Amartya Sen, on the Recession, Adam Smith, Keynes, and Kerala

I was recently talking to a financial consultant visiting from India about the state of the Indian economy (she recently married my cousin; congrats. P & S!). She seemed to think that, despite how gloomy the Indian television news analysts tend to be, the Indian economy is actually continuing to grow somewhat even as western economies are sliding into a deepening recession. A quick look at the Economist’s latest country data for India seem to confirm that outlook: India’s economy is still forecast to grow at a 5% rate this year. That’s down from 9-10% in the past few years, but growth is growth. (She suggested that Indian business news analysts might be channeling the gloom of their western counterparts, rather than using actual data particular to the Indian economy.) Have readers seen other data about the state of the Indian economy as a whole?

That might lead us to Amartya Sen. Sen has an essay re-appraising of the works of Adam Smith in light of the current global economic recession in a recent New York Review of Books. His basic point seems to be that Adam Smith was right, though perhaps hardcore free market types today tend to misread Smith as advocating unregulated free markets. Sen also notes that Keynes is currently more popular than ever, though he argues that Keynes’ contemporary at Cambridge, Arthur Cecil Pigou, might be more helpful to us today because of the latter’s work on the role of behavior in shaping markets (behavioral economics), as well as welfare economics.

In a discussion of the possible role that reforming health care might play in government-supported economic recovery programs, Sen makes an interesting side-note about health care in Kerala as compared to China:

A crisis not only presents an immediate challenge that has to be faced. It also provides an opportunity to address long-term problems when people are willing to reconsider established conventions. This is why the present crisis also makes it important to face the neglected long-term issues like conservation of the environment and national health care, as well as the need for public transport, which has been very badly neglected in the last few decades and is also so far sidelined—as I write this article—even in the initial policies announced by the Obama administration. Economic affordability is, of course, an issue, but as the example of the Indian state of Kerala shows, it is possible to have state-guaranteed health care for all at relatively little cost. Since the Chinese dropped universal health insurance in 1979, Kerala—which continues to have it—has very substantially overtaken China in average life expectancy and in indicators such as infant mortality, despite having a much lower level of per capita income. So there are opportunities for poor countries as well. (link)

Interesting that Sen singles out Kerala; I wonder where he got that information from. Also, I wonder what the differences are between Kerala’s current health care policy and that of other Indian states. (Or, is this just yet another case of “everything is better in Kerala”?)

Also see: Wikipedia on Health Care in India, Palliative Care in Kerala

41 thoughts on “Amartya Sen, on the Recession, Adam Smith, Keynes, and Kerala

  1. will the real adam please stand up. please stand up

    He was concerned about potential problems with the separation of management and ownership. He wrote of the directors of limited-liability companies that “being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”

    i think the stock market is a horse;s arse and those who speculate are just there because they think they enjoy smelling the horse’s queef.

  2. hardcore free market types today tend to misread Smith as advocating unregulated free markets

    Sen’s wife Emma Rothschild is an economic historian and has written quite convincingly about Smith’s ironic use of the notion of the ‘invisible hand’ as opposed to the dogmatic interpretation that the Chicago School types developed.

    I don’t have any hard data on health in Kerala off hand but check out the Centre for Development Studies (Trivandrum) website (usually a good place to look); also this website, although the link to statistics is down at the moment.

  3. kerala is just known in public health circles as a place that is pretty well developed by development scale measures, esp health parameters. it’s esp notable b/c they’ve made developmental progress w/o being a rich state. there are many parts of india that are still seriously lagging behind on various developmental measures, esp things like infant and maternal mortality.

  4. re: Indian growth — by most measures, I think India will continue to grow

    • its coming from a VERY low base (<50% per capita GNP than China)
    • its growth is internally led (e.g. mass market, growing middle class consumers; folks getting a cellphone for the first time, or internet access; “new middle” tends to be less cyclically elastic (one you have a cellphone you rarely go back) rather than “high middle” (you don’t need as many designer clothes in a downturn).
    • its credit crisis has always been “too little credit” rather than “too much”

    re: Kerala — no socioeconomic analysis of Kerala is complete without recognizing that up to 25% of the total economy is remittances from abroad. It works b/c the best and brightest are shipped abroad and are a veritable spigot of $$$ that the locals tap.

