Lesson from Old India: When an Economy Just Doesn’t Get Better

http://www.nytimes.com/2014/08/24/upshot/lesson-from-old-india-when-an-economy-just-doesnt-get-better.html?hpw&rref=upshot&action=click&pgtype=Homepage&version=HpHedThumbWell&module=well-region&region=bottom-well&WT.nav=bottom-well&abt=0002&abg=0

by jseliger • 12 years ago

50 60 12 years ago

nytimes.com

conistonwater• 12 years ago

The article is a bit light on reasons for why India's economic problems would be similar to the Great Depression. It shouldn't be enough to point out that both economies did very badly, one should also point out the reasons behind that. There is one sentence that sort of does that:

But in India, internal regulations and underdevelopment, combined with British colonial depredations, prevented Indian resources from being redeployed productively.

It is difficult to understate how much history, and human suffering, is hidden behind the words "British colonial depredations".

It was once an unthinkable question, but we’ve arrived at the scary point where it needs to be asked: What if American median income over the next 15 years keeps stagnating — or maybe even falls?

Hasn't it already? http://research.stlouisfed.org/fred2/series/MEHOINUSA672N And what's so outlandish about assuming it will keep doing what it's doing now?

Our Social Security system, whose receipts are based on wage taxation, could then prove to be a bigger fiscal problem than Medicare.

Oh, and having a political axe to grind doesn't help the article either.

hibikir• 12 years ago

How much Tyler Cowen have you read? He has an ideology, but maybe not quite the one you think.

If wages do not increase, and demographics remain the same, social security does become a big problem. But that doesn't make him an alarmist that wants to gut social security. His typical writings prefer to avoid the problem the other ways: By either finding ways to increase wages, or through immigration.

He has also written book on the problem of how, while the last decade was great for world growth, it was very bad for the US and Europe: He calls is the great stagnation. So he is aware that more of the same could be coming. He just thinks most NYT readers do not really expect this to happen, as they think it'd be unprecedented.

The entire point of the article is not that 19th century India's problems were all that similar to the great depression, but that the US' current problems are a lot like India's, in the sense that we are facing a major supply shock as some major competitors industrialize and get better, while the country in question does not. In India, it was a country with major manpower advantage getting hit by new technology it couldn't adopt quickly. In the US' case, it's about a lot of countries that were competing mainly on cheap labor, and that now are catching up on technology, making the US' advantages disappear.

wsxcde• 12 years ago

I haven't read the paper and probably won't get to it until after the weekend. So I'd be interested in getting a summary of their main claims.

But I do know a little about this subject and my understanding is:

(a) the essential claim is right that living standards in India declined in the 19th century.

(b) I believe this was largely caused by British interference and mismanagement. One egregious and well known example of this is the salt tax which made it more or less illegal for Indians to mine salt in India. This eventually was the catalyst for Gandhi's salt march.

Another example is the British East India company raising land taxes from 10% to 60% during the great bengal famine of the 1770s. The famine caused the death of about 30% of the population of Bengal.

(c) Art, culture and handicrafts were a big part of the Indian economy in the pre-British era. These were primarily supported by the kings and queens of the era. The British had no interest or use for Indian arts and culture and they got rid of most of this. And most of these people fell into subsistence farming with the obvious repercussions on the rest of the economy.

In general, most colonized countries had this terrible scenario where the rulers could set economic policies that had no repercussion on them personally. So they focused primarily on extracting as much wealth as possible with no regard whatsoever for the consequences of these policies because there were no consequences to bad governance by the colonizers. And it was precisely these policies which led to most colonized economies falling into mostly subsistence farming and the inevitable economic decline. I think the figures for India are something like 40% of the population doing agriculture before the arrival of the British ending up in about 70% of the economy being just agriculture a hundred or so years later.

