What is the core of Economics?

Transcription

1 What is the core of Economics? Prof. Amit Bhaduri 1 Keynote Address delivered at the National Conference on Economics Education in Schools, NCERT, New Delhi, March 4-6 th, What do we want economics to do? I think we want economics to do two things, something which I firmly believe. One, we need to demystify economics. To say that somebody is a great economist and therefore when he says that 6 per cent budget deficit is very serious for the country, this kind of nonsense you must know is a bluff. A famous economist once said, Economics is a very important subject not for what it teaches you, but not to be fooled by other economists Every time I open the television and hear pundits talking about share prices going up, India s health is much better, India is having an 8 per cent growth rate and therefore we are in a wonderful state and things are going to be solved - you must know where the bluff is.. This is the first reason why economics is important for all of us, at this level. I have tried to talk to common people and write common books which do not basically require much economics, or any economics if one has commonsense. This is because, I think, it is our duty at various levels to demystify economics. To know that a budget is really not much more than housekeeping and the only difference between budget and housekeeping is that the government can make money - the government can borrow from the Reserve Bank and can create money - so-called deficit financing - and usually a housewife or household cannot do this unless it has some overdraft facilities. This is one of the things that really distinguishes budget from housekeeping, and we have obliterated this nowadays by saying that government must not spent too much, or there is a limit. So, budget is really housekeeping: where you should spend, where you should not spend. And this is important for arithmetic but it is not something you really require deep knowledge of economics to understand. But you open the television and see the learned people and what do they talk about? Half of the things I don t understand; most of the time what are they talking about is completely irrelevant. So the first thing you need is: to be citizens with an open mind. It is not about whether you believe in left or right but with an open mind you can really demystify and look at economics for what it is. That it is really coded commonsense and whatever is not coded commonsense is really what we need to say very clearly. The second thing related to this, is to have an idea where economics meets with ideology. What distinguishes all the social sciences is that you can have your ideology: from BJP, to CPM to even more left, more right. You cannot have something that is completely neutral, but you must be honest to know where you are introducing your ideology. And the first check on this is an understanding of the numbers. I do not mean sophisticated statistics, I don t mean econometrics, with Indian data most of the time they are of not much use, except to get a professorship. Like much of the mathematics is really to show your skill, rather than to contribute to knowledge or to better understanding. I want to be intellectually honest and say that much of the use of mathematics is to show that you can put things in a much sharper way, but it is not something which gives you anything new. It never gives you anything new. 1 Keynote Address delivered at the National Conference on Economics Education in Schools, NCERT, New Delhi, March 4-6 th,

2 There is not a single social science where mathematics tells you something which you could not tell in words but what it does is to say the same thing far more sharply. It also tells you in some cases, how to bluff, I will come to that. Before I go on propounding general things on what economics is about, let me say what I consider to be the core of economics. I have been at this game, with this subject for about 50 years in different places, in different universities around the world in different teaching capacity and research institutes. I was trying to think before coming to this lecture, what actually is the core of economics? What is it ideally someone as an economist should know? And then you can tell me later, against this, what actually is there in the textbooks etc. There are about three basic areas in Economics going by the conventional classification. The first area is microeconomics. The second area is macroeconomics and the third area is quantitative applications including Indian economy, using India as an illustration of understanding information. Micro, macro and Indian economics with some idea of how to analyse quantitative information. I Microeconomics and the problem of choice If you look at microeconomics, it has two basic elements. To some extent they can be useful, to some extent they can be misused, but there are two things one should know before you can say they have some idea of Economics, let s say high school economics or first year of college. The first element is some idea of how choice, individual choice is discussed in Economics. You don t have to know Amartya Sen and all that kind of stuff but what you all really need to know is something very simple, one basic idea in the theory of choice. This basic idea is choice is made