Home > 2018 > Twin Birds at Bay: The Economics Nobel Prize for 2018

Mainstream, VOL LVI No 47 New Delhi November 10, 2018

Twin Birds at Bay: The Economics Nobel Prize for 2018

Monday 12 November 2018

by Atanu Sengupta and Sanjoy De

Introduction

TheNobel Memorial Prize for Economic Sciences was started from 1969. It was a rather late realisation of the donors of the prestigious accreditation. Controversies arose from the beginning. Some said that it was a resonance of the power of modern world that yields in its best form in the discipline called Economics. In a way, it seems to rehabilitate the Foucaultian concept of knowledge as power. Others, who were less critical, argue that the broadening of the prize is the bowing of the prestigious echelon to the reality of the present-day world. It is a world essentially dominated and dictated by Economics—the language in which business and politics speak.

In recent years, there has been a tendency for the Nobel Memorial Committee to confer it to the less treaded path of mainstream Economics. In 2017, it was awarded to the ‘Nudge’ theorist, Richard H. Thaler. In 2018, it is awarded to the climate economist, William D. Nordhaus, and the growth theorist, Paul Romer. It is difficult to see how they may be bracketed within the same set though they may be related. In fact, this bracketing surprised the economic world. Numerous attempts have been made to rationalise this somewhat eerie decision. We, however, feel that here lies the deeper recognition that goes beyond the face value of what the supporters (and/or critics) think.

Nordhaus’ Contribution

Nordhaus worked in building up an integrated model of environmental parameters and economics, popularly known as Dynamic Integrated Climate-Economy Model, or DICE. In this approach, Nordhaus was the first to bring in the concept of carbon tax and carbon credit that basically focuses on the government’s intervention and international recognition of past prejudice.

Mainstream Economics is completely mum (or dumb) about the role of natural resources. It is a model of high-mass consumption society (a la W.W Rostow) where the main aim of Economics is to feed the desires of consumers—whether real or manipulated. All the economic activities—consumption, investment, employment and others—are to be judged at the altar of ‘consumers’ sovereignty’.

It took nature in the background as almost given and unaltered by such an expansion of consumer society. This is in complete contrast with the classical thinkers (Smith, Ricardo, Marx, Mill, Malthus and others) who visualised the human society as an interaction between man and nature. In fact, this is the definition of the labour process by Marx. Ricardo, on the other hand, defined rent to be the ‘original and indestructible property’ of land—that is bestowed by nature.

Classical economists felt that nature was performing two roles—to provide the platform of economic activities and to absorb the ‘leftovers’ (garbage and wastage) that the humans produce in this role as economic agents.

Ricardo forcefully argued that the rent of land will rise with overuse. Marx visualised a society of social and natural harmony. To Smith, man is a product of nature itself. They felt that human development cannot go unabated and limited by the restrictions of nature. The famous prescription of Malthus of a faltering foodgrain production and resulting decline in population was an indicator of such a phenomenon.

Mainstream Economics assumed an infinite capacity of nature to supply the platform and absorb the waste. This assumption made the neo-classical model free of the constraint of land and Malthus’s prescription of deteriorating natural atmosphere with overuse.

It was the environmental economists who broke the proverbial sleep of Kumbhakarna and forced it to open its ears to the trumpets of nature. By itself, a mature economy would not yield to the calls of nature. The warning-bell is the environmental degradation. Use of tax and strict government policies are the only ways to stop this impending doom.

Another interesting concept of Nordhaus is the idea of carbon taxes. It posits that carbon emission is historically high where there is industrialisation. Ever since the industrial revolution of Britain, it was the Western world that was traditionally responsible for carbon emission. Industrialisation added to their lifestyle, consumption and pleasure. The capitalist society gave all its fruits to the Northern men and women. People in the Southern region were deprived of such desserts. They languished in poverty, famine and mal-nutrition—a saga of the colonial rules of the Western powers.

Only recently, some of the poorer brethren have woken up and added to the precarious level of carbon emission. Here lies the international battle between the old doers and new doers about the responsibility of carbon emission. In short, Nordhaus has opened up a bleak history that mainstream Economics wants us to forget. Here we see Nordhaus laments: “The policies are lagging very, very far—miles, miles, miles—behind the science and what needs to be done” in his effort to transform the dumb ears.

Romer’s Contribution

 

Paul Romer was honoured for his contribution to the development of the theory of the endogenous growth model. In it, however, he is not alone. He shares company with eminent economists such as Kenneth Arrow, Robert Lucas, Grossman, Helpman, Avinash Dixit and many others. Romer’s contribution is more technical.