I think talk about the lack of industrialization is a big smokescreen. Lots of developed countries industrialized really late - Russia, Japan, Korea, even Germany to some extent. The difference between these countries and India is not late industrialization but colonization. Because colonization systematically drained the country of both material wealth (i.e., capital) and technology (subsistence farming doesn't leave you with much time for educational accomplishments).

ahi• 12 years ago

Might the deindustrialization of the United States have similar causes? Bad governance by stateless corporate colonizers?

dsr_• 12 years ago

I'm certain that it does; the argument is whether it is "bad" in a global sense. (It's bad for the US in the short term, and in the long term, we're all dead.)

The US got very good at producing food, and the result is low farm employment, low food prices, and too many monocultures and high-intensity operations that trade a few years of profits against long-term fertility. Corporations have few incentives to look many years into the future, and no incentive to clean up anything that can be externalized cheaper.

The US got very good at mechanization, and then at building tools for mechanization, and then at selling plans for building tools for mechanization... the low-wage jobs move to cheaper areas of the world.

Apple is a microcosm: what does it say on your shiny new white box? Designed in California. (Built in China, from components from Thailand and Taiwan, from materials mined all across Africa.)

But what replaces the low-wage jobs, when there are no factories, no farm jobs? Retail and service, and retail is being eaten by Walmart on one end and Amazon on the other.

eli_gottlieb5• 12 years ago

I'd be interested to see if the United States has actually "deindustrialized" in the sense of doing less material production, in terms of either metric tons of goods or dollar value, or whether it has just specialized in cutting the labor force while keeping production levels high.

Mind, I also find the prominence of "back to the land!" sentiments extremely worrisome.

notahacker• 12 years ago

That's a simplified version of what Cowen's arguing here, but frankly it's a strange argument to make.

India reverted to subsistence farming after UK trade policy essentially forced them to buy cotton spun by machines in Manchester instead of cotton made by hand-looms in nearby craft villages. But we're talking about uneducated, illiterate cottage industry workers reverting to the only other trade they could participate in, in a country whose social and economic mobility was nonexistant even before the British started arriving.

It really couldn't be much further from the US outsourcing menial production line jobs to developing countries whilst keeping the cushier design, marketing, management, finance and logistics jobs for its own educated workforce.

HarryHirsch• 12 years ago

The American economy is relatively flexible, and various candidates for future growth are strong: technology, health care research, energy and higher education.

Everyone knows that Tyler plays fast and loose with the facts, but this statement really plumbs new, uncharted depths. Healthcare research seems to mean the pharmaceutical industry, and that field has been in trouble for 15 years. The major players have been on an outsourcing spree for the last decade, research is being gutted, and despite all that the development pipelines are not doing well. Energy is by its nature an extractive industry, which have this habit of creating some very rich people and many very poor people.

Finally higher education: higher education in the US is in trouble. Research is being done only at top-20 places. Even there the money is getting tighter, at any conference you'll go to you'll hear that so-and-so is shutting down their lab for lack of funds. The rest of the universities are repositioning themselves as vocational colleges, where students are paying for workforce training. It used to be that companies would train their staff, but nowadays a college diploma is the equivalent of a GED; you cannot afford not to have one. And then there is this proliferation of useless Masters degrees. Higher ed in its current form is a growth industry, but the country would be better off if it weren't.

q25• 12 years ago

If you are seeing past life of eastern countries (India or china ...etc) only through economic point of view, you will never get proper understanding. Infact, outside colonial Europe and America, money/economics was/is not the only pursuit.

1. Almost all colonial powers in the west fought across the world primarily for territory, gold, resources, spices ...etc. This pursuit of selfish economic interests at the expense of rest of the world, environment is still we see in the world. Amount of loot/destruction from East to support Britain is just gigantic even during world wars.

2. Wealth, GDP might be there in the past Eastern world but that was by product/side effect of something else. No one really pushed for efficieny/productivity just like we see now in the west. It was individual interest to earn but not enforced one as if whole world is in a race and we will fall behind if we do not compete ...etc. You won't see such insecurity/paranoid in the past Eastern world. Selfish economic pursuit was never a primary/sole criterion for past India at state level. Yes, there were rules/laws for finances (e.g: Artha Sastra ...etc) but that is part of bigger picture just enough to maintain state but not main one. Kings of India before Mughals/British fought too among themselves but not for resources/money/territory. Dominating world/make a dent on the universe/earth ...etc was never part of eastern thinking even when East was financially strong. Concepts like Yoga/Kama Sutra ...etc emerged which are not at all connected to Finance/economy.