not on the basis of exact knowledge but an inexact knowledge. Well, so how do we represent this? One way of representing this is, say 2,3,5: where 2 is different from 3 by 1 but 3 is different from 5 by 2, what you call cardinal numbers. So there is a bigger difference between 3 and 5 on the number scale than between 2 and 3. Now when you not only know that something is bigger than something else, but you also know how big the difference is quantitative idea of how big is the difference - you call it cardinal measurement. However, in most cases, we do not know that exactly. For example, I might prefer apple to bananas. But I do not know how much I prefer apples to bananas. So this is what you call ordinal preference and from this comes the indifference curves. People need not know great details about the tangency conditions, marginal rate of substitution and so on, but this idea that inexact knowledge can also give a certain kind of logic. Most real life choices are made on the basis of inexact knowledge. Think about our daily life. An insurance company takes a 40 year old and a 50 year old. It is not a very good example but still it is a probabilistic example. They will ask for a higher insurance for a 50 year old. Why? They will say that the 50 year old is likely to be more prone to illness and death, so we will take a higher premium. This is not exact knowledge, this is another kind of inexact knowledge, it is a probabilistic inexact knowledge. You can devote your time to these ideas rather than a lot of time on how choice is made and how tangency condition is met, which once students leave school will never need again. All 2

3 you really need is the idea of inexact knowledge and more exact knowledge. And that should be told in two ways: one is where you are making choice of the kind as in apples and bananas, and one when it is probabilistic knowledge. When you have some basis but not too detailed basis and one where you have no basis, except some sort of... In the theory of the firm, rather than teaching all these rather absolute nonsense that nobody ever needs - U- shaped cost curves and so on (why? cut it all out), I think all we need to know is that when a firm makes a choice, it is also making the choice exactly in the same way. There is exact and inexact knowledge - in today s computer language we call it hard information and soft information. Think of a firm, if you are a businessman you have some knowledge of your firm such as what would be your cost. Your internal accountant will tell you what would be the cost the hard knowledge. You also have some inexact knowledge - you want to sell, you do not know how much you are going to be able to sell particularly if it is a new commodity, something which is a new innovation. Note that you can teach this at all levels, only the mathematics and the way you present is different. Now, if you are a businessman, this hard knowledge you would use as much as you can, make use of this information as much as you can. You will also use soft knowledge: like if you are a 70 year old or 80 year old, you would know death is sufficiently close so you would have much more interest in your security for example security of house and old age. If you are very young you couldn t care less, you don t need to think of these things. In your real life you use soft knowledge, probabilistic soft knowledge that most people die at 80 or 70 die much more than most people in their 30s and on this basis you make your plan. Similarly a firm makes plan on the basis of cost; if its cost goes up, it will raise its price, because it is hard knowledge. When the petrol prices go up you will raise prices, whether by 0.4 per cent or 0.8 percent but you will raise prices a little bit that is for sure because it is your hard knowledge. You know that tomorrow you have to spend much more. But your soft knowledge is if today you grow, let us say genetically produced food, issues such as how people will take it, whether it is good or bad, what it would do, you have very soft ideas about these. And as a business man you will do much more probing about this, about a new model car, about the new dress, whatever it is. This is what actually all microeconomics at one level needs to teach in the theory of choice which is supposed to be really the core of microeconomics (I think, much more than game theory or this that). For example, firms set prices. If you know the director of any firm from soap to an automobile manufacturing firm, how do they put prices? They look at the cost. You say this is my unit cost, the cost of producing one bar of soap and I put a 20 per cent margin and set the price. This is what is called cost-based pricing. What am I using here? I am using the cost which is the hard knowledge completely, saying that I want to use this to set my price and then the 20 per cent is soft knowledge. If with that I can sell I will then make it 30 per cent. Tata will sell their Nano at Rs.1 lakh. If they can sell sufficiently in two years prices will be raised. They will see how much they can sell. This is true of everyone; you probe the market. If you see that the 20 per cent is too high, you will reduce. This is actually the logic of cost-based pricing. You break up your price into a hard information and soft information. These are actual real life examples. You can check, if you know anybody in the board of directors, how do you set prices? This is how they do it everywhere in the world. They don t set it by demand and supply, and market equilibrium and marginal revenue and marginal cost and all that stuff that we teach and profit maximisation. Who knows what the demand curve is? What is the marginal revenue? What is the marginal revenue of an extra bar 3

