity situations which Keynesian analysis by itself does not exhibit. This is brought out in the forefront of the debate on policy measures through the multiple-turnpike models of choice of longterm strategies. Among these strategies is the heavy investment strategy,’ which maximizes the rate of growth of heavy industries, and at the same time keeps the rate of growth of consumption and employment up in the sector of less-mechanized techniques for the production of consumer necessaries. Future growth, accumulation, etc. are all looked after by the growth of heavy industries, and distributive justice is secured through greater employment in the sector of small farms and cottage industries and consumption therein, whereas the surplus therefrom is used for workers in the heavy investment sector. One cannot say in general that any refraining from consumption per man or of a high magnitude in the aggregate is necessary for a fast pace of development and provision of employment. The causation of ‘refraining from consumption’ to ‘accumulation’ gets a little blurred when put in the context of the heavy investment strategy, compared to the mechanized light machinery The comparison shows that the strategy.s presentation of the problem of resources for development either as a trade-off between growth and social justice, or between the present and the future, or consumption necessaries and accumulation, or inflation and unemployment is unreal. (d)
Keynesian
causation
The great contribution of Keynes to economic analysis was the causal equation that investment (together with consumption) governs the level of income which further determines the level of the part of income notionally
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT
refrained from consumption to be the same as the original investment. The whole of the apparatus of the multiplier and the successive rounds of expenditure within the same period (and assumption of production being instantaneous) are not essential parts of the Keynesian analysis. Further, the theory of liquidity preference as determining the money rate of interest cannot work in the same way as for an advanced country in a situation where the market is undeveloped. Moreover, money marginal efficiency of capital as a determinant of the level of investment has lesser importance in a planned mixed economy than in a completely private-enterprise economy. The important aspect of Keynesian analysis which has seeped through to development economics is the stress upon investment as the prime-mover of growth whether in equilibrium situations with underutilization of factors of production (labour and capital) or states of full capacity (or full employment). In this context, as has been explained while discussing the nature of savings, the capital stock can grow even in a full-capacity situation without a decline in this period’s consumption (as the stocks of consumption goods already exist), by putting more resources in capital-goods production rather than in consumption-goods production. In the next period, because of less effort devoted to production of consumption goods there would be less available for consumption, which may mean a situation of decline of real wages per man, or creation of excess capacity or decline of consumption by entrepreneurs. But, in the present period, investment is not being thwarted by any bottleneck of people refusing to refrain from consumption, because no restraint on consumption is necessary for this period. Hence: la
2
Yc-ce,
where Ce is given by requirements of consumption goods per man pegged at the level of the last period (or the average level of the last few periods). In terms of the next period the level of investment (I) and the necessary consumption per man would determine whether real wage will decline and investment be kept up, or the number to be employed will decline (and the real wage per man-employed kept up along with creation of excess capacity).9 The causal sequence, after denoting time intervals by subscripts, is: w
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where w represents the inflation-barrier real wage which governs the number of workers which will be employed for the production of consumption goods in that period. The Robinsonian concept of the inflationbarrier wage, and the Keynesian concept of the level of investment as determinants of further production, together represent the true essence of Keynesian analysis. Even as regards national income (Y) the causation is not really: I
s-’
I
I
(2)
but: &C I
(3)
i-l
Y
where C (consumption) depends upon the inflation-barrier real wage, and Zis causally dependent as Zr is in chart 1. Savings (S) or propensity to save (s) do not enter into the argument of chart 3 at all, and these concepts even are not essential to the real Keynesian argument. It is for this reason that importation of savings in so-called Keynesian discussions is considered here to be an element of neoclassical thought. One can and should get away altogether from the second Keynesian equation that income is disposed of through consuming and not consuming. One may even say macro economists should desist from the very use of the word ‘saving’; the understanding of the true spirit of the Keynesian system would become much easier that way.
(e) Causation in the Harrod model The same .element of dependence upon savings as a parameter detracts from the utility of the warranted-growth model of Harrod. This pioneering model (to which we owe all longterm post-Keynesian analysis) is meant to show that the warranted rate of growth is composed of two constituents presumably governing it as the equilibrium rate of growth. Harrod’s second identity of growth makes the rate of growth dependent, in full-employment conditions, upon the natural rate of growth (or the growth rate of population and of output per man). Sir
978
WORLDDEVELOPMENT
Roy also stated that fiscal and monetary policies are now always used to ‘prevent a downslide’. He could have said with equal conviction that the government should assume a full-employment policy. In that case the actual growth rate will not be less than the potential growth rate. Hence, when talking of an efficient path based upon equilibrium growth (rather than under-employment and excess-capacity aberrations), we should, in the present state of economic science, assume (as post-Keynesian models usually do) that a rational government would make gw = g,. In that case the equation of the warranted rate of growth has nothing more to teach us, for as Sir Roy himself told us the natural rate of growth is then a determining variable. In that case, as in the analysis of Professor Joan Robinson, the savings rate would depend upon the rate of growth of capital at full capacity, set by the natural rate of growth of the technology, the distribution of income and the thriftiness of the entrepreneurs. That would be the true Harrod model. The true Harrod model can be built from the true Keynesian equation and definitions step by step, as follows, from the tautology of increase in capital stock (1) in relation to the stock itself (k’), being identically equal to the investmentincome ratio (s) multiplied by the incomecapital ratio (u) which is the reciprocal of the capital-output ratio(v). Thus the rate of growth of capital stock, g, is identically equal to the product of the two constituents as follows: I
IY (4)
g=K=rK. But according
to the true Keynesian I 2
(Y-C).
equation: (5)
Therefore: g -‘-fl;.