So do not look at just financial parts to understand whole. You will miss many subtle/nuanced/implicit points and your understanding may not be correct/complete.

Note: Please do not downvote if you disagree. There may be several implicit facts which you may not aware because of cultural difference.

nnq• 12 years ago

Kings of India before Mughals/British fought too among themselves but not for resources/money/territory.

...then what did they fought for?

(Note: I didn't downvote you and I think this may be an insightful comment, but please use a spellchecker... this is HN and you can get downvotes just for bad spelling even when English is obviously not your native tongue :))

q25• 12 years ago

>> ...then what did they fought for?

In some cases "Dharma" and in some cases, just to show their power or get the titles such as "king of kings" ...etc.

Remember "time" is continuous spectrum and there may be dilution of the above in some cases but since history won't preserve every emotion/reason/circumstances behind every decision of every participant, we can just speculate in such diluted individual cases.

Also, just like modern day games which happen in a stadium, there used to be "war stadiums" where war is confined to that place only (e.g: Kurushetra). This is primarily to avoid loss of innocents/women/children unlike current practice of destructing whole opposite country including small children some times.

EDIT: Just added a new line.

eli_gottlieb5• 12 years ago

I'm not downvoting because I disagree. I'm downvoting because you're spouting a bunch of blatantly Orientalist "the four nations lived in harmony, but everything changed when the ~~Fire Nation~~ West attacked" bullcrap.

When you talk about the "rich Eastern world" of pre-industrial history, you are primarily talking about civilizations who considered Europe too poor and ignorant to colonize or exploit when, after all, they could be colonizing and exploiting each-other.

q25• 12 years ago

Honestly, I do not have points to down-vote you but I wish to down-vote since you abused the power of down-voting without adequate knowledge on cultural differences or intentional differences and blindly followed what some authors might have told/wrote by looking just at superficial level.

There is a quality called "contentment". Ask yourself a question? If Europe was poor/ignorant/weak and East can exploit them, then they could have been used as slaves, right? After all, that was easy. Isn't it? Why that did not happened? Because there was no interest/intention in the so called "world domination" or "we are better than you" ...etc attitude.

This is the mindset/weakness of some part of west where you get confidence of your power only if you colonize/destroy other country. But if you are self-aware of your powers, then you do not need to exhibit them unless they are needed.

Concept of Colonization/exploitation intentionally was not part of Eastern mindset/attitude. If you want to speculate, you can but that cannot be truth.

jasonisalive10• 12 years ago

Articles like this (ignoring the insulting, historically-naive comparison) aren't news. If you have even a weak understanding of economic theory, it's clear that countries like Britain, France and the USA are all clinging to self-destructive public policies - driven by popular demand, mind you, not corporate interference. When the "developed world" becomes serious about competing economically with China (distinct from militaristic aggression), it will be plain to see. The following of the West's sacred cows will begin to fall:

1) Knowing better/attempting to overrule the free market (minimum wages, minimum labour conditions, centralised permits to sell goods such as drugs, medical services, legal services)

2) Giving "something for nothing" (subsidised/free education, subsidised/free healthcare, subsidised/free pensions/saving schemes.

Currently anyone who dares to question these aspects of Western economies is immediately eviscerated by the crowd. The culture of entitlement is very strong. Soon enough, however, with the last of the props that sustained these sick economies thus far failing (militarism, centralised currency control, controls on global mobility, global cultural allure), getting rid of them will be hailed as bold new thinking.

specialist• 12 years ago

I've heard a lot of good things about this free market you mention. Can you please provide an example?

jasonisalive10• 12 years ago

If you're really interested, pretty much any Econ 101 textbook, read closely and critically, will get you going. There are various economic schools of thoughts (Classical Liberalism, the Austrian school) with extensive literatures available for further in-depth reading.

rayiner• 12 years ago

The irony of holding communist China up as some sort of free-market paradise...

jasonisalive10• 12 years ago

I never said that at all. The only thing about China that I specified was the widely-agreed upon fact that they are out-competing the West in low-cost manufacturing. China has many problems, not the least a culture of corruption and coercion in government, as well as the absence of intellectual property protections. They are nevertheless (or rather owing partially to this) very competitive.