4 of soap? Can you tell? If a student asks us: madam what are you teaching, what will you say? You will say that this is how it is but this is not the core of economics!!! If you look at much of what is taught as core economics including American Economic Review, Economic Journal and the so called respected journals, where does the big mathematics come from? It comes from saying that you maximise: you maximise this way, you maximise that way and this is the condition of maximisation, marginal revenue is equal to marginal cost. But this is much more to prove that you know what it is all about and if you are going to be a professional economist, you should simply know it because otherwise you will think that they know much more than you do. They don t. What they know is much more of...but not really the substance of how things work. There is a second thing in microeconomics that I think is important: the difference between what we call the income effect and the substitution effect. Take for example, India s inflation today. What do you think is the effect of inflation? Why there is inflation is a different question, but what is the effect of inflation? One way to analyse it is to say that whenever the price rises particularly of an essential commodity, let us say, food prices rise, what does it do? It does two things: it reduces your real income and it obviously raises the prices of food. Economists think of these in a way which actually orders your basket - to some extent you will try to not buy those vegetables whose prices have increased more and if there are some whose prices have increased less, you will substitute in their favour (substitution effect). There is direct substitution in favour of the cheaper versions. Second effect is your real income is less so you will consume less of everything. (income effect) This actually allows you look at inflation in a very different way. Because for those who are at the bottom, the poor, and have nothing to substitute for. They are probably consuming the cheapest variety of everything. Hence, what do they do? As their real income is going down, they will simply cut down on something else, which is called Engel s Law. They will buy food, because they have to buy everyday food and they will cut down on health and they will cut down education of their children and so on. This is a good introduction to say how poverty affects as the prices rise. The income and substitution effect is one thing and choice using soft information and hard information or exact information and inexact information is the second thing that is all I think which is really valuable in microeconomics. Now, let me come to the other part macroeconomics. II Macroeconomics: the whole is not equal to the summation of its parts This is actually my area, I do macroeconomics much more. If you take macroeconomics, what is valuable there? How do you say what is important and what is not important? You see what is important or what is worth knowing is something which you cannot get simply by looking at yourself, or very often what is called knowledge by introspection. Almost everything of microeconomics except a little bit of game theory, which I don t think is relevant here, is actually something about one individual you or me, the so called Robinson Crusoe an individual, isolated or influenced a little bit by the neighbours. What does the individual purchase, what they do not purchase, how to make choice, etc. What I was talking about earlier, whether it is a businessman or a housewife or a consumer or a producer, everybody we are talking about is in isolation. When does that knowledge fail us? That is what actually should be the core of macroeconomics. 4

5 Teaching macroeconomics is not the same as saying there is one individual, it is micro and then you put ten individuals, ten times, it is macro. It is not such a stupid question. If you put ten individuals, it will just make it ten times bigger, but it doesn t become macroeconomics! Half of American macroeconomics (before the crisis particularly, now it has changed a little bit) was precisely that and that was its problem. If you look at what goes as core macroeconomics there is a lot of mathematics and that mathematics comes from what? Exactly from the condition marginal revenue is equal to marginal cost, from the maximising individual. You think of a maximising individual, and then let s say there are n maximising individuals. How does the n work? Multiplied by n, that is all. That is how many Nobel prizes were obtained because of mathematics. But this, I think, is a false approach; the false approach has now been proved to be a false approach. In many places we ask the question: why is the whole not equal to the summation of its parts - this is what really makes it macroeconomics. The best answer to this was given by Keynes, undoubtedly the greatest economist of the 20 st century. You have to recognize that