The Poverty Of Political Economy: How Economics Abandoned the Poor

By Meghnad Desai

In this compelling new book, Meghnad Desai takes a critical, introspective look at the bodies of thought that have driven economics across the world. From Adam Smith to John Maynard Keynes, and from the Great Depression to the collapse of the Lehmann Brothers, Desai studies the contributions of economics to domestic and international politics.

The Poverty of Political Economy asks necessary and startling questions: Where have we fallen short? How have changes in the international order affected the making of economies? In the face of Covid-19, how do we reinvent the way that economic policies are formed?

This is a remarkable thesis by one of the foremost political economists of our time. Desai argues his point persuasively, with great erudition, insisting that in the twenty-first century, humanity must return to economics.

• Language: English
• Publisher: HarperCollins India
• Release date: Dec 9, 2022
• ISBN: 9789356290563

Meghnad Desai

Meghnad Desai is an economist by profession and taught at the London School of Economics for forty years. He is a keen observer of British politics and participates in it from his perch in the House of Lords. He has written books on economics, Marxism, Islamist terrorism, Ezra Pound and Bollywood. This is his first novel.

Book preview

Chapter 1

In the Beginning

Introduction

AS 2021, ONE OF THE WORST YEARS IN LIVING MEMORY, DRAWS to a close, we look forward to an escape from the effects of the pandemic, the most virulent since 1918 and a truly global crisis. In the United Kingdom (UK), Brexit, our treaty of withdrawal from the European Union, has added to our woes. Both events carry with them huge economic consequences, some already past us and others awaited. We have experienced how suddenly stable economic livelihoods can be disrupted and destroyed. How activities and outcomes, previously enjoyed or endured, can be lost. How incomes decline suddenly, jobs go, debts pile up, houses are lost owing to mortgage arrears, children’s education is disrupted, and careers are damaged.

It is at such times that the economic consequences of our choices as individuals and societies come to dominate our lives. We discover how precarious livelihoods are. Even in the so-called rich countries, we find people thrown back on food banks, made homeless and facing serious poverty for no fault of their own. Even those in charge of economic policy—central bankers and finance ministers, bank managers and corporate leaders—are out of their depth. Rules previously learned—‘balance the budget, don’t borrow’—no longer help steer the way out of crisis. Factories stand empty, not because there is no demand but because people cannot come to work. Supplies are low despite acute demand. Food may rot while millions go hungry. No surprise then that the economic cure of the disease is to give money to rich corporations, offer subsidies to big banks and salaries to millionaires, while extra money on welfare payments under universal credit is carefully rationed and withdrawn at the first chance.

It took a talented English footballer barely out of his teens, Marcus Rashford, to cut through the official logic of fiscal prudence so that poor children in the world’s fifth richest country could get a free lunch. Rashford shamed Prime Minister Boris Johnson into guaranteeing hot lunches for poor children during school holidays. It is the story of the child and the emperor with no clothes.

It is also at times like these that we need to ask questions that are radical—going back to the roots—of how we arrived at the present juncture. How far back do we look for our present economic arrangements, our money and our banking, our jobs and our wages—our entire economic system? How did our current system come about? Why is there so much poverty at home and abroad and inequality—racial, gender-based, age-related—within and between countries? Have we grossly overused our natural environment and face misery or even extinction in the future?

This inquiry will be deep, wide and difficult but, let me hope, enlightening. It has taken me sixty years of learning and teaching and thinking about economics to arrive at this understanding. It is because the pandemic gave me enforced leisure to sit and read and think that I have unthought many opinions and remapped what I used to see as the atlas of economics. I hope to try and convey it to you in a few hundred pages.

In the Beginning

Historians are fond of delineating centuries in a slightly skewed pattern. Thus, the nineteenth century is stretched from 1815 to 1914 and the twentieth from 1914 to 1991. This is by the Western Calendar of what we call the Common (Christian) Era (it used to be called AD—Anno Domini, in the year of our Lord—before we got culturally correct). Other calendars exist—the Chinese, the Islamic, the Hindu and the Ancient Roman, among others—but the Western Christian Calendar has become universal. Why is that? It may be best to start with that.