Anyway, the West doesn't need to respond to the threat of China and others (Korea for instance) by aping the worst aspects of these countries. True economic liberalisation will pose a far more effective and constructive counter.

jlangenauer• 12 years ago

These are not "something for nothing" services. They are paid for by taxes. And in doing so, these services are generally supplied on a cheaper basis with better social outcomes than the private sector is able to.

jasonisalive10• 12 years ago

But from the perspective of the users of these services, they are. With a socialised medical system, you don't pay upfront for your medical treatment. It's paid for from taxes from the whole population - and if your income is low enough, you may consume more resources than you provide towards the system - in which case you are getting something for nothing! The combination of these factors - obfuscation of payment, and disconnection of amount paid/good received - create the perverse incentives causing economic decline seen in the countries pursuing these policies.

And the argument about socialised services being more efficient definitely needs a citation.

lingoberry• 12 years ago

Removing social services will not make society more productive. Not having to constantly worry for your life and family works wonders for creativity, productivity and overall happiness. It's not about entitlement, it's about enabling the people to do great things.

jasonisalive10• 12 years ago

By that logic we should socialise everything. Sure worked out well for the Soviet Union!

rtpg3• 12 years ago

Labor markets would not magically become free markets (in the textbook-definition sense) if there were no regulations. People are forced to work in them, there aren't enough job openings per person to make the work availabilty high enough to make the market fluid, and a single employer can influence the price.

I suggest you try reading Econ101 more clearly before citing it to make such dangerous propositions as removing labor regulations.

jasonisalive10• 12 years ago

On the contrary, it's you who is confused here. The conditions you're describing - a surplus in supply for a range of market goods (mostly low-skilled human labour) is the result of the continued attempts of Western countries to regulate against free market dynamics. Removing the perverse regulations which caused this imbalance to arise would result in a short, hopefully not too harsh correction, after which supply and demand would again equalise across the range of various market goods in question.

It's similar to the situation of a hypothetical (or not so hypothetical really) society which decided to "help out" potato farmers by limiting the price of a kg of potatoes to $10. What would you expect? Potato production would skyrocket as people try and cash in on the boom, while potato buying would plummet as people switch to unregulated alternatives.

Imagine this situation continuing on, with more and more vegetables becoming price-controlled, all the while as the mass of unemployed farmers grows and grows (because the system supports people in their failure to be vegetable farmers with unemployment handouts), the conditions of the market become worse and worse, and the further distortionary actions (for example, police crackdowns on blackmarket vegetable sales) required to sustain the whole system become more and more extreme. When someone questions the need for the price restrictions, the average citizen responds:

"Vegetable markets would not magically become free markets (in the textbook-definition sense) if there were no regulations. People are forced to grow vegetables, there aren't enough buyers per grower to make the demand high enough to make the market fluid, and a single buyer can influence the price."

Of course, this really isn't hypothesis. Citizens of today's socialised, regulated countries are just blind to the destructive consequences which surround them.

tim3333• 12 years ago

the West's sacred cows will begin to fall:

...blah...minimum labor conditions...free education

I think you've got that one backwards. Said cows will spread to China rather than falling. It's not sacred entitlement, just a practical choice of what regulations to pass and what to spend tax receipts on.

eli_gottlieb5• 12 years ago

Your condescension towards everyone else here, based on nothing more than moralizing ideology, does not actually counter the basic facts: social democracy is a very productive and effective system, in ways that neoliberalism (ideological "free market" schemes that somehow always end up forgiving the collusion of businessmen) is not.

jasonisalive10• 12 years ago

As I said originally, anyone who questions the prevailing ideology of "social democracy" (if that's what we're calling it) is quickly attacked and shut down these days.