macroeconomics is about how the whole is different from its parts. Why? Because what is true for the individual is not true for the society. Now Keynes tries to explain in one fat book, in more than one book, in many ways, because it was new idea he was trying to put forth. Let us take some examples. All of you know and many of you teach the paradox of thrift. If everybody saves all their income, take the extreme case, obviously there will be no demand. So is savings good? You can easily ask this to a ten year old, you can certainly ask this to someone in class eleventh. Take another example: the wage cut controversy which actually is the beginning of game theory, also. Suppose there is one firm, which cuts its wage and cuts its cost. It helps because it is more competitive with lower costs. If most of the firms cut their cost, does it help? No, because relative positions don t change. Now go a little bit further, come to the present context, to Dr. Manmohan Singh for that matter. We want to globalise. We cut our costs, let s say in producing tea. And what do we hope to get? We hope to get better export performance. This is after all the big part of trade liberalisation. We hope to get bigger exports and to be more internationally competitive is the government s intention. Suppose all your neighbours do it, as they really do; Bangladesh does it, Pakistan does it, China does it in various ways. Isn t this the same thing as the wage cut? Dr Manmohan Singh and I were taught by the same group of economists at Cambridge and I very often think that how could they forget this simple thing! Take another real life example: you decide that I will attract industry by giving it incentives. So Mr. Modi in Gujarat gives incentives to the industries, Mr. Bhattacharya will give it in West Bengal, Mr. Navin Patnaik tries to attract industry. What happens in the process? Everybody involved is in a competitive game and who is gaining in the process? Industrialists. These are all the elaborate examples of the same wage cut controversy. These also have same ideas of savings and the paradox of thrift. If everybody saves, it does not help; it cuts down demand. This is the classic example of what is true for the individual is not true for the society. One last example, a familiar one because it is so common nowadays almost in the entire corporate sector: every corporate manager not only in India, in Germany, America, England, 5

6 everywhere, whenever a new chief executive officer comes, they say that I want my corporation to be more efficient, more lean, hungry. That is, less people must produce more. For example, Tatas have, very recently the data shows, cut down their labour cost to half in steel production and still produced five times more with better technology and so on but also by cutting down. But suppose everybody cuts down. This is what is called downsizing in the jargon - cutting down the labour force. Suppose everybody manages to cut down their labour force, can you tell me what will happen? You will have the same effect that you would have as a result of thrift. Who will purchase these goods? To some extent, it will not be as obvious, but it will be the same problem. This is why the basic difference arises between Keynesian and non-keynesian or what is called neoclassical economics. It is not a set of equations. It simply says that if you are producing for the market, what Marx would have said you are producing commodities (you are not producing for self consumption but producing for the market), you must know whether market will purchase it. And if you want the market to purchase it, you have to say whether there is demand for it. And demand, more than anything else, depends not on taste but on purchasing power of people. You cut wages of everybody. You have the same problem. But Keynes was different from others by saying that if you cut wages then there is another thing you can do: you can increase investment, public investment or other investment, so purchasing power will be more. So in some way, the basic thing which the students have to be drilled in their head is there is for a macroeconomy a demand, and this problem of demand you do not understand by looking at the individual. Because individuals have fixed income typically, and we know how much demand we have and for this amount of money what we can buy. If I think of myself or you or any one of us, we have a fixed income. But when you think of economy as a whole - this actually was the contribution - demand actually is generated by expenditure. If I say that expenditure is what gives income, how do I explain it? This is the notion of Keynesian Multiplier, probably the most beautiful notion in macroeconomics. Keynes, Kalecki and all of them have contributed to this. What is that notion? This also you can teach with a geometric series, matrix algebra and so on, but you can also teach it in the simplest possible way. The notion basically says (and you probably teach it) that the government decides to spend let us say one more or one million more on national highway. So I get the money, usually not as a labourer but as a contractor. Now I spent it on her. She keeps some of the money as savings and spends it on the next person, and so on and it goes around. If you assume that everybody saves a little, I spend 1 and she spends 