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A PRIMER IN ECONOMICS: Prosperity

Economic prosperity is neither impossible nor inevitable. There are scores of examples on either side of the prosperity divide. From these we can learn quite a bit about what it takes to be economically successful.

Prosperity eludes some countries while others flourish– but not because of some deep, dark, mysterious reasons. Economists know what works, what doesn’t work and why. Here I present some basic bits related to the subject from a personal perspective.

Why societies prosper

The prosperity of societies varies across time and space. Fortunes shift. Societies that were once rich, become poor, and vice versa. At any time, there are rich and poor societies. Why these variations occur is a question that has engaged many brilliant minds for centuries.

What can be done to bring about prosperity is a question not only analytically challenging but also has practical implications for human welfare. The broad outlines of the answer are clear and there can be little disagreement about it.

Stated simply, material prosperity depends on how much stuff people produce and how efficiently. Higher productivity means more stuff gets produced. More stuff produced means there’s more stuff to go around.

Stuff — Hard and Soft

I use the word “stuff” to denote all the things humans produce, trade and consume. It means food, clothing, shelter, etc. Those are the basic “hard” stuff. Hard stuff is stuff that you can eat, wear, hand over to someone, throw, etc.

There’s another kind of stuff we also produce and consume: the “soft” stuff – such as education, entertainment, health care, scientific research, etc. These are generally called services.

The richer the society, the higher the share soft stuff has in its production (and therefore consumption) bundle. Rich people spend a significantly smaller portion of their incomes on food and other necessities of life (usually the hard stuff) than the poor do. The rich are different from us, not only in the sense that they have more money but also in the way they spend.

The production of soft stuff depends on the availability of hard stuff. The world produces more soft stuff today than it did in the past is because the amount of hard stuff produced has gone up. Everything we produce and consume ultimately depends on the production and consumption of hard stuff.

Consider theoretical physics, for instance. All one appears to need for producing theoretical physics is some paper and pencil. (Story goes that Einstein’s wife was being shown around some giant astronomical observatory. “Here’s what we use to figure out the nature of the universe,” the guide informed her. She replied, “Really! My husband just uses paper and pencil for doing that.”)

But the fact is that theoretical physicists need food, clothing, shelter, and all the other hard stuff just as much as the rest of us do. Follow the chain backward and you will find that all the soft stuff depends on the hard stuff. If there isn’t enough hard stuff, there will never be enough soft stuff. The hard stuff is the tortoise upon whose back the entire edifice of human activity rests. We consume stuff because we are made of stuff. The hard stuff is important because we ourselves are made of hard stuff.

From here on, I will simply say “stuff” to mean “the hard stuff, and by extension all the soft stuff as well.”

Exchange

A society that does not produce enough stuff is poor.  An interesting question at this juncture is whether a society needs to produce all the variety of stuff that it needs. The answer is no: it can produce something and then trade its production for what it needs to consume.

Thus if it only produces rice, it does not have to solely subsist on rice as long as it can trade rice with others who produce non-rice stuff such as cars and clothes. Trade is good because it increases choices.

When trade is possible, you can produce some tradable soft stuff and trade it for the other stuff that you need. If an economy produces only software programs, for instance, it can sell software and buy all the other stuff it needs.

Thus the prosperity of a society depends on its ability to produce stuff and to trade. If somehow that ability is inhibited, it leads to poverty. Conversely, everything that promotes production of stuff (and productivity) and trade promotes prosperity.

People Produce Stuff

People respond to incentives. If what people produce is taken away from them, it inhibits people from producing stuff. Stuff can be taken away from people through legal or illegal means. The ability to reap the results of one’s efforts is a powerful incentive to produce. If one is prevented from reaping the fruits of one’s labor, one will not put in the effort to sow and tend the crop. That is human nature, and messing around with it has dire consequences.

Talking of human nature, I believe that humans are pretty much the same in any part of the world. So what accounts for their varied successes or failures as collectives? Why are some collections of humans (such as nations, states) more successful than others if indeed they are naturally, essentially the same? Why do some countries produce so many apparently bright high achievers and others so few?