The neo-classical growth model, for which Solow was designated the Nobel Prize that was sadly missed by Trevor Swan, postulated the technical relationship between per capita growth and capital accumulation. In neo-classical Economics, capital is merely a stock of goods that can be used for producing more goods. However, in order to maintain the assumption of perfect competition, Solow has to take recourse to the law of diminishing marginal productivity. Thus, growth cannot be sustained in the long run. Technical progress was supposed to be treated like the manna from heaven.

Romer and the innovators of the new growth theories persuaded a completely different logic. Romer admitted that the idea of capital as given by Samuelson and Solow was hollow. There was a bitter debate between the two contributors on both sides of the Atlantic regarding the nature of capital-capital controversy. The main carrier of the debate from Cambridge, England was Prof Joan Robinson—a non-recipient of the Nobel Prize.

She virulently argued that there cannot be any unique relation between the stock of resource, known as capital, and its return. In the same pen, a shopkeeper writes the list of prices (or quantity) of his product, while Einstein writes the theory of relativity. It is highly possible that a technique, which was producing less return at a lower level of capital, will produce a higher return at a higher level of capital. This is called re-switching of technology—an idea that makes the neo-classical theory of capital illogical without basis—into thin air.

Samuelson admitted it and defined a new surrogate production function. Romer admitted it and did away with the concepts of capital. He defined capital to be a combination of intermediate goods each embodying an idea. When a new idea is generated, the range of intermediate goods rises, giving a false denomination of capital accumula-tion.

Romer was thus able to provide a logical pathway to capital accumulation. It is merely the spreading of new ideas. In this, he is merely reiterating the voices of Schumpeter or Karl Marx as written in Capital.

In Capital, Marx stated that perfect competition cannot be a long-term dynamic solution. This is because, in the long-run, under perfect competition, all capitalists earn zero or normal profit. In order to gain extra, capitalists have to innovate in a way so that profit is raised by way of innovating new products that fetch them a larger revenue and/or at lower cost. Hence capitalists thrive on a continuous stream of innovation, each sparking a profit for some time and then weeding out in the long run. Innovation and new ideas are thus prime movers of the competitive capitalist structure.

Again here, Romer has to bring the new idea of monopolistic competition—that is developed by Robinson and Chamberlin. This type of market assumes a large number of buyers and sellers competing with each other but each has a set of consumers who are loyal to the brand. Thus, brand loyalty, advertisement and selling costs, relative stickiness of price—all follow from such a market. In the analytical model of growth, though, Romer is more restrictive following Chamberlin’s assumption that cost per unit remains the same for all producers.

Romer’s concept of the capital market as a monopolistically competitive market of intermediate goods that embodies this idea is in close proximity to classical Economics, and notably Marx. This point was already noted by Professor Ratan Khasnobis in a Bengali article. The most revolutionary is his idea generating input and output. This is a complete breach from the neo-classical Microeconomics where inputs and outputs are treated as completely different entities. Thus, by using seriously non-neo-classical concepts that are alien to it, Romer was able to derive the role of ideas in fostering growth.

We are, however, sad to add a caveat. He gave us the surprisingly horrendous idea of ‘Charter cities’. He argued that generation of ideas and use of ideas are two separate things. The former is the privilege of the First World countries. The Third World countries should use the ideas generated in the haven of the knowledge hubs that reside in the First World countries. He argued that the Third World countries could not develop by themselves. They should offer some of their leading cities to the guardianship of the First World countries. These are called Charter cities that will be developed and later handed over to the Third World. The poor people of the Charter cities would not necessarily have any democratic privileges such as voting rights. Also the law of the original country may not be applicable here. Unfortunately, we find a staunching smell of the ‘white man’s burden’ and a lack of historical sense here. (Aditya Chakraborty, The Guardian)

Conclusion

The link between the Nobel winners in Economics of this year is clear. They have treaded outside the ambit of neo-classical rigidity. Answers to some serious problems of the modern civilisation still lie in the ambit of the classical world. In effect, the Nobel Committee has accepted the limitations of modern mainstream Economics in answering some of the fundamental problems of our time. This is an important pending recognition of the Nobel Memorial Prize. In effect it signifies an indirect gratitude of the Nobel Committee to a bearded philosopher whose bi-centennial was observed this year.

Atanu Sengupta is a Professor, Department of Economics, Burdwan University, Burdwan. He can be contacted at e-mail: sengupta_atanu[at]yahoo.com

Sanjoy De is a Research Scholar, Department of Economics, Burdwan University, Burdwan. He can be contacted at e-mail: sanjoyde2000[at]gmail.com

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