  5. Have readers seen other data about the state of the Indian economy as a whole?

    The latest quarterly report showed agriculture and manufacturing had negative growth year on year. This is particularly troubling since the UPA government had focused its efforts on these sectors, to ensure that growth was more broad based than just IT gains accruing to the middle class. While manufacturing slowdown has a significant relationship to the global economic meltdown, the agriculture slowdown is not as explainable (I assume there might be theories based on migration etc., but I haven’t seen much convincing data).

    One interesting observation I’ve seen made is that the meltdown will hurt India far less than China because a lot of China’s production is inefficient due to massive state subsidies, and the output is mostly targeted for external consumption rather than internal consumption, which is much more the case in India.

  6. Since the Chinese dropped universal health insurance in 1979, Kerala—which continues to have it—has very substantially overtaken China in average life expectancy and in indicators such as infant mortality, despite having a much lower level of per capita income. So there are opportunities for poor countries as well.

    6 · vinod said

    re: Kerala — no socioeconomic analysis of Kerala is complete without recognizing that up to 25% of the total economy is remittances from abroad.

    Also, importantly, I don’t know how much in the red Kerala’s state budget is. Low cost services are certainly possible if profitability isn’t an object (not saying that it is the case in Kerala, but I think most Indian state governments have huge budget deficits, and I don’t know the cost breakdown for Kerala healthcare).

  7. Schmen should visit Kerala sometime, and go to a government hospital. He is living in the 70s. Private healthcare is booming in Kerala, no one in their right mind will go to a government hospital.

    Kerala’s balance sheet is a mess. If the annual Sabarimala pilgrimage doesn’t happen one year, the state employees won’t get their salaries. Incidentally, that sort of guarantees that no terrorist will attack that pilgrimage, because the Wakaf board and Muslim schools also runs with money from there. Not a bad way to ensure communal harmony, I guess.

  8. Rahul — all of the information you are looking for is on the Kerala state government budget website. In particular, look at table B-13, and table b-16(a). Page b-38 is also interesting. Please let us know what you found when you’ve compelted your analysis.

    In brief: Kerala ranks with Andhra and Punjab in per capita tax revenue, tax revenue as a percetnage of GDP is on the high side, but lower than Karnatrak or TN (southern states are high tax states). Kerala’s Health expenditures are higher than average, but not at the top. Ity’S debt to GDP ratio is lower the W. Bengal or UP, higher than Gujurat or TN.

  9. 10 · Ikram said

    (southern states are high tax states).

    It is amazing to me that a country like India, which was founded with the socialist ideal, has regressive taxes such as sales and octroi be the dominant form of revenue for the states. Does anybody know what the historical basis for no state taxes was? Was it to cement more central control of the states?

    all of the information you are looking for is on the Kerala state government budget website. In particular, look at table B-13, and table b-16(a). Page b-38 is also interesting. Please let us know what you found when you’ve compelted your analysis.

    Thanks for the link and the summary, it is very informative. I am lazy/busy right now, and will consume your regurgitate for the time being.

  10. His basic point seems to be that Adam Smith was right, though perhaps hardcore free market types today tend to misread Smith as advocating unregulated free markets.

    It helps to have a brilliant wife whose primary research deals with Adam Smith’s thoughts on the free market.

  11. There’s an NDTV talk show with Amartya Sen by Shweta Rajpal Kohli: ‘Ride the Recession’ done today, March 6 – with an audience of Delhi University students – DSE, SSC, SRCC, LSR, etc.. (22 min)

    I agree in general terms with his basic point about (i) the ‘parasitic’, ‘wasteful’, ‘self-serving’ nature of the financial sector, especially in the US (ii) the enormous distortion caused by this, and by employing physicists and mathematicians on Wall Street. (iii) That India is not nearly as badly impacted because this distortion did not go as far (though it was well on its way). IIT and IIM placements in the top investment banks have slowed, and poor blokes now have to accept jobs with regular companies, who actually, like, make real stuff.