The difference between us is that what I propose has never been properly implemented and tested, while social democracy has, extensively. How you could make claims about the relative productivity of these two systems with the vacuum of test data is beyond me.

Anyway, I've made my claim, and I stand by it. I'm confident that eventually people will see the merits of it, even if it does take some thinking. In the short term it really doesn't matter if people disagree with me. We'll see how things stand in 50 years or so.

wisty• 12 years ago

In the last 20 years, the economic surge of Asia, especially China, has brought a large trade readjustment to the world, one with few parallels with the possible exception of the rise of the Western economies several centuries ago. China’s per capita income, less than $300 in 1984, is now in the range of $10,000. The country is now the world’s second-largest economy, and becoming the largest by one measure.
Who are some of the possible losers in this radical transformation in the global economy?

To be honest, we already know who the losers were. Median wages in the US didn't budge for 30 years, as manufacturing went downhill. Now that China is more or less industrialised, and Chinese wages are pushing up, US manufacturing is coming back.

The 2007+ recession wasn't about China taking the jobs. It was a credit crunch which wasn't really connected to anything China did, and should go away once the bad debt is all cleared.

You could argue that India's deindustrialisation created a path-dependent problem. It couldn't grow, because it had locked into a bunch of institutions that were anti-industry. But I suspect the British also helped forge those dodgy institutions. India was saddled with institutions which were designed for a richer country (risk adverse), then modified to be extractive (sending wealth back to Britain), and without the need for industry (both because India didn't have the industry, and Britain didn't want them to have it). It was a triple whammy, and it was kept in place for quite some time. Add in the inevitable costs of a revolution (and subsequent sectarian violence), and it's not too surprising that India has had a rough time.

The EU can probably survive a few decades of deindustrialisation with less issues, though the EU is a mixed blessing.

dualogy• 12 years ago

It was a credit crunch [..] which should go away once the bad debt is all cleared.

Heh. Thanks for a chuckle :)

tnuc• 12 years ago

The salt tax was detrimental, people and fetuses do not develop properly without adequate salt. Many died.

The amount of salt a normal person needed for a year cost well over one months pay.

http://en.wikipedia.org/wiki/Inland_Customs_Line

Buy time Gandhi had done his salt march the salt tax was nearly insignificant.

tim3333• 12 years ago

Gosh - I never knew about the great hedge. Us Brits did some dubious stuff.

skynetv2• 12 years ago

Badly written./there was no India in 1750. And the east India company had a lot to do with what happened to the Indian subcontinent in the following centuries. Author has trusted history to his own benefit.

asgard10242• 12 years ago

I wonder, to what extent was this about labor costs? Wasn't it higher price of labor in the west that forced it to industrialize more than India? Perhaps India got stuck in a local optimum, with low wages.

A similar situation may be happening today. Due to automation, there is not enough jobs for everybody, which may decrease the cost of labor, slowing down pressure on technological development.

b1daly• 12 years ago

I'm very skeptical of such hand wavey story telling about macro economic subjects, whether the source is a credentialed academic or an anonymous internet raver.

It does seem incredible that the author doesn't give more weight to the economic impact of exploitive colonisation by the British in India.

I think Macro economics is to complex to figure out by extremely intelligent people who are trying, let alone be summed up in a short essay.

The problem is both micro and macro. The individual actors in a human economy, humans that is, are fantastically more complex in their behavior than, say air molecules that could be modeled as part of a complex emergent, chaotic phenomena like weather.

So you have 7 billion human actors, all existing within the complex ecosphere of the earth.

The human economies are simply an aspect of mass social phenomena, with continuous, ongoing feedback looks in cultural, biological, and geographical domains.

Feeble attempts to illuminate the issues of the world's economies strike me as little fairy tales, and I'm amazed it gets published like this for a credulous public.

known• 12 years ago

To Curb Poverty In India, Governance Must be Decentralized For 1.25 Billion People. Each State In India Should Have A Separate Currency.

Lesson from Old India: When an Economy Just Doesn’t Get Better

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