0.8, he spends even less, he spends even less, she spends even less...it goes round the room and by the time it comes to the nth person, she spend a very small amount of this one. This is the idea of a convergence series. You can teach it with formula, or if you want, you can cut out the formula, so long as it is dwindling (at each round it is less) it must be like that. But what it says is that one, and that is the most important thing to understand, will have a magnified effect. The government spends one, I get one. That is only the initial impact. You would have never understood it from common sense. Somebody like a banker would not understand it. A typical politician will not understand it. For this you need to know some Economics. So when a government cuts down its budget, it is not only cutting down, what you hear on the TV, so many million dollars, it will have an impact of this sort, which you must know. So the first thing or the main thing in macroeconomics which one needs to know is that there is a fallacy of composition: what is 6

7 true for the individual is not true for the society. And out of which comes two things these examples, like wage cut, paradox of thrift and so on and then from this you go to the multiplier why one rupee spent on me really ultimately leads to four five six whatever it is, through this whole circle when it comes to the end, why it leads to much more than one rupee, why does it have a magnified effect. How the magnified effect is one divided by the marginal propensity to save, the formula is much less important. And it doesn t hold in real life. You have to do it in much more complicated ways, if you actually want to make a guess. But it is certainly true that the central idea, which is what you want, that one rupee spent will have magnified effect on how much demand would be generated. And this will not be true for an individual. So you can end the analogy between the individual and the society and this is the most important thing in macroeconomics. There is a second thing in macroeconomics which makes it different from Micro. And that was also Keynes, the first economist to get us to it. (Well it started with David Hume and so on, but one can forget about that right now) This is the notion of what is money all about. What is money? In a way it is the most difficult thing in economics. However, if you look at the crux, it is not the quantity theory, it is not MV=PT, please forget about all that. We simply need to say two things: the first is, what is the basic function of money? If I want to sell this watch and suppose you say you want to buy it for Rs.200. The price is Rs.200. You will say: it is alright, here is Rs.200, give me the watch. Then I cannot say, (well I can change the price but I cannot say) I won t accept the two hundred rupees. Neither can I say, I will like one of the pieces of your ornament in exchange of it. I cannot say this legally. If I have quoted the price, we all have to quote the price in a common numeraire. This is the first function of money: to measure it in the common numeraire. If I say something cost Rs.200, we talk of exchange, you give Rs But if I want to sell it for Rs.200. and you give me 4 dollars (approximately Rs.200) I can refuse. This is the meaning of the term, Rupee is a legal tender. If you are a citizen and if you are a resident of India, you have to accept money as a common numeraire in the mode of transaction. I might not accept anything else. I might not accept dollar. I might not accept Euro. I might not accept gold. But I have to accept the rupee. That is the meaning of legal tender. I am legally bound and this is something that the government can create. By borrowing from the Reserve Bank, by deficit financing. What does it mean? Reserve Bank prints notes; in return, the government gives that I owe Rs.100,000 and the Reserve Bank gives the government hundred thousand rupees notes. Once the government gets the money, the government can spend and that is why we say government s purchasing power is unlimited. Now link up the two, government has an unlimited ability to create money in that sense. And if the government spends the money, what does the government do? It creates the demand multiplier. Every time it spends hundred rupees, it goes round the room and it becomes, let us say, three hundred rupees demand. So deficit financing is the traditional way of creating demand and employment. You can create direct employment and expand the market much more. So you can actually link up money with deficit financing. Nothing more is needed at this stage. What I talked about so far is money as a medium of exchange and a legal tender. Medium of exchange is not enough, but medium of exchange which everybody has to accept legally. The second thing which we need to say actually somebody who put it clearly was again Keynes and the Keynesians and over which the whole controversy monetarist versus Keynesian arose, Milton Friedman came - is that there is a second function of money which is money as a store of value. 7