(6)
This is the true interpretation of Harrod’s first identity of growth and can be seen to be of no significance on account of its reversal of causation. The Harrod identity as it is presented usually is in the form g = s/u or g = so, which is an incomplete way to state it, as the causation is not indicated in the equation itself; but one is made to understand by a study of the text that it is meant to be from s to g. In the usual interpretation, as the identity purports to show causation from s to g, the Harrod formula is, in its essence, non-Keynesian in causation (as it cannot be derived in this reverse-causation form from the true Keynesian equation). For this
reason the Harrod formula as usually interpreted is really a neoclassical element in postKeynesian thought, and when correctly interpreted it is of no special utility. 3. DORMANT (a) Residuary
VARIABLES variables
In the theory of causation the variables may be classified as active and dormant variables. To determine these it is necessary to plot the chain of causation in the form of charts like the following:
A-B
i
_i C
*I1 0
E
In this scheme, effect B takes place with the governance of .d and X, and effect C through the determination of B and Y. Further effect D is caused by C and Z jointly, but from cause Z alone, effect E also follows. Then it can be noticed that Z is the common cause of D and E, while D and E existing together, and even showing a high positive statistical correlation, are not the causes of each other. If Z is required to promote D primarily, E is only a side-effect. The variables given from outside are A, X, Y, Z. These only can be treated as planning parameters. B, C, D, E are dormant variables and cannot be the basic instruments of operation by the planners. Out of the dormant variables, D and E are the residuary variables, being last in the chain of causation. Dormant variables are governed, but also govern further. Residuary variables are governed only and do not govern further. Dormant variables transmit the force of causation from active to residuary variables. Residuary variables are the receptacles of the end consequences of the force of causation transmitted to them direct from active variables (as for E) or through dormant variables (as for D) or both. Active variables have one or more causal arrows flying away from them. Dormant variables have one or more causal arrows flying towards them, as well as away from them. Residuary variables have causal arrows flying towards them, but not away from them. When models do not show the direction of causation properly, their prescriptions are apt to be perverse when applied to conditions different from those for which they were invented. Thus the prime movers in advanced countries may be different from the underdeveloped countries and the policy conclusions would be
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT different. In a full-employment golden-age equilibrium, according to the Robinson-Kaldor formulation, the rate of growth of population and of increase in technical knowiedge form the ceiling to the rate of growth (as in Harrod’s identity of natural rate of growth), and provided that the government policy maintains the level of investment to utilize these opportunities fully, the rate of growth is determined. It further sets the level of the rate of profit (through the consumption propensity of entrepreneurs), and from thence, as explained in detail by me elsewhere, through the production 10cus’~ based upon Joan Robinson’s book of Blue Prints and technical production matrices of the Sraffa and von Neumann input-output type, the profit-maximizing technique is indicated which shows the capital intensity and the productivity level per wage unit and the corresponding relative-wage-profit-rate curve yields the wage rate as the residue. The same production locus (transformed into share-ofwages-profit-rate curve) shows the share of wages as a side-effect of the rate of profit and the technology. Further, from the share of wages, and as a side-effect of the consumption propensity of entrepreneurs, the rate of investment out of income (usually misnamed the rate of savings) is determined. The production locus and the rate of profit, as side-effects, also give the output-capital ratio. Thus the wage rate, the investment rate (savings rate) and the output-capital ratio are the residuary variables in this system of causation. In an underdeveloped country, with a vast population in relation to capital goods in the advanced sector, and a low subsistence wage rate, the bond between rate of growth of population and the rate of growth is severed. With huge unemployment, the current addition to the workforce does not offer a ceiling to the
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rate of growth of employment. Investment in the advanced sector is limited then by the minimum acceptable standard of living of its workers (the inflation-barrier wage), and further by the productivity of the techniques available, and also by the propensity of entrepreneurs to consume out of profits, along with the parasitic consumption of others from the products of the advanced sector or the claims of dependent processes upon it. In this case the real wage, the technology, and the propensity to consume, of entrepreneurs are the governing variables, while the rate of profit, degree of mechanization and share of wages in income are dormant variables along with the rate of growth, output-capital ratio, and rate of savings as residuary variables. (b) Null variables In the above description of dormant variables, it will be noticed that some variables are determined variables in both situations - of full employment and of unemployment. These may be termed ‘non’ variables. Thus the outputcapital ratio, aggregate rate of investment and relative shares in income are dormant variables in both situations, as also are the rate of growth, rate of profit and degree of mechanization. Those which are residuary variables in both situations may be termed ‘null variables’ representing extreme cases of futility regarding their function as possible sources of causation. Thus the output-capital ratio and the aggregate rate of investment out of income are residuary variables in the non-employment situation as well as full-employment conditions and hence they are null variables. l3 The reason for the use of the term ‘null variables’ was suggested after inspection of Table 1 in which a determining variable is given the score unity, a dormant
Table 1. Variables Full employment (true golden-age) Unemployment (bastard platinum-age) Total score Type of column a. Unit vector or
W’
s
0
g
r
+
K
G?
r
1
0
0
0
t
t
t
t
1
1
0
0
1
0
0
t
t
t
t
1
1
1
1
1
0
0
A
A
A
A
2
2
gz
&rt
1
vector (1 0) : c2 (0 1):
b. Sum vector
(1
c. Null vector
(0 0)
_/-l-l
1) : J,
: 0,
-f-f
-Ii
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WORLD DEVELOPMENT
variable an epsilon, E (near zero) and a residuary variable zero. In this table gl = rate of growth of the working population, g, = rate of growth of scientific advance in productivity per man, g = rate of growth of capital, r = rate of profit, w = real wage rate, s = aggregate rate of saving being the average of the propensities to save of different classes weighted by the distribution of income, u = output-capital ratio, $ = relative shares expressed as ratio of profits to wages, K is capital intensity representing the degree of mechanization expressed either as a value of capital per man or per wage unit, c, = consumption propensity of entrepreneurs expressed as a ratio of profits, and T represents the state of the technology (depicted either in a production function or production locus, or shareof-wages-profit-rate curve or relative-wageprofit-rate curve). The non-variables are never dominant as regards causation, whether it be a developed country or developing country. They are by their nature, prohibited from ever being the parameters of choice in a proper model of planning. In the models or plans in which the nonvariables are chosen as basic structural pieces and the rest of the plan is drawn up on that basis, one is bound to be confronted with the same type of difficulties which would face a householder who chooses the shape of door curtains as low and broad by his own artistic preference (and, on that basis, assumes the size and shape of doors would oblige him by corresponding to the curtains). In this sense the Harrod-Domar model (with its causation described in the previous section) is based upon two variables both of which are not merely non-variables, but of the special order called null variables. As such, the model is of no applicability at all as a planning model, whether for developed or for underdeveloped countries. Its place lay in initiating the modem thinking regarding growth. It has the utility of the ladder for the master builder because having got him to the churchsteeple it was not able to be of any further use to him. The present author is, after the foregoing analysis, unable to share the belief that importance is to be given to this model, as has been done by Mr. Paul Streeten14 in recognizing its demerits in transcendental criticism and yet thinking it worthwhile to define its constituin immanent criticism, ents more precisely, merely because some planners are misguided enough to use it. It is rendering disservice to the eradication of poverty, if too much attention is paid to improving the definitions or
methods of measurement of variables which should never be used as basic variables in drawing up plans.ls (c) Abstract
variables
of moral
choice
Another aspect of parameters of moral choice in planning in underdeveloped countries is the selection of variables which are open to ascertainment from the public and exclusion of variables which are not. Sophisticated mathematical models of choice of techniques dealing with intertemporal choice postulate that the community has a marginal rate of time preference. This parameter is not ascertainable from the public either by surveys or through discussion with their elected representatives. Nor is it possible to get it from the past behaviour pattern, as a growth situation has not confronted the particular community in the past. In any case, the strategy of growth may aim at altering the behaviour pattern (e.g. not to allow production of limousines even though there is sufficient demand for them, or to curtail admission to nondevelopment courses at universities in spite of their being popular). One has to ascertain the wishes of the common people by giving them the choices among goods to be obtained and those to be foregone. For this purpose abstract parameters cannot evoke meaningful answers. What well-thought out answer will we get from a peasant to the question: At what rate of discount
expected standard present one?
would you equate your of living 20 yr hence to the
Nor would we get a meaningful housewife to the question: Would you like the economy
answer
from
a
to grow at 4 or 6%?
One cannot take the rate of growth as given by political choice for a developing country. What one has perhaps to ask a peasant in a survey is a series of questions similar to the following: If you want your son to have a scooter and a tractor, 2.5 yr hence, you will have to keep on eating only half a pound of rice a day. Is that acceptable to you’? If not, then you can increase your daily food intake by taking a quarter pound of pulses in addition to the rice, but 2.5 yr hence your son wilI only be able to get a bicycle and a hand-tractor. Is this preferable to the previous offer? Alternatively, increase your consumption by taking half a pound of treacle in addition to pulses and rice, but 25 yr hence only look forward to your son being provided with a pair of shoes for walking and an improved plough. Is this the best alternative’?