The Great Shift

The sixteenth century can be said to start in 1491. It marked the shift of the world’s economic centre of gravity towards the West from the East. Until then, the prosperous and indeed populous civilizations were China (GDP I$62million/103 million population) and India (GDP I$61 million/110 million population), while all of Western Europe had a GDP of I$44million with a population of 57 million (Madison 2007; I$ is international dollar as calculated by Madison).

China and India dominated the Eurasian landmass. Western Europe had suffered a huge loss of population from the Black Death pandemic in 1348. Even so, that meant that in terms of per capita income, Western Europe was ahead of Asia. While China had per capita income of I$600 and India I$550, Western Europe had I$771 per capita income (Madison 2007).

People in the Eurasian landmass, at least at the western end, knew the world was round and that there were unknown (to them) lands they had to ‘discover’ and, of course, the prosperous ‘Indies’ out east to benefit from. The Pope, in his infallible wisdom, awarded the exploration rights of the world to Spain and Portugal—Spain to the west of a line running through the Western Hemisphere and Portugal eastwards. The Pope did not rule the world but the Western Christendom was his parish and the Kings and Emperors obeyed him.

The relatively smaller (compared to China and India) countries of Western Europe had an advantage. They had developed light, manoeuverable ships which carried guns on board. This equipment allowed Portugal and Spain to change the fortunes of the West relative to the East. The second half of the millennium was to be different from the first. The world began its march to globalization (Cipolla 1964).

The Portuguese got Brazil and, sailing eastwards, explored Africa, reached India (in 1498) and the Malacca Strait, before arriving in China. Columbus ‘discovered’ America in 1492 as we all know (1492 was also the year in which the Chinese Imperial Navy made its last big journey towards the West for the next 500 years). Spanish conquistadores crossed over to fight, master and loot Mexico and South America where there were settled civilizations. It was the beginning of the age of Western maritime Empires.

The Portuguese came across abundant spice supplies in Asia which they began to take back to Europe. The Spanish conquistadores brought back shiploads of gold and silver. Between 1500 and 1800, 1,708 metric tons of gold and 72,825 metric tons of silver were brought from America to Western Europe. The shock of tons of gold and silver arriving in Europe was the beginning of our modern world and of economics as a subject of inquiry.

People always knew about what came to be called economic problems. There was buying and selling, trading across land in caravans and across the seas. Local money was regularly exchanged for other money across continents. Gold, silver, diamonds and pearls were sought after. Sophisticated financial instruments to transfer money across a network of ‘money changers’ were known in countries across the Mediterranean as well as the Indian Ocean (Recall how Jesus threw ‘moneychangers’ out of the Temple).

The word ‘economics’ concerns a household enterprise (in Greek). Households with family members and slaves constituted enterprises, and the business of household management was the arena of economics. Civilizations knew about the use of money and had speculated about the nature of money. The Abrahamic religions had restrictions on lending money at interest. Aristotle judged that money was barren and naturally should not bear any fruit. Scholastics debated how to separate usury from profit or rent (for a brief account, see Meghnad Desai, The Route of All Evil: Political Economy of Ezra Pound). No such negative view of money took any hold in India or China or the rest of Asia and Africa as far as we know. There was some speculation about ‘just price’ among scholastics. There is an ancient Indian Sanskrit text, Arthashastra, which translates as economics. But the text is about public administration and statecraft rather than economics as we understand today.

The gold and silver which arrived back in Spain caused massive social upheaval. A century of inflation followed from the mid-sixteenth to mid-seventeenth century. Old fortunes based on landholding were surpassed by upstart traders and fortune-seeking soldiers. Prices rose and went on changing from their previous stable levels.