    He also makes some comments on Obama, Slumdog Millionaire, the Left in India, the Indo-US nuclear deal, India vs China, HDI vs GDP, stimulus impact on fiscal deficit, etc though what he actually said is hard to decipher. My complaint – in the literal sense of the term, Amartya Sen does not articulate very well. He writes fabulously, has a good sense of humor too, but as a talk show guest or interviewee, he’s not stellar.

  12. 14 · oldMarty said

    My complaint – in the literal sense of the term, Amartya Sen does not articulate very well.

    It’s not entirely his fault. He had cancer of the mouth as an undergrad, and the radiation treatment in Calcutta destroyed the bones in his palate, which he had to have removed in had his palate removed because of cancer when he was in his late 30s.

    He writes fabulously, has a good sense of humor too, but as a talk show guest or interviewee, he’s not stellar.

    I don’t agree about his writing, but the one thing that comes through in all his talks, as an interviewee, is his fundamental decency (the phrase is cliched, but I’ve never felt that about another public personality. It’s probably because of the serious, and deeply humble way in which he interacts with questioners and the audience.)

  13. 6 · vinod said re: Kerala — no socioeconomic analysis of Kerala is complete without recognizing that up to 25% of the total economy is remittances from abroad.

    I don’t know the particular’s of Kerala’s budget deficit, trends in allocations to health etc. (okay, too lazy to look it up :-) But, reg. the contribution of remittances in supporting the Public Health system:

    1. Kerala’s public health system was comprehensive even before the remittances started flooding in. (If anything, the system has become worse over time in terms of expansion, quality, commitment etc.)

    2. Remittance adds to the state’s revenue and public health allocations primarily through sales taxes and stamp duty on real estate deals. There is no state income tax.

    3. Now more and more private facilities are coming up, so, I would expect the pressure on the Public Health system to be easing up with the neediest getting better access. Not all good news, as the exit by the rich is more related to quality differences, rather than any social welfare motivated willingness to pay. (Kerala’s well off are less disdainful of accepting/dealing with public facilities compared to, say, similar demographic groups in many of the North Indian states, so exit, I would guess, is primarily because of the steep fall in quality.)

    Another very crucial point (not sure of current situation, though) Kerala used to be quite good at acquiring a disproportionate share of Central Govt. health allocations. Corruption and lack of political will elsewhere worked to Kerala’s advantage. For e.g., till the last decade, Kerala used to get more than half (or thereabouts) of the entire nation’s Integrated Child Development Scheme (ICDS) funding (Govt. of India’s flagship child and maternal food and nutritional supplementation program)

  14. and the radiation treatment in Calcutta destroyed the bones in his palate, which he had to have removed in had his palate removed because of cancer when he was in his late 30s.

    Ok, that sentence fell in the chasm between edits, but I think it is clear what I meant. BTW, you can find an anecdote about his surgery in his nobel autobiographical essay.

  15. 15 · Rahul said

    It’s not entirely his fault.

    OK. To round out my point, his entire public speaking manner leaves a lot to be desired. Having seen him speak at several occasions over the past decade, it isn’t just his lack of clear articulation that has bothered me – you can find him playing with his hair during an interview, making imaginary towers with his fingers, often not making direct eye contact with his audience or the interviewer/host, reading from a prepared text in a talk with complete lack of emotional audience-connect – when a more extempore style would fit the occasion etc. On most of these lapses, the media give him a total free pass. I will not add more to this either, it is a subjective impression, should be taken as such, your mileage may vary. I still think he writes quite well.

  16. 19 · oldMarty said

    On most of these lapses, the media give him a total free pass.

    That’s only because he obliges them with the occasional nip slip.

  17. often not making direct eye contact with his audience or the interviewer/host, reading from a prepared text in a talk with complete lack of emotional audience-connect – when a more extempore style would fit the occasion etc. On most of these lapses, the media give him a total free pass.

    love is blind my man.

  18. 5 · sparky said

    kerala is just known in public health circles as a place that is pretty well developed by development scale measures, esp health parameters. it’s esp notable b/c they’ve made developmental progress w/o being a rich state. there are many parts of india that are still seriously lagging behind on various developmental measures, esp things like infant and maternal mortality.