The Environment

Part of the answer lies in the environment. While it is true that humans are essentially the same anywhere in the world, what differs is the environment in which they find themselves. In some parts of the world, the environment is good and in others not so good. Where you are born determines how much your lifetime earnings will be. It’s the luck of the draw. If one is born in Somalia, as opposed to Sweden, one starts the game of life with a handicap that is hard to overcome through personal effort alone.

No one has control over where one is born. So also, no one has control over the environment in which one lives. The environment has to be taken as given for an individual. In other words, the environment is “external” to the individual. But as a collective, society gives shape to the environment and determines what it is. The environment is external to the individual but “internal” to the society.

Actually, we need to distinguish between what can be called the “natural environment” and the “man-made environment.” The former is the environment which is defined by factors such as the terrain, the climate, the natural resources, etc; the latter is what humans create and includes things as the culture, the institutions, the history, etc.

One  Rupee Note

The natural environment changes slowly but the man-made environment can be rapidly changed if conditions are right. The natural environment is external to the individual and also to the collective (or society.) Contrast that with the man-made environment which is external to the individual but internal to the collective.

Thus the collective determines the nature of the man-made environment. Neither you nor the society at large can do anything about the average rainfall in your part of the world. But while you as an individual cannot do much about the legal or the political system that prevails in your country, society as a collective determines what they are.

To sum up this part of the discussion, the amount of stuff produced by society determines whether the economy grows, stagnates or declines. That in turn is determined to some extent by the natural resource endowments (the natural environment), and to a very significant degree by the man-made environment. Therefore although two societies may have the same natural endowments, they may differ markedly in terms of material prosperity due to the differing set of institutions that government the two.

Choice Matters

That gives us reason for hope since the man-made institutional environment can be changed. What’s more, over the years we have acquired the knowledge – empirically and analytically – of how institutions affect prosperity and how to design good institutions.

The question we then ask ourselves is why, when it is known which set of institutions work, some countries don’t choose to make the needed changes. For example, we know with near certainty that economically free societies prosper. Why then do some countries choose policies that deny economic freedom to its citizens?

India is a shining example of a country which has had the potential to be a materially prosperous economy. Yet consistently over the decades, if not the centuries, Indians have been denied (or have denied themselves) economic freedom. Why? One possible answer could be that Indians are not actually free to choose economic freedom.

Or perhaps they do not value economic prosperity much, and therefore they don’t choose to become prosperous. This may not be such an outlandish proposition as it would appear: the collective objective of a society could well be something else. You can choose something if have a choice but you have to have the will to choose in the first place. As the philosopher pointed out, you are free to choose what you will but you are not free to will what you will. Is it possible then to evoke within Indians the will to desire economic freedom?

To be continued…

aaa@dey.biz'
Dr. Atanu Dey is an economist and author of the book, “Transforming India.”
  • Chatrapathi Akula