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT The sort of questionnaire tailored for each income class may be given to a random sample of the stratified population. One may get widely different responses from individua1.s but, by and large, a consensus will be visible, and the answers will be meaningful as the questions have been cast into the mould of the sociological field of reference of the person in concrete terms. No ordinary person can either visualize or give answers to abstract variables like appropriate national rate of growth, optimum rate of interest, marginal rate of time preference, rate of discount of the future, etc., without knowing how the answer will affect him and his environment. Another method used is observation of past data regarding the degree of social unrest and protest occasioned in the past when inflation of various degrees had been inflicted upon the economy. But this may give a distorted picture, for the capacity of some better-off but organized sections to protest violently may be higher than in proportion to the degree of burden inflicted upon them, and of other worse-off, unorganized long-suffering, patient groups less than what an enforced silence might indicate, though the burden is relatively higher and intolerable. Moreover, in a proper planning strategy there is no question of imposing a burden. It is only a question of relaxing a burden to allow the standard of living to rise, and little observation exists in the past as to peoples’ reaction to the degree of relaxation of the burden to the extent a constantly rising real wage will require. One also does not discover thereby whether capital goods are not more preferred to consumption goods in the wake of the country’s prosperity. Farmers may prefer small threshers to transistors as a manifestation of rural prosperity. Whatever the means, if the planner obtains the people’s choice of consumption goods in real terms, then that can be directly used for planning, for though one would be able to calculate all the other abstract variables required from the data collected, one would find it unnecessary to do so. When we are in possession of the primary data on which to base the real wage, the long-term strategy becomes known for that level of real wage. The questions themselves imply that for each level of standard of living, the corresponding increase in consumption and capital goods, a long time hence, has been worked out and is presented to the public to determine the choice. The moment the answers are tabulated and a consensus found, the strategy is indicated. What earthly purpose do the abstract quantities serve then, except for statistical records? The abstract variables are
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purely dormant variables, being always dependent upon calculations derived from primary data relating to the determining variables. They are non-variables and not material for determining the choice of the strategy or the timeprofile of consumption. It is like the reply which Professor Ian Little once gave (in 1962) to an econometrical enthusiast who had asked for the former’s ‘subjective estimate of social marginal rate of time-preference’: I want this quantity
to be such that if you plug consumption per man in the community gets doubled in 35 years for a country Iike India. that
in your
equations,
The term ‘rate of growth’ also serves the same purpose, and for this reason basing a plan on a time-profile of growth rates, rather than on real wages, uses a model of non-variables for the underdeveloped country. In such cases it is a meaningless question to ask whether a 5 yr plan has been successful or not. for no meaningful plan based on determining variables open to public political choice was ever formulated. (d) Active variables useful as instruments ofimplementation Similar remarks apply to models assigning a role to the rate of interest as an instrument of framing a plan. In development planning, for a country with a large unemployed population the active variables determining the plan size, time structure and allocations, are the timeprofile of real wage acceptable, the technical knowledge available, the social habits of consumption of workers, farmers, entrepreneurs and landlords, and the limits to which each, when taxed by a democratic government administered as a firm state, will tolerate the burden rather than plotting to overthrow the government, along with the initial endowments of labour, skills, equipment and natural resources, and also the ascertained political priorities to parasitic sectors (either unnecessary prestigious investments like buildings of the Federal Court and State Secretariats, or necessary items like defence) and the conditions of foreign trade and aid. These determine the optimum strategy or long-term path of development. The rate of interest does not determine any aspect of this path nor does the rate of time preference perform that function. Even if the rate of interest were to enter into any calculation for drawing up a plan, as in a full-employment situation, it is the notional rate not the actual one which is required. The two may not even pull in the same direction, because for the planning of a high growth rate
WORLD DEVELOPMENT
982
when the rate of scientific advance is large, the notional rate of interest has to be taken at a high level, but for inducing private-sector investments, it has to be actually at a low level. The goods produced in each year and the instruments of their manufacture, the relative sizes of industries and the degree of mechanization of the techniques to be used is determined from the optimum path. The allocation of the known and fixed size of each industry between the public and private sector is a matter of public political choice (like the possible nationalization of certain segments of the insurance and banking business, or of steel factories, or of fertilizer production). That spectrum of discriminatory interest rates for each industry and each technique, which induces the private entrepreneurs in a composite economy (having public as well as private enterprise) to invest to the levels allocated to private enterprise in each field is the appropriate set of interest rates. Its role is that of a dormant variable again, and not a determining one for the size of the plan and composition of industry in it. It is an instrument of implementation, not a parameter for on a formulating a plan. I6 It is like putting
wide bridge the bold white line separating fourwheeled traffic from the rest, which is drawn after the width of the bridge has been decided by the resources available for this purpose, and the position of the bold line fixed by the number of lanes for fast traffic (depending upon the importance to be given to the easy flow of the type of traffic following from the settlement of claims based upon exigencies of social and economic desirability). The white line regulates the quantum of each category of traffic per hour, after the decision to apportion the road to each type of traffic has been made. The white line does not determine the width of the bridge. The models using the still more abstract terms ‘utility’ and ‘welfare’ as entities quantifiable with single values, or whose ordering is thought to be indicated through social indifference functions, are, as yet, too remote from reality to be classifiable as economic models rather than metaphysical ones, and are not discussed here. Such models are to be held in reverence like those related to what things may be wrought with prayer, and what is the nature of life everlasting.
NOTES 1. See Planning fbr Stead-v Growth (Oxford: Blacknotes on (i) one-good model, (ii) production loci, (iii) Cobb-Douglas function, (iv) multiplicity of turnpikes, etc. See also ‘Neumann systems and dependent processes’, The Econometric Annual of the Indian Economic Journal, Vol. XIV, pp. 163-190.
10. Steady
Growth,op.
cit., pp. 178-179.
well, 1965). See various
11. See the discussion and visual tabulation in Steady Growth, op. cit., pp. 76-78 (especially Chart II).
12. ibid., pp. 80-81 2. Steady Growth, op. cit., pp. 155-187, regarding the definition and effects of Wicksell structure. 3. Joan Robinson, Accumulatiotr don: Macmillan, 1956), p. 48. 4. Steady
Growth,
of Capital
(Len-
op. cit., pp. 177-180.
5. A. K. Sen, Choice of Techniques 1960), pp. 32-33.
(Basil Blackwell.
6. ibid., p. 65, bottom. 7. Steady Growth, op. cit., p. 220 et. seq. Also see ‘Investment criteria in a platinum age’, Oxford Economit Papers, Vol. 19, No. 2 (July 1967). p. 208. 8. Steady
Growth.
9. ‘Inflation March 1968),
op. cit.. p. 227 et. ~ceq.
and excess p. 30-31.
capacity’,
Seminar
(Delhi:
(especially
Chart
III).
13. ‘On meta-econometry’, Inaugural Lecture, Fifth Indian Econometric Conference (Poona: 1967), by the author. 14. See Asian Drama by Gunnar Myrdal, Vol. III, p. 1968 et. seq., containing an essay on ‘Immanent critique of capital/output ratio’ by Paul Streeten. In 1962 when the present author was given an opportunity by the author of that portion to look through an earlier draft of his paper, the comments were more constructive than destructive. In the present state of thought the comments would be aimed at rooting out the concept of aggregate capital-output ratio altogether from the planning models. The proper use of this variable, measured as current-output/fisedcapital ratio is an index of bias in technical progress as indicated in the book by the present author cited earlier, pp. 265-273. Incidentally, this form of measurement of the output-capital ratio does not find a place in the detailed list of forms discussed in the above-mentioned paper by Streeten.