    Does any one know whether Kerala is rich or not? It does not seem particularly poor by Indian standards. The per-capita income is certainly low (lower than many other Indian states), but given the anecdotes about its economy being kept afloat by remittances from the gulf; we probably need a measure that captures that money in the per capita figures (I suspect per capita income does not capture it) to get a real data point on whether a “poor” state can have far better developmental indicators than “richer” neighbours.

  19. 11 · Rahul said

    It is amazing to me that a country like India, which was founded with the socialist ideal, has regressive taxes such as sales and octroi be the dominant form of revenue for the states. Does anybody know what the historical basis for no state taxes was? Was it to cement more central control of the states

    Primarily.

    BTW, Why do you call Sales tax regressive? Presumably the rich consume more, so will pay more tax. Sounds progressive to me.

    Personally, I am a bit unclear what octroi is exactly and am too lazy to google.

  20. Kerala’s health care system is definitely good. However the quality of some of the government hospital facilities are pretty pathetic. The best doctors and surgeons in Kerala were employed by the Goverment, the recent economic boom is changing that. Even now the best hospitals in Kerala (in terms of quality staff not the quality of the surroundings) are run by the government. People often put NRI remittance as the number one reason for anything good in Kerala. I strongly think the remittance is the single threat to many traditional good things in Kerala. There are so many private hospitals with five star facilities, but they cannot attract the best talent in Kerala. Some of the best talents still are working in Sri Chithira, and other famous government medical colleges.

    Infant mortality rate in Kerala is on par with developed nations. Female literacy rate and the doctor-population ratio are the reasons. Kerala’s doctor-population ratio is better than that of California. That has nothing to do with remittance. If you are doctor who studied with NRI money, you will more likely be with your parents practising in foreign countries. Kerala mills out more nurses than any other region in the world. The motivation to become a nurse was there in Kerala in the 40s, 50s and 60s, when there were not many opportunities outside. Women of religion were drawn to it as a form of service to the humanity. The higly imbalanced money flow from outside made a mockery of earlier advancements of the social causes in Kerala. I still think many good things in Kerala is going down for the same reason.

    I personally had a better experience in hospitals(major hospitals with doctors) in my last couple of visits. Some of that could be attributed to the cultural communication advantages. The doctor(s) that I met, put the patient’s better health as the focus as opposed to medicine and data fed from the pharmacecutical companies. By saying that, I am not forgetting that fact that all the methods are developed in advanced countries. I personally know many peple from our community go to Kerala for better treatment for hard to treat chronic illnesses. Those illnesses are treated aggressively by the doctors here leaving the patient with long term disabilities. The same diseases are treated much less aggressively, but efficiently by the doctors there. The cost could be the primary factor on that one. Like anything, there are bad faces of that system in many (not all) hospitals in Kerala primary health as well as on advanced health care. But that neglect is on the facilities and management, but not largely on the abilities of the personnel.

  21. All the best and bright ones in Kerala did not ship abroad. They still continue in India.

  22. I personally had a better experience in hospitals(major hospitals with doctors) in my last couple of visits. Some of that could be attributed to the cultural communication advantages. The doctor(s) that I met, put the patient’s better health as the focus as opposed to medicine and data fed from the pharmacecutical companies.

    I look forward to the day that starts happening in the USA.

  23. The financial flow from/to Kerala is not as imbalanced as it is sometimes made out to be. The large remittances going into Kerala are tempered by the the revenue that is generated from the export of such wonderful dishes like masala dosa and Kappa n’ Minnu curry which go for an average of $7-$8 per serving in countries like the United States.

  24. India’s growth is impressive, but the big money is going to the upper echelons of Indian society. The upper segment’s consumption in India is very miniscule. The reinvestment of the returns of the rick in India is providing jobs for few ones in the major cities. India’s growth has to be on its agriculture. Land reallocation is long overdue in India. Jim Rogers of old Qunatum fund is one of the few of my favourite hedge fund managers. He has forecasted several waves of the past and present economic events. He is forecasting farming to be the next big wave in the world after the asset boom. The farm sector has contracted in India. India is caught with its dhoti down on this end. BTW I like Manjeet Kriplani, but she should stop using terms from people like Surjit

    The asset ballon is deflating in the west. It has to do the same thing in India. But the Indian assets are held mostly by individual investors without much debt. They are not likely to write off their losses like a western bank. That means protracted spiralling down to the bottom. When the rest of global economy would be looking up after this cycle, India will be trying to come up for air. Moodys will see rupee valued at 65 per dollar in another 2 years. Which will bring more outsourcing to India with better productivity, but the real earning power of the call center type workers will go down. Uber urbanization and western model central bank economy is not what India needs, but that is what they currently want.