8 I have Rs.200 today and I may decide to spend Rs.100 or Rs.150 and the rest I decide, not to spend but save. What does this mean? I typically either hold it in currency or I buy some paper which will give me some interest. If I decide to do that what am I doing? I will spend the money sometime in the future. It is a store for me, it is store of value for me. Do you all understand this? And this is why the simple quantity theory of money is wrong. You know famous early philosopher David Hume says and this still goes around if you double the quantity of money, prices will be doubled, which is what we know as the quantity theory of money. Now, the reasons why prices will not be doubled are two. One is that money which is now coming to the hands of the people, they will hold some of it normally. The entire amount will not be spent. Two hundred rupees will not enter the purchasing power, only a part of it will. And second, if someone spends it, there will be a multiplier effect. Keynes said that there is a multiplier effect, and if there is an effect in terms of spending and demand increases with unemployment, what will happen? People will produce more. Earlier you were not producing because there was not enough demand. Now there is more demand, they will produce more. Money has led to increase in production. This will be true in some cases and not true in some cases. Tell me do you think it will be true in India today if the government spends more? Well you can decide. I think in certain sectors it will help, for example, textiles. Sometime ago, when there was a lot of foodgrain, it would have helped. That was the time when we were all talking about employment guarantee then you could have spent and I think this could be used to create more output. Today the situation is not like that, because there is food price rise and so on and the government has sort of muddled up in various ways. Like everything in economics, this is something which depends on the time when you are saying it. If you are really honest, this is where your politics comes in. The same policies do not hold all the time. The same nationalisation is not always good; the same nationalisation is not always bad. It depends on which industry. This is a politician s know. This is what you need to teach students over and over again. To be good citizens who can use their economics, this is the only thing which they need to know: that economics unlike physics unlike chemistry, does not produce the same result. The same chemicals do not combine in the same way all the time. So if something was true at one time, it is not true at another time. And when it is true is much more important - the conditions. Keynes was certainly right and he is again right today, for example in the United States there is now a lot of unemployment, a lot of excess capacity, and so on. In India, as soon as you have lot of foodgrains, other sectors can always produce usually much more. If that is true, that you have excess capacity and unemployed labour, Keynesian economics will work quite well. It is false to say that it will not work. But in some cases it will not work. And this you must remember India always has a lot of unemployment. To recount, these are the two things, I think, you really need to teach students. First, there is a fallacy of composition that is why you need to know macroeconomics. Second, money is a very special social device by which things are brought together, everybody is forced to accept it. It also links to the future, where I decide to spend more. You will have noted that this is also related to the demand problem. Why? Because the same thing, if everybody saves, what will happen to demand? You can round up the macroeconomics by saying that if everybody saves and holds their money, things are not going to be good for the economy because it is 8

9 the withdrawal of purchasing power. Anything which is held in money without being spent for that period amounts to a withdrawal of purchasing power. If you have hundred rupees and you spend seventy rupees and hold thirty rupees, you are withdrawing purchasing power for thirty rupees. And in that period, if there is shortage of demand, it becomes a problem. Saving investment equality you can leave, it is certainly not required in schools. Once they know this, they can later do it, they can also do other things, multiplier and so on. Teachers can pick up from there. The basic idea they need to know. III The third and last thing which is required is the so called Indian economics and quantitative methods. Here you know, the few school textbooks and even college textbooks which I have seen and usually circulate in India have enormous information. Actually they have information of a type which I do not know. (No, I am not joking) But you see these are information which you can get from Tata Handbook, and plenty of other books. This is not what you want to give students. What do you want to give them? One, we want to give them a kind of broad historical view: what the Indian economy was at the time of independence and what it is now. This is done in different dimensions: how our income has grown or our GDP has grown? How it has changed? How much of agriculture, industry and services? Nothing more. And then, how it is today. This every book does and I am sure every school/college does it. The second thing which they do not do is: why do you want all this all the data about GDP and so on. Why do you need it? You need it because we also want to know what this income does to the people. That is, how it is distributed and hence the question of poverty. You