The Hindu Business Line : Moving from `Gandhigiri' to `Gandhivaad'

`Wantlessness' ignores problems of welfare and information and thus the concept needs to be expanded to inclusive growth — a difficult task that has to be undertaken, says A. VASUDEVAN.

The release of the much raved about Hindi film Lage Raho Munna Bhai coincided with my re-reading of Prof J. K. Mehta's A Philosophical Interpretation of Economics (1962) — a book that has been neglected by most Indian economists.

The film focusses on truth and non-violence as tenets that could transform even tough individuals into humane beings. The `Gandhigiri' of the film has no economic philosophy to offer; yet, it is tangential to it.

The neglect of Prof Mehta's writing is not surprising, given his emphasis on limiting wants (`wantlessness', as he termed it unfortunately) as the end of human endeavour. The neglect is a reflection of the strong grip of materialism that is assumed to be `unlimited' — an idea that suffers from many shortcomings, as we shall see.

Economic development means mass production of consumer goods and services, the distribution of which has to be egalitarian. It also provides for augmentation of productive capacity consistent with this primary aim.

For a better tomorrow

Some Indian economists — the dominant ones of the 1950s and the 1960s — however held the view that production of capital, rather than consumer, goods should get societal (read state) emphasis for the sake of enjoying, what Sukhamoy Chakravarty colourfully described, `jam tomorrow.'

The current generation (let us call it the first generation) was thus expected to sacrifice most of its comforts so as to ensure better living standards for the succeeding generations.

Such a perspective, however, has two aspects. First, postponing consumption to a later day till the economy matures sufficiently to produce a large array of consumer goods. Those with Prof Mehta's orientation would have lauded such an effort of the first generation. But they went further to advocate limiting wants for the sake of realising a sense of well-being, much in the mould of Mahatma Gandhi, the central figure that provides a connect to the essence of the film.

Second, growth and choice. Choice being exercising choice for the sake of growth in the present . But growth could imply a loss of societal welfare and human development in the present and perhaps for generations.

Welfare economists like E. J. Mishan, on the other hand, point to the ill-effects of the growth pursuit, in that the externalities that arise out of modern factories are detrimental to living beings, a position that was subsequently taken by environmentalists.

While the position of such welfare economists would be agreeable to followers of Prof Mehta's philosophy, they would also suggest that growth often ends in accumulation of capital, with a few persons becoming richer, thereby fostering economic inequality.

Triumph of the growth economist

Economists who sought limitation of wants and promotion of social and economic welfare have, however, lost out to growth economists. But a recent twist in the tale has made growth economics more respectable.

The exercise of choice in the course of the `ordinary business of life,' as Alfred Marshall remarked while defining economics, is now regarded an essential ingredient that fosters freedom and democracy in the growth, rather development, process.

Choice, however, is not merely a macro concept: It operates at the micro, individual, level as well. It surely cannot be exercised at the macro level where there are limited quantities of consumer goods. Countries that adopted the Communist form of government and produced very few consumer goods, that too in restricted quantities, are testimony to this. In free societies, choice is considered inevitable because producers generate goods to satisfy consumer wants.

Even import controls and domestic production licences and permits would not be able to alter the exercise of choice, as our experience with a dirigiste regime from 1956 to mid-1991 has shown. It in fact bred allocative inefficiency, corruption and nepotism and undermined the very roots of freedom and democratic values.

Cost of information

Free societies are characterised by the existence of markets that provide insights about individual preferences for commodities and for wealth-creating assets that in turn influence prospective consumption. But the efficiency of the market depends on the degree of adoption of transparent best practices by the participants and the effectiveness of monitoring by the regulatory authorities.

The cost of monitoring compliance with the best market practices is often borne by the state, either in entirety or with some supplemental support from the participants.

The costs could be large but insignificant in relation to GDP. They, therefore, seem to be bearable at the macro level. But at the micro level, the costs could be burdensome for small firms that share the costs of monitoring.

More important, firms would have to continuously incur costs for finding the preferences of consumers so as to adapt the required production methods and technologies and at the same time ensure that ecological sustainability is secured. Besides, they would have to incur expenditure on collecting information about costs and sales of their competitors. More often than not, firms differentiate their products and incur advertisement and marketing costs so as to flourish and, in some cases, to stay in business.

The larger the costs, the higher the need for firms to achieve a certain critical size so as to exploit the economies of scale. Whether this would be achieved through mergers or through creative financing mechanisms, including larger ploughback of profits, is a matter to be decided by firms.

From the consumers' viewpoint, exercising choice is not costless either. Collecting information about products, their use, prices and effects on human and animal lives can be time-consuming and costly.

Where differentiated products in one area of consumption (say, medicine for body pains) are available in large numbers, it would be well nigh impossible to store in memory their comparative qualities to decide on which to consume. In the case of durable consumer goods, such as cars in the secondary market, there could, additionally be information asymmetry, as Prof Akerloff's `lemon' problem demonstrated.

The high information costs for both producers and consumers thus tend to constrain choices and question the validity of the argument that their wants are unlimited. Wants are bounded, circumscribing the choices in all modern societies.

An unusual instance of such bounded space arises when fiscal levies for specific purposes (education cess, for instance) result in some individuals foregoing some of their wants from being satisfied.

`Gandhigiri' does not touch upon the problems concerning welfare and information and has to be stretched to `Gandhivaad', wherein the recently espoused `inclusive growth' with its concomitant concept of financial inclusion has to be fitted in — a difficult task that has to be undertaken.

(The author, a former Executive Director of the Reserve Bank of India, can be contacted for clarifications at asurivasudevan@hotmail.com)

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