GROWTH
MODELS
AND ANALYSIS
15. E.g. on the measurement of the rate of savings. See comments of the present author during the discussion on inflation and its control at the Kandy COCference of the Intemationai Economic Association on ‘Economic Development of South Asia’, proceedings in book edited by Prof. E. A. G. Robinson and Dr. M. Kidron (Macmillan, 1969), p. 363. Also see, by the present author: ‘An essay on the logic of economic policy’, in inaugural issue of the Journal of Management (ed. Jahindra Singh), Administrative Staff College of India, Hyderabad, Vol. I (Sept. 1971), pp. 121-133; and ‘Symbolic poetry in ecomathic analysis’, A.B.O.C.S. Lecture at the Ruhr University, 1971, printed in Peter Meyer-Dohm (ed.), Economic and Social Aspects of Indian Development (Tubingen: Horst Erdmann, 1975).
OF DEVELOPMENT
983
16. The deflated role of interest rate merely as implementing the desired ratio of ownership of public and private sectors was fist suggested by the present author at the disctission on ‘Role of interest in a developing economy’, 49th Indian Economic Conference (Calcutta: 1966), where it was described by the then President, Prof. I. G. Patel, in the final presentation as representing one extreme, in contrast to the other extreme view that the rate of interest is a genuine indicator of capital scarcity, and is as such a parameter influencing the formulation of plans through choice of techniques. The above discussion indicates why I consider that the two points of view are not equally valued in a planning perspective.
Growth Models and Analysis of Development GAUTAMMATHUR* University of Allahabad
Summary.
- This paper deals with remnants of neoclassical elements in Keynesian and postKeynesian thought, and attempts to demonstrate that the elimination of these elements from our modes of thinking would not impoverish economic analysis as a means of solving real problems. In the Keynesian analysis the causation from investment to savings is exhibited in terms of income determination. When put in terms of a capital theory model, the vector of savings is represented in two ways: firstly, real savings, and secondly, counterpart real savings. The former coincides with the investment vector and the latter with the vector of consumption goods foregone for diverting resources towards equipment making. Thus the Keynesian causation in capital theory terms makes the concept of national savings as an independent variable redundant. The Robinsonian causation in a golden age with full employment and its reversal of direction in a steady state with non-employment are then considered. But in each of these, variables like rate of savings and output-capital ratio are found to be dormant variables. They are termed as null variables which, being of no account in both full-employment and unemployment situations, could, without loss, be deleted from the repertory of analytical tools. The Harrod formula of warranted rate of growth, when put in causal form, thus becomes a redundant portion of economics of growth. The real determinants of the growth rate and real wage rate on which the analysis of growth or of development should be based, are also depicted.
1. INTRODUCTION This essay (presenting the analysis of the author during the last 15 yr teaching at Osmania University pertaining to this aspect of the subject) seeks to outline the logical difficulties of an economic nature encountered in the application of growth models to planned development of underdeveloped countries. This paper deals with the applicability of the essential aspects of Keynesian and Robinsonian analyses to development planning, and the inapplicability, for this purpose, of the rest of Keynesian analysis as well as neoclassical analysis (including the post-Keynesian elements in neoclassical thought). The matter requires treatment from two angles pertaining to the inapplicability of some models. The first one is ‘reversed causation’ and the second one is ‘insufficient disaggregation’. The question of insufficient disaggregation is a part of the theory of capital and has been dealt with by the present author elsewhere.’ This essay seeks to concentrate on the aspect of reversed causation in growth models. The analysis starts by singling out causation with respect to savings. Firstly, the role of savings
in the neoclassical models is discussed, as also confusion as to its role following from semantic usage., Then the nature of savings is analysed. After that the interpretation of real savings as the investment matrix and of counterpart real savings as a matrix of consumption foregone is given, and the causal connection of the latter with the former is indicated. The role of savings in Keynesian and post-Keynesian models is examined with reference to the concept of ‘determining’ and ‘determined’ variables. After that some of the determined variables are shown as null-variables which ought to be debarred permanently from acting as parameters of planning. Following that some abstract variables, used sometimes for moral choices in growth and development models, are shown to be dormant variables, and hence unsuitable for determining the framework of a plan. * Based upon a paper prepared for discussion at the Society for International Development, Eleventh World Conference on Challenges to Prevalent Ideas on Development (Delhi: November 1969). The author thanks Dr. Vaman Rao and Mr. H. Venkateshwar Rao for making comments on an earlier draft.
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WORLD DEVELOPMENT
2. REVERSED CAUSATION IN NEOCLASSICAL AND POST-KEYNESIAN MODELS (a) Semantic
confusion
regarding
savings
The neoclassical growth models put special emphasis on savings as the prime mover of investment programmes. However, the nature of the term ‘savings’ is not adequately comprehended by those who use the models based on it. The confusion in neoclassical analysis occurs on account of semantics. When the classical economist referred to refraining from consumption, he looked upon it in physical terms more corn for seed means less available for eating. But the classical economists were not content with the term ‘a community’s refraining from consumption’. They wanted a shorter term, and borrowed the word ‘savings’ from common language pertaining to households. Since the introduction of this term in analysis of national production, a verbal confusion has existed in the sense of the term ‘savings’ to the nation as accumulation of capital, and to the householder as putting by for the rainy day in the form of life insurance policies, provident funds, savings bank deposits, government securities, etc. To throw seed upon the ground instead of eating it, apart from enforcing an abstinence from consumption, is investment also in a physical sense; it yields production later, as a technological phenomenon. To store up corn, though a physical act, is not to invest it for future production, but is merely an act of hoarding. The classical economist’s meaning of refraining from consumption was coupled with a simultaneous act of investment. The householder’s meaning of savings is coupled with hoarding either in physical terms or money terms of purchasing paper assets. The confusion which occurs on account of the use of the term savings in the two senses firstly of ‘refraining from consumption combined with investing’ and secondly, of ‘hoarding’ _ makes it difficult for the correct economic policy for development to be formulated and communicated. When the public finance expert requires the public to consume less and to invest, he sends the abbreviated message: ‘save more’. For the District Commissioner, savings are confused with pieces of paper issued by government, bearing promise to repay. When asked to help in the process of development he understands the directives of government to increase savings only in this sense. So he interprets the message as an exhortation to people
to convert their cash into bonds or savings certificates. It is not taken to be an appeal to increase productive capacity and hence the expectation is that they will, after buying the bonds, continue to sit with folded hands doing no extra work. ‘Waiting’ in the expectation of future consumption by itself becomes the prime developmental virtue, and the words of Milton reverberate over the household wirelesssets and the public loud-speakers: ‘They also serve who only stand and wait’. Thus the term savings as connoting idle waiting makes the confused casual connection between ‘investment’ and ‘refraining from consumption’ more confounded, and serves to cloak the significance of those concepts. The political authorities who, on the advice of traditional public finance experts, think that government borrowings are less inflationary than creation of currency, have also a certain amount of misconception regarding the meaning of savings and the role of government borrowings. They do not realize that these gentlemen are in the habit of using refined language, for they prescribe ‘increase of savings is required’ when they mean ‘restraint on consumption is necessary’. When asked to clarify why the real meaning is being hidden, they explain that the latter is not a sugar-coated expression, and will be unpalatable to the public. They do not visualize that by means of this semantic dressing-up, they are trying to throw dust into their own eyes; for if the desire of the people to consume is so high that the very mention of ‘restraint on consumption’ calls forth their resentment, then its actual implementation by exhortations to increase voluntary savings would almost certainly be thwarted by popular indifference to the appeals.