just look at what is happening to the top 10 or 20 percent and what is happening to the lowest 20 percent. The data is very much available and you can see what is happening. I will give you a little bit of data to give you a sense of what I am saying. We all know that India grew at around 8 percent for the last 20 years. True, statistics is not false. There might be differences by one or two percent. The rest of the world grew at something around 3 percent in the last 20 years. So India grew at a reasonable rate. Now, you look at the data on poverty. Extreme poverty, i.e., people who are below nutrition norm. The UN data and now also Tendulkar committee. You will see something absolutely striking and this will explain what I am trying to say. India in 1980 had somewhere close to one-fourth of the world s poor or less, about per cent of world s poor per cent of the poorest people in the world were in India in Since then, India had grown at twice the world average. What has happened to poverty? India s share today is close to 40 per cent of world s poor! That is the rest of world including sub-saharan Africa reduced poverty faster than India. People will pity, if you look at the nutrition standard and if you look at the health standard, and so on. The rest of the world, of course including China also, they have reduced poverty. Each and everywhere they have reduced poverty faster than India. Do you ever hear it on TV? Do you ever hear our prime minister say this? Do you ever hear our finance minister saying? Who says it? Do you hear Prannoy Roy saying it on the TV? Nobody says this. Occasionally (like yesterday) you hear so many people died because they came for this little money or for one full meal. But it is an indication of something much much deeper. If you say poverty has been reduced due to high growth, you should say what is wrong with it. This should be told to the students. Both are true. India has a very high growth; it is also quite true that India has reduced poverty much less than the rest of the world. Both are almost quantitatively incontrovertible facts, facts which cannot be contested. You might say 40 per 9

10 cent but 38 per cent. You might say Tendulkar Committee says world s poor is 37 percent. Saxena committee says 50 percent. But that is what is the bottomline: that growth is higher and poverty is higher. That is why we also hear of all these extremists problems and so on gradually gaining ground. You have to face this. As citizens of this country, you cannot avoid this and it is much better that students should be informed. They are not informed. Rather than have a lot of rubbishes - cost curves and such type of constructions - this is what they should know. In the Indian eco, we need to know firstly, the growth and the composition of output. The biggest way how the poverty grows or does not grow is how the employment situation is changing. So the second thing is to know about the occupational structure, the change in it and what has happened to employment. Our record has been disastrous exactly in the period of high growth. India grew at 8 per cent and employment grew at 1 per cent. In the earlier period India grew at 4 per cent, employment growth was 2 per cent. So employment growth has gone down we need not have to go into why and how but they need to know this because that is one of the biggest contributor to the poverty problem, middle class, lower middle class and more and more people joining the informal sector. And more and more people in disguised unemployment in villages and so. This they should know. So the output data, people who produce the output, that you produce more and more output with less and less growth in the number of employed people. That is part of the logic of the corporate. Because you mechanise, you want to compete with the multinational. The third thing they need to know is why is India a very rich country, only after the United States. I do not know whether you know this, India has the largest number of multibillionaires now only after United States. Now it has crossed 50. Only the United States has so much. Now, if I tell you something more do you know Bellery and the Reddy brothers in Karnataka (Is there anybody from Karnataka? You know Bellary?) Do you know Bellary has the maximum number of private aircrafts? Can you imagine, it has the maximum number of aircrafts in such an area anywhere in the world today? Anywhere in the world! Now this is what they need to know that extreme growth of income on the one hand and extreme poverty which is reducing at a much lower rate. We are producing billionaires and producing poor also. I think we need to explain this. These are the second thing they should know. And this is what much of the problem is about. Much of the problem of our politics, much of the problem of our political parties. One last statistics. Today you have in the Parliament, more than 300 people in our parliament are literally multi-crorepathis by official declaration of their assets. If take the the unofficial assets, I don t know who will be left. You cannot fight elections today without spending several crores. Somebody told me the average is Rs. 8 crores for a parliamentary election. So any one of us is out of politics and I can tell you and you can tell me and so on. But our next generation, if they