  25. He writes fabulously,

    ‘Development as Freedom’ was soporific. It made a great point, but one which could have been made in a 20 page paper. Honestly. All that unecessary profundity made our camp the butt of libertarian jokes. I mean Sen’s capability framework decisively kicks Nozick’s ass. But homeboy has to be a little sharper. (In contrast, Nussbaum defends herself beautifully, even from her strident uber-feminist critics; she is an amazing speaker — check the U Chicago Law School podcasts; but few beyond the choir listens to her sensible and well-argued positions).

    I like some of papers from back in the day, but his monograph on inequality was horrid, if I remember correctly.

    Economists, more often than not, are horrible public speakers. But dear Marty, thanks for that link. I might have to watch it :)

  26. ~5 % growth of the Indian economy is not adequate. In real terms it is probably a recession, since it is insufficient to offset the growth in demand for employment. This is an example of the soft bigotry of low expectations. India can do better even in this climate, but the current situation(elections are near) puts constraints on policy options.

  27. Growth rates in India might be impressive but they have a very limited impact on poverty reduction and social welfare. What is important is the compisition of growth and its distribution. I remember an editor of a financial newspaper in India enthusing about a mega-IT park being developed in Karnataka and complaining that local farmers and residents were holding the project up when it would benefit people like him. When I told him that two basic requirements for any job in this kind of sector was English fluency and basic computing skill, he agreed, he then had no answer to the fact that 90% of people in India don’t have these skills.

    Agricultural growth and that in manufacturing are key to generating employment and making an impact on improving the lives of everyone ooutside the middle class and the elites. Unfortunately agriculture has been in crisis for a number of years now and one of the great disappointments of post-1991 economic growth has been the low number of manufacturing jobs created. What are booming are the transport, hospitality and communication sectors. But there is a limit to how many unskilled migrants can become taxi drivers, waiters, receptionists etc.

    There are several reasons for Kerala being better on public health; greater budgetary allocations is one of them, higher literacy rates is another. Yet another reason, though is that such welfare services are politicised in that people expect the state to deliver them and will agitate if they are not. This owes a lot of specific historical and political factors in Kerala – and in the south generally. In northern India it is harder to mobilise people around these demands and their expectations of the state are somewhat different.

  28. When I told him that two basic requirements for any job in this kind of sector was English fluency and basic computing skill, he agreed, he then had no answer to the fact that 90% of people in India don’t have these skills.

    Why can’t they just require the company to build and maintain a school?

  29. USA should invest in building up Mexico. They are our neighbors. They are poor. They need work. They could provide everything that Indians are providing for American companies and they are so conveniently close. Imagine how much money companies could save in travel! I just don’t get why this has not been done. Seems like a no-brainer to me.

  30. Why can’t they just require the company to build and maintain a school?

    That would be good especially since investment in children probably has the most impact on poverty reduction and income mobility over the long-term. The problem is though what would you do with the farmers and agricultural labourers who lose their livelihoods as a result; farming is in crisis already and shedding workers, and the other main value-added sectors of the economy can’t absorb more than a fraction of new entrants into the job market due to the skills barriers. This is why so many urban migrants get shoved into the unorganised sector or go into low-paid, low-skill jobs with little change of promotion and insecure tenure. We didn’t learn China and East Asia’s trick of creating large demand for unskilled labour in labour-intensive industries unfortunately.