(b) Nature
of real savings
In the technical sense, real savings is a vector of capital and consumption goods existing in excess of the last period. In valuation (which is possible in an unambiguous manner only under conditions of steady growth), only those goods which can be utilized at full capacity would be given the equilibrium value, the rest (including the proportion of each good having unutilized capacity) would have zero value during the next period. According to this view, the real savings vector coincides with the investment vector and is not only equal in value to it, but is the same thing. According to this interpretation, the second Keynesian equation Y = C f S could be compared with the equation Y = C + f. The
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT former equation serves no useful purpose in the Keynesian analysis which the latter cannot do equally well or better, and hence it is redundant. Moreover it is misleading, in as much as it purports to give a function to the former equation (and to the term saving) which it cannot perform without being thought to be coincident with the latter equation. It is a neoclassical element in Keynesian thought, and the whole equation along with the term national savings can be dispensed with, and hence these could be eliminated from macro-economic literature without any analytical loss. In the sense of the counterpart of real savings in the field of consumption, we have the concept of refraining from consumption. It is the opportunity cost of the extra investment denoting what has been foregone to make additional real savings come into existence. In the current period, it is a transfer of consumption goods (and possibly people along with them) from the sector for production of consumption goods to those who will be engaged in production of investment goods. But the aggregate consumption remains the same because the stocks already exist after the last harvest. Thus increase in investment is possible without depressing the standard of consumption in this period. But as resources have been diverted to investment from the consumptiongood industries, it is in the next period or still later, that the output matrix will show aggregate consumption in the nth period to be lower than what it would ordinarily be expected to be in that period (which would be the present period’s consumption multiplied by the nth power of the coefficient of growth which was ruling in the previous period before the higher rate of investment was undertaken). The aggregate consumption in the next period or later, though lower for some years than the corresponding quantity of expected consumption, is not necessarily lower in any period than consumption of this period. On the other hand, consumption foregone does not necessarily imply reduction of aggregate consumption below the present level, yet (as higher employment is created because of higher investment and consumy’ion goods produced are less than, while investment goods produced are more than, the last year’s output multiplied by the coefficient of growth ruling till now) for fullcapacity growth next period the consumption per man employed has to be lower than this period (assuming a constant consumption propensity of entrepreneurs out of profits). The amount by which goods in the consumption vector are lower in any period than
975
what would have been ordinarily, indicates the savings in that period in terms of refraining from consumption, and may be called the ‘consumption foregone vector’ for that period. Counterpart real savings may be defined as the vector of consumption goods which shows the consumption foregone vector integrated or summed up over all the years until the aggregate consumption has been brought (through the extra production emanating from investment of this period) to the level of ordinary expectations of aggregate consumption per year. However, neither the value of additional capital accumulated over a period of n years as a result of this year’s additional effort at real saving continued in the future period, nor the value of increase in investment in the present year, need coincide with the value of counterpart real saving (although it is the opportunity cost). This is because firstly consumption foregone is possibly spread over many periods and the rate of discount is not unique as the rate of growth is not constant over all the period, and further because the real wage being different, the subeconomy has changed and the relative valuation of goods forming the real savings vector and the counterpart real savings vector changes according to the Wicksell structure2 of the technology. Thus savings in the sense of refraining from consumption is not necessarily equal in value to savings in the sense of increase of inventories (of capital and consumption goods), of which the latter is always equal to investment (when properly valued). No single monetary figure or value gives the information about these two different vectors of real savings and counterpart real savings.
(c) Association of consumption and investment Even if we interpret savings only as refraining from consumption rather than purchase of savings certificates, some of the doubts as to its efficacy as an instrument of growth still remain. The models of neoclassical economics lay stress on refraining from consumption as the prime element of capital accumulation in various forms. For instance, it was put in the classical form that out of given income either one can consume or invest and the more one consumes the less is left for investment. In another form this is expressed as capital accumulation being the reward of waiting or of postponing consumption. In yet another way it is exhibited as the marginal rate of time preference being
976
WORLD DEVELOPMENT
lowered, the future income discounted to the present appears to be not so lacking in value. The conflict between consumption now and consumption in future also appears in economic analysis in the non-neoclassical models. Thus, in the Keynesian model applied to a full-capacity situation (war or boom or war-devastated countries or countries lacking capital ab inifio), the conflict appears sharply as the capacity to refrain from consumption as limiting the investment. In the Robinsonian analysis it was carried over as the inflation-barrier wage3 limiting the rate of accumulation in a situation of nonemployment but full capacity. In the application of Robinsonian analysis to the Neumann System it occurs as the demonstration of higher growth rates for lowering of the consumption technology remaining the intake per man, same.4 In the Sen model it appears through of techniques, viz. less-mechanized choice techniques maximizing output per unit of capital give high present consumption with a low rate of growth, and middle degrees of mechanization maximizing the rate of surplus give less of the present consumption and a very much higher future one.5 The conflict is more pronounced at high wages, for the degree of mechanization of the profit-maximizing technique diverges a lot in that case from the output-maximizing technique.6 In planned Soviet growth it was manifested through stress upon control of consumption for priority to heavy investment. In modern growth economics this appears as the classical conflict between economic growth and social justice. There is a certain element of truth in the basis of this conflict, but its application has to be watched with caution. Thus, in a situation of unemployment, for the sake of future conone could certainly refrain from sumption, recommending that real wages of the employed population may rise now (through money wage increasing), for by this action not only the rate of accumulation would fall, and consequently the rate of growth of employment (thus hitting at the poorest section of the population), but also the price increases following increase of money-wage costs, would hit at the unorganized labour and decrease its standard of living. This action would increase the present consumption of organized labour, and not only decrease the realization of potential future consumption of the same section, but also the present consumption of the unorganized workers and the expectancy of higher present consumption (through employment) of the non-employed workers. Hence, it neither results in growth, nor in distributive justice to the least advantaged and in
this respect the two effects of increasing the real wage do not conflict with each other, but move in the same direction. Conversely, if the real wage were quite a bit above subsistence, a decline in it - efficiency remaining constant would result in allowing a higher rate of accumulation as well as yielding distributive justice to the least advantaged, in which case also the conflict is replaced by compatibility. Of course, for an excess capacity and unemployment situation, the Keynesian prescription itself is a demonstration of the compatibility of increases in consumption and investment, as they go up together. However, one can formulate examples of prescriptions where the protection of the future does not entail a sacrifice of the present even in full-capacity situations which Keynesian analysis by itself does not exhibit. This is brought out in the forefront of the debate on policy measures through the multiple-turnpike models of choice of longterm strategies. Among these strategies is the heavy investment strategy,’ which maximizes the rate of growth of heavy industries, and at the same time keeps the rate of growth of consumption and employment up in the sector of less-mechanized techniques for the production of consumer necessaries. Future growth, accumulation, etc. are all looked after by the growth of heavy industries, and distributive justice is secured through greater employment in the sector of small farms and cottage industries and consumption therein, whereas the surplus therefrom is used for workers in the heavy investment sector. One cannot say in general that any refraining from consumption per man or of a high magnitude in the aggregate is necessary for a fast pace of development and provision of employment. The causation of ‘refraining from consumption’ to ‘accumulation’ gets a little blurred when put in the context of the heavy investment strategy, compared to the mechanized light machinery The comparison shows that the strategy.s presentation of the problem of resources for development either as a trade-off between growth and social justice, or between the present and the future, or consumption necessaries and accumulation, or inflation and unemployment is unreal. (d)
Keynesian
causation
The great contribution of Keynes to economic analysis was the causal equation that investment (together with consumption) governs the level of income which further determines the level of the part of income notionally
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT
