The title of Meghnad Desai’s recent book, The Poverty of Economics: How Economics Abandoned the Poor, is a clear pointer towards how the discipline of economics, since the time it evolved from the late 18th century, systematically kept the interests of the poor at the periphery.
As he says in the foreword, “… much of what passes for economic policy thinking is invariably and almost casually hostile to the poor”. How did things come to such a pass? This is the question Desai tries to answer by drawing an arc from Adam Smith to current day economics.
Desai argues persuasively that Smith’s work is rooted in an ethical framework where the market is seen as a social construct. The economy, for Smith, is an interconnected social process where the benefit of the largest number of people led to wealth and prosperity.
It was under Thomas Malthus and David Ricardo that political economy turned away from the ethical moorings of Smith. Under Ricardo, the first attempt to make economics an exact science was attempted as he formulated laws on how the economy worked. With Ricardo’s sole focus on distribution of total income, “Political economy is no longer the friend of the poor.” (page 98).
It was the fight for universal franchise in Britain and other parts of the Western world from 1815 to 1928, which led to many important social and economic changes specifically for the poor and eventually led to the formation of the modern Western welfare state.
Desai’s special fondness for Arthur Cecil Pigou comes out shining in the chapter ‘The rebirth of political economy’, where he discusses, in some detail, his views on economic welfare, income redistribution, and even the environment.
Pigou also was clear about the inefficacy of free markets and pioneered the study of Welfare economics. But Pigou’s ideas failed to gain much currency within mainstream economics, eclipsed as he was by John Maynard Keynes, who brought about the Keynesian revolution in economics. Keynes’ ideas were to dominate the worlds of academia, as well as policy making for the next few decades.
How the ideas of Keynes were reshaped and re-imagined in the US in the economics departments of Harvard and MIT and how that led to a backlash from the more traditional Cambridge, UK, economists, many of whom were Keynes’ students, is the most interesting chapter of the book. This was also an era where the West saw the expansion of the welfare state and helping the poor began to be seen as the political responsibility of elected representatives.
But the high inflation of the 1970s and the ensuing stagflation in West in 1970s led to the monetarist backlash against the Keynesian consensus of governments stepping in to revive the economy from its slump. Milton Friedman and his monetarist school and later, the new classical ‘rational expectations’ school from the University of Chicago led this counter movement in the 1970s and ’80s.
Desai says that the rightward shift in Western politics in the 1980s reversed many of the hard-won progressive achievements of the 1950-60s.
But it was not tight money policies of the West that slayed the beast of inflation in the 1980-90s but a shift of global manufacturing to East Asia and China, which flooded the Western markets with cheap goods, as Desai rightly remarks.
If the 2008 global financial crisis dealt the first blow against this right-wing economic consensus, the 2020 Covid pandemic banged the final nail in its coffin. The US Fed’s quantitative easing became the policy mantra in this era. Desai is brutal in his criticism of the US Fed that was more keen to serve the interests of the discredited bankers and corporate sector.
Economists of all hues and shades had no solution for the Covid crisis. The woefully inadequate investment in public health, even in the West, was tragically exposed during the pandemic. Desai ends the book with policy prescription on a sensible basic income strategy, which should be seen as a supplement to the various other government welfare measures.
This book, though written in a lucid manner, may largely be of interest to students of economics. Though not strictly a book on the history of economic thought, lay readers curious to know how the discipline of economics evolved over the last two centuries would find it interesting.
Click the link to check out the book on Amazon.