know, there is little bit of hope. My time is gone but your time is still there and people you will be teaching certainly will be there. I think they should be sensitised to this and I think that is the real importance of economics. At one level when you teach Indian economics and you explain what is... don t be bluffed by all these demand and supply equates the price and therefore the market does the thing and people holding forth in the market. Just state in microeconomics what is choice all about precise and imprecise choice; what is income and substitution effect. In macroeconomics what is fallacy of composition all about. What is money all about, a little bit on that and how deficit financing works. And in Indian economics, how this country, and we are not the first country, is gradually moving towards producing extreme richness and extreme poverty at a level which was never done 10

11 before. We were never good at solving poverty but we were also not good at producing multibillionaires. Now we are good at both. In quantitative methods, there are two things which we need in terms of statistics and mathematics, if at all. Let me start with algebra which is much simpler. In microeconomics most of the things becomes much easier to explain with a little bit of coordinate geometry and at a slightly higher level, with a little bit of calculus. I don t know whether students have this requirement, to explain the marginal condition. Once you have drawn an indifference curve to say that this is the ordinal choice. Then, the tangency condition rather than giving it as history, you can also use calculus/ geometry to state it. This is more than what students should require certainly at the school leaving level in terms of mathematics little bit of coordinate geometry and a little bit of one variable type calculus. The second thing which we need is statistics, I don t know whether you teach regression, I think there is one thing which is absolutely basic and needs to be taught. That is central tendencies mean, median and mode, how the three different. You can calculate mean, median, mode, standard deviation for any set of numbers and can show how they are different. And then you show simply a picture of a normal distribution, where the three are together. I think that is enough. This is more than enough given what a student of +2 students can absorb. You see one of the basic problems of our teaching, this is much more for you (teachers), is that so much pressure is put on students and on teachers. I felt it with my daughters, I felt it, even more when I was teaching in JNU and even in IIT with engineers. They are bright students. But one of the reasons why it becomes so much more is the pressure that we put on students and teachers. If you are given so many books and told you teach this in micro that in macro, in statistics, in algebra, I think that does not help anybody. I have met people who have got Nobel Prizes not only in Economics, in other subjects. For people who stay in academics, what really makes the difference in terms of originality is a grip on the basic ideas. You see once you get a grip on the basic idea that there is precise knowledge and imprecise knowledge, which I put it in a certain way but there are ten different ways you can deal with imprecise knowledge and define imprecise knowledge. There is a whole theory of mathematics, which I don t understand very well, this is called fuzzy sets. Now there are various ways in which the people all over the world try to deal with imprecise knowledge. There is a whole theory of artificial intelligence. This we cannot teach them. This is not the purpose of school, colleges, and universities anywhere to teach the whole knowledge. I have taught in the most famous universities of the world. I have taught in completely insignificant institutions. Nowhere it is necessary to teach all. What is necessary at every level is for the students to get with confidence some idea of the basics, so that he does not have to mug. And that is why I tried to say what is the core of economics and how it relates to our life. What I have said, I believe, with a little bit of thinking, you all can cut out those parts. (It is another matter what will come in examination. We will come to all that). Also I have outlined what I think can be brought across to student much more easily than if you try to get all sorts of issues. Take Indian economics, it has all kind of information. You might choose not to have this or something else, but some basic information which you think is important and why it is important. I said why I think this is important today. There is so much talk of market, liberalisation and high growth. We should know the other side in that. To be a balanced citizen, you should know the two sides. In everything, you can choose something, you can have your political bias and if you are intellectually honest, you can say, this is the bias I have. It is true that I am probably much more worried and interested about the poor than most people who appear on the TV these days. But that is ones personal choice. You 11

12 can certainly say, this is what I think. But certainly stock markets is not the main part of the Indian economy. Thank you. 12

13 Explanatory Notes: Game theory Paradox of thrift Wage cut controversy Trade liberalization 13