refrained from consumption to be the same as the original investment. The whole of the apparatus of the multiplier and the successive rounds of expenditure within the same period (and assumption of production being instantaneous) are not essential parts of the Keynesian analysis. Further, the theory of liquidity preference as determining the money rate of interest cannot work in the same way as for an advanced country in a situation where the market is undeveloped. Moreover, money marginal efficiency of capital as a determinant of the level of investment has lesser importance in a planned mixed economy than in a completely private-enterprise economy. The important aspect of Keynesian analysis which has seeped through to development economics is the stress upon investment as the prime-mover of growth whether in equilibrium situations with underutilization of factors of production (labour and capital) or states of full capacity (or full employment). In this context, as has been explained while discussing the nature of savings, the capital stock can grow even in a full-capacity situation without a decline in this period’s consumption (as the stocks of consumption goods already exist), by putting more resources in capital-goods production rather than in consumption-goods production. In the next period, because of less effort devoted to production of consumption goods there would be less available for consumption, which may mean a situation of decline of real wages per man, or creation of excess capacity or decline of consumption by entrepreneurs. But, in the present period, investment is not being thwarted by any bottleneck of people refusing to refrain from consumption, because no restraint on consumption is necessary for this period. Hence: la
2
Yc-ce,
where Ce is given by requirements of consumption goods per man pegged at the level of the last period (or the average level of the last few periods). In terms of the next period the level of investment (I) and the necessary consumption per man would determine whether real wage will decline and investment be kept up, or the number to be employed will decline (and the real wage per man-employed kept up along with creation of excess capacity).9 The causal sequence, after denoting time intervals by subscripts, is: w
977
where w represents the inflation-barrier real wage which governs the number of workers which will be employed for the production of consumption goods in that period. The Robinsonian concept of the inflationbarrier wage, and the Keynesian concept of the level of investment as determinants of further production, together represent the true essence of Keynesian analysis. Even as regards national income (Y) the causation is not really: I
s-’
I
I
(2)
but: &C I
(3)
i-l
Y
where C (consumption) depends upon the inflation-barrier real wage, and Zis causally dependent as Zr is in chart 1. Savings (S) or propensity to save (s) do not enter into the argument of chart 3 at all, and these concepts even are not essential to the real Keynesian argument. It is for this reason that importation of savings in so-called Keynesian discussions is considered here to be an element of neoclassical thought. One can and should get away altogether from the second Keynesian equation that income is disposed of through consuming and not consuming. One may even say macro economists should desist from the very use of the word ‘saving’; the understanding of the true spirit of the Keynesian system would become much easier that way.
(e) Causation in the Harrod model The same .element of dependence upon savings as a parameter detracts from the utility of the warranted-growth model of Harrod. This pioneering model (to which we owe all longterm post-Keynesian analysis) is meant to show that the warranted rate of growth is composed of two constituents presumably governing it as the equilibrium rate of growth. Harrod’s second identity of growth makes the rate of growth dependent, in full-employment conditions, upon the natural rate of growth (or the growth rate of population and of output per man). Sir
978
WORLDDEVELOPMENT
Roy also stated that fiscal and monetary policies are now always used to ‘prevent a downslide’. He could have said with equal conviction that the government should assume a full-employment policy. In that case the actual growth rate will not be less than the potential growth rate. Hence, when talking of an efficient path based upon equilibrium growth (rather than under-employment and excess-capacity aberrations), we should, in the present state of economic science, assume (as post-Keynesian models usually do) that a rational government would make gw = g,. In that case the equation of the warranted rate of growth has nothing more to teach us, for as Sir Roy himself told us the natural rate of growth is then a determining variable. In that case, as in the analysis of Professor Joan Robinson, the savings rate would depend upon the rate of growth of capital at full capacity, set by the natural rate of growth of the technology, the distribution of income and the thriftiness of the entrepreneurs. That would be the true Harrod model. The true Harrod model can be built from the true Keynesian equation and definitions step by step, as follows, from the tautology of increase in capital stock (1) in relation to the stock itself (k’), being identically equal to the investmentincome ratio (s) multiplied by the incomecapital ratio (u) which is the reciprocal of the capital-output ratio(v). Thus the rate of growth of capital stock, g, is identically equal to the product of the two constituents as follows: I
IY (4)
g=K=rK. But according
to the true Keynesian I 2
(Y-C).
equation: (5)
Therefore: g -‘-fl;.
(6)
This is the true interpretation of Harrod’s first identity of growth and can be seen to be of no significance on account of its reversal of causation. The Harrod identity as it is presented usually is in the form g = s/u or g = so, which is an incomplete way to state it, as the causation is not indicated in the equation itself; but one is made to understand by a study of the text that it is meant to be from s to g. In the usual interpretation, as the identity purports to show causation from s to g, the Harrod formula is, in its essence, non-Keynesian in causation (as it cannot be derived in this reverse-causation form from the true Keynesian equation). For this
reason the Harrod formula as usually interpreted is really a neoclassical element in postKeynesian thought, and when correctly interpreted it is of no special utility. 3. DORMANT (a) Residuary
VARIABLES variables
In the theory of causation the variables may be classified as active and dormant variables. To determine these it is necessary to plot the chain of causation in the form of charts like the following:
A-B
i
_i C
*I1 0
E
In this scheme, effect B takes place with the governance of .d and X, and effect C through the determination of B and Y. Further effect D is caused by C and Z jointly, but from cause Z alone, effect E also follows. Then it can be noticed that Z is the common cause of D and E, while D and E existing together, and even showing a high positive statistical correlation, are not the causes of each other. If Z is required to promote D primarily, E is only a side-effect. The variables given from outside are A, X, Y, Z. These only can be treated as planning parameters. B, C, D, E are dormant variables and cannot be the basic instruments of operation by the planners. Out of the dormant variables, D and E are the residuary variables, being last in the chain of causation. Dormant variables are governed, but also govern further. Residuary variables are governed only and do not govern further. Dormant variables transmit the force of causation from active to residuary variables. Residuary variables are the receptacles of the end consequences of the force of causation transmitted to them direct from active variables (as for E) or through dormant variables (as for D) or both. Active variables have one or more causal arrows flying away from them. Dormant variables have one or more causal arrows flying towards them, as well as away from them. Residuary variables have causal arrows flying towards them, but not away from them. When models do not show the direction of causation properly, their prescriptions are apt to be perverse when applied to conditions different from those for which they were invented. Thus the prime movers in advanced countries may be different from the underdeveloped countries and the policy conclusions would be
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT different. In a full-employment golden-age equilibrium, according to the Robinson-Kaldor formulation, the rate of growth of population and of increase in technical knowiedge form the ceiling to the rate of growth (as in Harrod’s identity of natural rate of growth), and provided that the government policy maintains the level of investment to utilize these opportunities fully, the rate of growth is determined. It further sets the level of the rate of profit (through the consumption propensity of entrepreneurs), and from thence, as explained in detail by me elsewhere, through the production 10cus’~ based upon Joan Robinson’s book of Blue Prints and technical production matrices of the Sraffa and von Neumann input-output type, the profit-maximizing technique is indicated which shows the capital intensity and the productivity level per wage unit and the corresponding relative-wage-profit-rate curve yields the wage rate as the residue. The same production locus (transformed into share-ofwages-profit-rate curve) shows the share of wages as a side-effect of the rate of profit and the technology. Further, from the share of wages, and as a side-effect of the consumption propensity of entrepreneurs, the rate of investment out of income (usually misnamed the rate of savings) is determined. The production locus and the rate of profit, as side-effects, also give the output-capital ratio. Thus the wage rate, the investment rate (savings rate) and the output-capital ratio are the residuary variables in this system of causation. In an underdeveloped country, with a vast population in relation to capital goods in the advanced sector, and a low subsistence wage rate, the bond between rate of growth of population and the rate of growth is severed. With huge unemployment, the current addition to the workforce does not offer a ceiling to the
919
rate of growth of employment. Investment in the advanced sector is limited then by the minimum acceptable standard of living of its workers (the inflation-barrier wage), and further by the productivity of the techniques available, and also by the propensity of entrepreneurs to consume out of profits, along with the parasitic consumption of others from the products of the advanced sector or the claims of dependent processes upon it. In this case the real wage, the technology, and the propensity to consume, of entrepreneurs are the governing variables, while the rate of profit, degree of mechanization and share of wages in income are dormant variables along with the rate of growth, output-capital ratio, and rate of savings as residuary variables. (b) Null variables In the above description of dormant variables, it will be noticed that some variables are determined variables in both situations - of full employment and of unemployment. These may be termed ‘non’ variables. Thus the outputcapital ratio, aggregate rate of investment and relative shares in income are dormant variables in both situations, as also are the rate of growth, rate of profit and degree of mechanization. Those which are residuary variables in both situations may be termed ‘null variables’ representing extreme cases of futility regarding their function as possible sources of causation. Thus the output-capital ratio and the aggregate rate of investment out of income are residuary variables in the non-employment situation as well as full-employment conditions and hence they are null variables. l3 The reason for the use of the term ‘null variables’ was suggested after inspection of Table 1 in which a determining variable is given the score unity, a dormant
Table 1. Variables Full employment (true golden-age) Unemployment (bastard platinum-age) Total score Type of column a. Unit vector or
W’
s
0
g
r
+
K
G?