  31. Sen has an essay re-appraising of the works of Adam Smith in light of the current global economic recession

    Amartya Sen’s essay is a keeper. Money quote from the Nobel Laureate to bash Reagan/Limbaugh Republicans with:

    The moral and legal obligations and responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments. A subprime lender who misleads a borrower into taking unwise risks can now pass off the financial assets to third parties—who are remote from the original transaction. Accountability has been badly undermined, and the need for supervision and regulation has become much stronger. And yet the supervisory role of government in the United States in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance grew, the needed supervision shrank. There was, as a result, a disaster waiting to happen, which did eventually happen last year, and this has certainly contributed a great deal to the financial crisis that is plaguing the world today. The insufficient regulation of financial activities has implications not only for illegitimate practices, but also for a tendency toward overspeculation that, as Adam Smith argued, tends to grip many human beings in their breathless search for profits.

  32. Even Advani of the BJP gets it. A global change in consciousness is underway:

    http://www.rediff.com/money/2009/feb/12bcrisis-india-needs-swadeshi-boom-advani.htm

    In recent years, many greed-driven financial instruments came into vogue. Such undependable devices of the free market economy cannot be the basis for building a truly prosperous nation. They have caused meltdown of the financial system in America and other western economies…………the past decade has demonstrated that the growth that unfettered capitalism produces usually culminates in a bubble. However, when the bubble bursts, the pain and havoc it causes has uneven impact on different sections of society.

    in the past nearly two decades, India has swung to the other extreme by trying to imitate the American model of free-market capitalism. As a result, agriculture, the informal sector and labour-intensive manufacturing sectors of the economy, which create maximum employment and self-employment opportunities, have suffered prolonged and systemic neglect. The shame of thousands of farmers committing suicide that we experience today is a direct result of the new imbalance created since liberalization and globalisation. The rich-poor and urban-rural divide has become wider than ever before in the past two decades. This has given rise to many undesirable consequences…………the Bharatiya Janata Party is committed to addressing this dangerous imbalance. We believe that the new as well as the entrenched developmental challenges before India cannot be met by carrying the influence of either free-for-all capitalism or freedom-killing communism………… The world rejected communism emphatically. Now the ravages of unbridled capitalism have come to the fore, forcing even America and other western countries to rethink their development philosophies

  33. 35 · Dhoni said

    Even Advani of the BJP gets it.

    Advani is an opportunistic joker. His opinions all seem to flow from only one logic: whatever the Congress says, say the opposite. This is after all the man and the supposedly modernizing party that opposed the nuclear party even when the Congress wanted it, essentially aligning with the far left and the regressive communist parties. And this is the man who was deputy pm during the time the bjp’s economic expansion left behind large swaths of india, and now he’s talking about broad based development?

  34. and when all else fails, bring up the ram temple bogey and whip up a communal frenzy as he is doing again now.

  35. Advani’s party is even more gung-ho liberalisation that the Congress; the sheer stupidty of the India Shining campaign illustrates this. Both in terms of its ideology of liberalisation and its support base amongst the trading community and corporate sector the BJP will not be able to offer an alternative development strategy.

    The economic policies followed by BJP state govts like Modi in Gujarat indicate that it still adheres to the estbalished approach of placing too much emphasis on aggregate growth rates without paying much attention to the composition and distribution of this growth.

  36. Madhya Pradesh has the highest infant mortality rate (94), followed by Orissa (90). Kerala has the lowest IMR (18). Some of the north Indian states like Uttar Pradesh, Bihar and Madhya Pradesh have very low human development indexes, comparable to sub-Saharan Africa. The economic growth India has experienced in recent years has bypassed these states.

    If you want the stats, it’s all available on the web or you can read Sen’s book “Development as Freedom”. He has a particular liking for Kerala for a number of reasons – high literacy rate, good health care services, low population growth, and relatively good communal harmony – all of which sets it apart from other states, particularly north Indian states, and on par with developed countries.

    The main problem with Kerala is that it is very dependent on remittances from overseas to support its economy. Industrial strikes bring the state to a grinding halt on frequent basis. In terms of economic growth, it is a laggard compared to other south Indian states. However, the Kerala model shows what can be achieved in terms of health care and education without significant government funds.

  37. “Kerala’s balance sheet is a mess. If the annual Sabarimala pilgrimage doesn’t happen one year, the state employees won’t get their salaries.” interesting.