    That’s most probably not true that Indians don’t value economic freedom or haven’t, it’s a small section of the society that doesn’t. On the other hand however, like the other commenter has pointed, people who are exposed to the knowledge of things that can be done by having money and also about where to invest it in so that you can get this and by procuring that what can you make/do with it etc. have no issues with this. You could also see that as a side effect, many people who are victims of today’s education in India and abroad as well, running on the lines built/constructed by the British during the colonial times, tend to spend money inefficiently mostly, in the sense that it isn’t very productive to the nation as whole. It is an individual group of people be it a family or a company that spends money/produces things so that they make a profit out of it and whatever comes a part of it goes as tax. However, what is made of the tax money is kept out of sight of people and therefore people don’t question when the money is not used for the upliftment and furthering of the existing culture/culture centric education, health, agriculture. Especially most of the people in/from the cities spend money on shopping, cinemas, clubs, electronics yada yada yada. The point I am trying to make is that, agreed if you buy things that are made by the same nation as they live in for example if India was producing quality finished electronics or fabric rather than having to import brands manufactured from raw materials or semi-processed materials exported to other countries. It hurts the economies of the villages in fields such as textiles, agriculture, art etc. Now having said that, it doesn’t mean that the villagers are not aware of their situation and causes for that, it is the way that – pointed by the author, human nature to use any means possible to get more from the least effort possible and that is what happens to villages when you force things like courts and police which are alien to most of them since these are institutions imposed on them since the times of the colonial rule. Agreed that today’s police system is supposed to be a local law and order maintaining body but why does it make the villagers hesitate to raise their voice when injustice is done to them? Why is that when a farmer dies or an artisan dies or a sculptor dies or a poet dies and the list could go on and their families depending on that profession or the art have to migrate in search for better fortune in other markets such as move to the city hoping to find a better life only to find that they lived atleast self sufficiently in their villages than having to come to a city unable to bear the living costs. It has always been a systematic imposing of this malady that disconnects the roots of a tree from the trunk and the leaves. In this case the leaves being the people and the city being the trunk who without the roots being the villages couldn’t even come to exist. Now it is also the thing that India is a nation that has always been self sufficient and enjoyed excellent domestic and international trade in a variety of fields including education, food, textiles, art etc. until the advent of the British imperialism which resulted in de-industrialization, de-institutionalization of Sanskrit based education etc which created a disconnect between the people who associated themselves English educated as different from the non-English speaking people and those who associated themselves with the English education, most of them got lost in the myriad illusion of modernity of endless consumption at the cost of civilizational ethos, culture degradation, health and environmental problems to name a few and forget the roots who they had distanced themselves from. Which non-English speaking Indian during the British rule had said I don’t value economic freedom though I am being looted and my people getting indoctrinated and my people being forced to die through famines etc? Which non-English speaking Indian said I don’t value my property, my profession of making pots or making footwear or sculpting temples or architecture or agriculture being snatched away from me so that I can manufacture for the sake of the foreign consumption while I die everyday to buy coal and electricity to live when I have no food and soul left that I can call as authentic and mine? I wouldn’t claim or conclude by saying therefore for the above reasons Indian’s can’t be said to not value economic freedom but I do hope the author or the people reading this article will keep in mind or already have observed this. However, I would say that from my observation from living abroad and in India and travelling to villages, having observed whatever small part of my world I observed, that it is unfortunate that many people who live in the cities don’t care where their money is invested and what they buy and where what they buy comes from and because of this willingness and lack of knowledge that they don’t invest back into the roots so that their professions of art, agriculture, education systems like the gurukula are equipped with modern environment conscious equipment and knowledge are nurtured and developed without making them leave their house and live as a pariah in their own country. Just for a day if you travel to a village thoroughly and a city thoroughly and observe, analyze and see what is different and why the difference you will find the answer immediately that it is not that the villages don’t care or they aren’t as intelligent as the citizens are but infact it is these very citizens that deliberately through organized stealing/scams and what not, or unknowingly/carelessly just go on living as parasites feeding their own purposes while their own nation, civilization is being eaten away. I am not suggesting or saying that therefore the citizens should give up English education and stop being tech savvy and fashion conscious, all I am saying is fine what is IS, but realize, gather the will to know where they come from, what can you do to develop your roots, how do you empower this great nation and its people who were once the people whose families gave their lives being forced or voluntarily for your happiness and comforts today. Invest in their happiness, their progress, therefore promoting the cultural diversity and civilization ethos of this nation. This doesn’t only apply to India alone but to every nation infact, so I hope the author would pardon me if I have spoken wrong anywhere and I have added my voice as well to this good willed conscious effort to share knowledge.

    Dhanyavadamulu,
    Itlu
    Chatrapathi Akula
    Student Software Engineer, Robotics
    University of the West of England

  • Stinger

    Gandhi confused the Indian mind. He made being prosperous,being rich a sin. But Indians have always valued wealth. We are the culture which worships Lakshmi, the goddess of wealth.

  • Ittiam

    Other reason why Indians are not choosing economic freedom is ‘Ignorance’.. People may not know what is good for them owing to cognitive distance between good policies and individual benefits accrued owing to them