r
1
0
0
0
t
t
t
t
1
1
0
0
1
0
0
t
t
t
t
1
1
1
1
1
0
0
A
A
A
A
2
2
gz
&rt
1
vector (1 0) : c2 (0 1):
b. Sum vector
(1
c. Null vector
(0 0)
_/-l-l
1) : J,
: 0,
-f-f
-Ii
980
WORLD DEVELOPMENT
variable an epsilon, E (near zero) and a residuary variable zero. In this table gl = rate of growth of the working population, g, = rate of growth of scientific advance in productivity per man, g = rate of growth of capital, r = rate of profit, w = real wage rate, s = aggregate rate of saving being the average of the propensities to save of different classes weighted by the distribution of income, u = output-capital ratio, $ = relative shares expressed as ratio of profits to wages, K is capital intensity representing the degree of mechanization expressed either as a value of capital per man or per wage unit, c, = consumption propensity of entrepreneurs expressed as a ratio of profits, and T represents the state of the technology (depicted either in a production function or production locus, or shareof-wages-profit-rate curve or relative-wageprofit-rate curve). The non-variables are never dominant as regards causation, whether it be a developed country or developing country. They are by their nature, prohibited from ever being the parameters of choice in a proper model of planning. In the models or plans in which the nonvariables are chosen as basic structural pieces and the rest of the plan is drawn up on that basis, one is bound to be confronted with the same type of difficulties which would face a householder who chooses the shape of door curtains as low and broad by his own artistic preference (and, on that basis, assumes the size and shape of doors would oblige him by corresponding to the curtains). In this sense the Harrod-Domar model (with its causation described in the previous section) is based upon two variables both of which are not merely non-variables, but of the special order called null variables. As such, the model is of no applicability at all as a planning model, whether for developed or for underdeveloped countries. Its place lay in initiating the modem thinking regarding growth. It has the utility of the ladder for the master builder because having got him to the churchsteeple it was not able to be of any further use to him. The present author is, after the foregoing analysis, unable to share the belief that importance is to be given to this model, as has been done by Mr. Paul Streeten14 in recognizing its demerits in transcendental criticism and yet thinking it worthwhile to define its constituin immanent criticism, ents more precisely, merely because some planners are misguided enough to use it. It is rendering disservice to the eradication of poverty, if too much attention is paid to improving the definitions or
methods of measurement of variables which should never be used as basic variables in drawing up plans.ls (c) Abstract
variables
of moral
choice
Another aspect of parameters of moral choice in planning in underdeveloped countries is the selection of variables which are open to ascertainment from the public and exclusion of variables which are not. Sophisticated mathematical models of choice of techniques dealing with intertemporal choice postulate that the community has a marginal rate of time preference. This parameter is not ascertainable from the public either by surveys or through discussion with their elected representatives. Nor is it possible to get it from the past behaviour pattern, as a growth situation has not confronted the particular community in the past. In any case, the strategy of growth may aim at altering the behaviour pattern (e.g. not to allow production of limousines even though there is sufficient demand for them, or to curtail admission to nondevelopment courses at universities in spite of their being popular). One has to ascertain the wishes of the common people by giving them the choices among goods to be obtained and those to be foregone. For this purpose abstract parameters cannot evoke meaningful answers. What well-thought out answer will we get from a peasant to the question: At what rate of discount
expected standard present one?
would you equate your of living 20 yr hence to the
Nor would we get a meaningful housewife to the question: Would you like the economy
answer
from
a
to grow at 4 or 6%?
One cannot take the rate of growth as given by political choice for a developing country. What one has perhaps to ask a peasant in a survey is a series of questions similar to the following: If you want your son to have a scooter and a tractor, 2.5 yr hence, you will have to keep on eating only half a pound of rice a day. Is that acceptable to you’? If not, then you can increase your daily food intake by taking a quarter pound of pulses in addition to the rice, but 2.5 yr hence your son wilI only be able to get a bicycle and a hand-tractor. Is this preferable to the previous offer? Alternatively, increase your consumption by taking half a pound of treacle in addition to pulses and rice, but 25 yr hence only look forward to your son being provided with a pair of shoes for walking and an improved plough. Is this the best alternative’?
GROWTH MODELS AND ANALYSIS OF DEVELOPMENT The sort of questionnaire tailored for each income class may be given to a random sample of the stratified population. One may get widely different responses from individua1.s but, by and large, a consensus will be visible, and the answers will be meaningful as the questions have been cast into the mould of the sociological field of reference of the person in concrete terms. No ordinary person can either visualize or give answers to abstract variables like appropriate national rate of growth, optimum rate of interest, marginal rate of time preference, rate of discount of the future, etc., without knowing how the answer will affect him and his environment. Another method used is observation of past data regarding the degree of social unrest and protest occasioned in the past when inflation of various degrees had been inflicted upon the economy. But this may give a distorted picture, for the capacity of some better-off but organized sections to protest violently may be higher than in proportion to the degree of burden inflicted upon them, and of other worse-off, unorganized long-suffering, patient groups less than what an enforced silence might indicate, though the burden is relatively higher and intolerable. Moreover, in a proper planning strategy there is no question of imposing a burden. It is only a question of relaxing a burden to allow the standard of living to rise, and little observation exists in the past as to peoples’ reaction to the degree of relaxation of the burden to the extent a constantly rising real wage will require. One also does not discover thereby whether capital goods are not more preferred to consumption goods in the wake of the country’s prosperity. Farmers may prefer small threshers to transistors as a manifestation of rural prosperity. Whatever the means, if the planner obtains the people’s choice of consumption goods in real terms, then that can be directly used for planning, for though one would be able to calculate all the other abstract variables required from the data collected, one would find it unnecessary to do so. When we are in possession of the primary data on which to base the real wage, the long-term strategy becomes known for that level of real wage. The questions themselves imply that for each level of standard of living, the corresponding increase in consumption and capital goods, a long time hence, has been worked out and is presented to the public to determine the choice. The moment the answers are tabulated and a consensus found, the strategy is indicated. What earthly purpose do the abstract quantities serve then, except for statistical records? The abstract variables are
981
purely dormant variables, being always dependent upon calculations derived from primary data relating to the determining variables. They are non-variables and not material for determining the choice of the strategy or the timeprofile of consumption. It is like the reply which Professor Ian Little once gave (in 1962) to an econometrical enthusiast who had asked for the former’s ‘subjective estimate of social marginal rate of time-preference’: I want this quantity
to be such that if you plug consumption per man in the community gets doubled in 35 years for a country Iike India. that
in your
equations,
The term ‘rate of growth’ also serves the same purpose, and for this reason basing a plan on a time-profile of growth rates, rather than on real wages, uses a model of non-variables for the underdeveloped country. In such cases it is a meaningless question to ask whether a 5 yr plan has been successful or not. for no meaningful plan based on determining variables open to public political choice was ever formulated. (d) Active variables useful as instruments ofimplementation Similar remarks apply to models assigning a role to the rate of interest as an instrument of framing a plan. In development planning, for a country with a large unemployed population the active variables determining the plan size, time structure and allocations, are the timeprofile of real wage acceptable, the technical knowledge available, the social habits of consumption of workers, farmers, entrepreneurs and landlords, and the limits to which each, when taxed by a democratic government administered as a firm state, will tolerate the burden rather than plotting to overthrow the government, along with the initial endowments of labour, skills, equipment and natural resources, and also the ascertained political priorities to parasitic sectors (either unnecessary prestigious investments like buildings of the Federal Court and State Secretariats, or necessary items like defence) and the conditions of foreign trade and aid. These determine the optimum strategy or long-term path of development. The rate of interest does not determine any aspect of this path nor does the rate of time preference perform that function. Even if the rate of interest were to enter into any calculation for drawing up a plan, as in a full-employment situation, it is the notional rate not the actual one which is required. The two may not even pull in the same direction, because for the planning of a high growth rate
WORLD DEVELOPMENT
982
when the rate of scientific advance is large, the notional rate of interest has to be taken at a high level, but for inducing private-sector investments, it has to be actually at a low level. The goods produced in each year and the instruments of their manufacture, the relative sizes of industries and the degree of mechanization of the techniques to be used is determined from the optimum path. The allocation of the known and fixed size of each industry between the public and private sector is a matter of public political choice (like the possible nationalization of certain segments of the insurance and banking business, or of steel factories, or of fertilizer production). That spectrum of discriminatory interest rates for each industry and each technique, which induces the private entrepreneurs in a composite economy (having public as well as private enterprise) to invest to the levels allocated to private enterprise in each field is the appropriate set of interest rates. Its role is that of a dormant variable again, and not a determining one for the size of the plan and composition of industry in it. It is an instrument of implementation, not a parameter for on a formulating a plan. I6 It is like putting
wide bridge the bold white line separating fourwheeled traffic from the rest, which is drawn after the width of the bridge has been decided by the resources available for this purpose, and the position of the bold line fixed by the number of lanes for fast traffic (depending upon the importance to be given to the easy flow of the type of traffic following from the settlement of claims based upon exigencies of social and economic desirability). The white line regulates the quantum of each category of traffic per hour, after the decision to apportion the road to each type of traffic has been made. The white line does not determine the width of the bridge. The models using the still more abstract terms ‘utility’ and ‘welfare’ as entities quantifiable with single values, or whose ordering is thought to be indicated through social indifference functions, are, as yet, too remote from reality to be classifiable as economic models rather than metaphysical ones, and are not discussed here. Such models are to be held in reverence like those related to what things may be wrought with prayer, and what is the nature of life everlasting.
NOTES 1. See Planning fbr Stead-v Growth (Oxford: Blacknotes on (i) one-good model, (ii) production loci, (iii) Cobb-Douglas function, (iv) multiplicity of turnpikes, etc. See also ‘Neumann systems and dependent processes’, The Econometric Annual of the Indian Economic Journal, Vol. XIV, pp. 163-190.
10. Steady
Growth,op.
cit., pp. 178-179.
well, 1965). See various
11. See the discussion and visual tabulation in Steady Growth, op. cit., pp. 76-78 (especially Chart II).
12. ibid., pp. 80-81 2. Steady Growth, op. cit., pp. 155-187, regarding the definition and effects of Wicksell structure. 3. Joan Robinson, Accumulatiotr don: Macmillan, 1956), p. 48. 4. Steady
Growth,
of Capital
(Len-
op. cit., pp. 177-180.
5. A. K. Sen, Choice of Techniques 1960), pp. 32-33.
(Basil Blackwell.
6. ibid., p. 65, bottom. 7. Steady Growth, op. cit., p. 220 et. seq. Also see ‘Investment criteria in a platinum age’, Oxford Economit Papers, Vol. 19, No. 2 (July 1967). p. 208. 8. Steady
Growth.
9. ‘Inflation March 1968),
op. cit.. p. 227 et. ~ceq.
and excess p. 30-31.
capacity’,
Seminar
(Delhi:
(especially
Chart
III).
13. ‘On meta-econometry’, Inaugural Lecture, Fifth Indian Econometric Conference (Poona: 1967), by the author. 14. See Asian Drama by Gunnar Myrdal, Vol. III, p. 1968 et. seq., containing an essay on ‘Immanent critique of capital/output ratio’ by Paul Streeten. In 1962 when the present author was given an opportunity by the author of that portion to look through an earlier draft of his paper, the comments were more constructive than destructive. In the present state of thought the comments would be aimed at rooting out the concept of aggregate capital-output ratio altogether from the planning models. The proper use of this variable, measured as current-output/fisedcapital ratio is an index of bias in technical progress as indicated in the book by the present author cited earlier, pp. 265-273. Incidentally, this form of measurement of the output-capital ratio does not find a place in the detailed list of forms discussed in the above-mentioned paper by Streeten.
GROWTH
MODELS
AND ANALYSIS
15. E.g. on the measurement of the rate of savings. See comments of the present author during the discussion on inflation and its control at the Kandy COCference of the Intemationai Economic Association on ‘Economic Development of South Asia’, proceedings in book edited by Prof. E. A. G. Robinson and Dr. M. Kidron (Macmillan, 1969), p. 363. Also see, by the present author: ‘An essay on the logic of economic policy’, in inaugural issue of the Journal of Management (ed. Jahindra Singh), Administrative Staff College of India, Hyderabad, Vol. I (Sept. 1971), pp. 121-133; and ‘Symbolic poetry in ecomathic analysis’, A.B.O.C.S. Lecture at the Ruhr University, 1971, printed in Peter Meyer-Dohm (ed.), Economic and Social Aspects of Indian Development (Tubingen: Horst Erdmann, 1975).
OF DEVELOPMENT
983
16. The deflated role of interest rate merely as implementing the desired ratio of ownership of public and private sectors was fist suggested by the present author at the disctission on ‘Role of interest in a developing economy’, 49th Indian Economic Conference (Calcutta: 1966), where it was described by the then President, Prof. I. G. Patel, in the final presentation as representing one extreme, in contrast to the other extreme view that the rate of interest is a genuine indicator of capital scarcity, and is as such a parameter influencing the formulation of plans through choice of techniques. The above discussion indicates why I consider that the two points of view are not equally valued in a planning perspective.