The fundamental questions of economics began to be asked. What is the value of a thing? How do you measure it? Why does it keep changing? Are there things, solid or liquid, which are stable in value? Gold and silver seemed to be valued highly across all countries, being regarded as national treasures. Things from far across began to arrive in abundance but at a high price. Spain began to see a drainage of its treasure to other nations. Much of the gold and silver—19,094 tons of silver equivalent between 1500 to 1800—passed on to Asia which shipped goods to Western Europe. Economic questions became questions of politics. Kingdoms had to think carefully about conserving their treasure of gold and silver—not losing it importing goods from others but acquiring as much as possible by exporting. Economics, the management of household production, became the concern of governments, became policy—political economy.

So, it all began with the inquiry into the causes of inflation. Why did gold, which bought a boatful of sugar last month, could buy only half a boatful now? Why was it so difficult to recruit servants? How did upstart merchants become so rich that they could buy more land than the Dukes?

Parallel changes were happening in cultural matters. Printing had been invented. Old texts, hitherto in rare manuscripts monopolized by a few, became widely available. There was a schism in the Roman Catholic Church initiated by the German rebel Martin Luther. England broke with Rome on the idiosyncratic reason of the King’s wish for a divorce. Soon, religious conflicts became endemic in Western Europe, climaxing in the Thirty Years’ War (1618-1648). There was also war between Great Britain and Ireland on religious issues in the 1640s.

A consequence of the spread of printing and dissemination of old knowledge was the growth of scepticism. There was a new understanding of the universe that challenged Biblical truths. Galileo discovered inconvenient facts about the planets. Newton mapped their movements from a few principles which had universal validity. He said he had unravelled God’s Scheme. The Age of Enlightenment arrived in Europe across Germany, France, Scotland, Italy and England, creating new knowledge.

Enlightenment, Immanuel Kant said, had a simple message: ‘Sapere Aude—Dare to know.’ Let Reason be your guide, not outside authority. As belief in God and priestly authority weakened, questions arose about the springs and sanctions for good social behaviour. How would you behave towards others to inspire trust that could lead to regular social interactions? How can trust be established and maintained? If the fear of God’s punishment no longer disciplines you, what will? These were questions of moral philosophy which lay at the base of social exchanges. Reason had to replace faith, but then, how could reason inspire trust?

There was also the curiosity about how a small northwestern corner of the Eurasian landmass had left the Asiatic Empires behind and progressed in the arts and sciences as well as in material terms. Why were rich countries like China and India stagnant while parts of Western Europe showed signs of rapid growth of wealth? What was the secret of this progress? Was it the guarantee of the Right to Private Property which was significant in this movement? If so, where had this right originated and why had it grown in acceptance?

A major fruit of that Enlightenment was the birth of what we today call the social sciences, chief among which was political economy. Of course, the subject of political advice for the King or of the limits to royal power were perennial issues. You see them discussed in the Bible and by the Greek philosophers, especially Plato and Aristotle. Christian tradition had resulted in books by St Augustine and St Thomas Aquinas. Machiavelli had pioneered a secular approach to statecraft, avoiding any appeal to superhuman authority. Ideas as to how civil society was formed—implicitly not taking the Biblical account as final—began in early modern Europe. What was the legitimacy of the State and royal power? Thomas Hobbes gave one answer at a time the challenge to the English King had taken on a bloody form.

The idea soon followed of a contract, a social contract. Contracts are a basis for exchange—an act based on equality between the contracting parties. But if the State is based on a social contract, what is the basis of social relations themselves? Is it self-interest of the members which drives them to enter into such contracts? How can people trust that the contract will be honoured?

Religious divisions and disagreements between Kings and subjects (partly driven by the religious divisions) raised issues of legitimacy and rights. One of the basic rights, as we have mentioned, was the Right to Private Property. What was the basis of the right? Was it a gift of the King or was it independent of the King? The Civil War in the British Isles and the parallel Thirty Years’ War in Europe opened up these questions to philosophical inquiry. The economic disturbances caused by the influx of precious metals were very much at the heart of these questions.

Of course, before a separate subject called political economy was hatched, economic questions were discussed by those whose occupation was to think—the philosophers. Earlier, Aristotle and St Thomas Aquinas and the Scholastics had thought and sought the answers to these questions. These philosophers were versatile. John Locke (1632-1704) was a medical doctor as well as a political philosopher who wrote Two Treatises of Government. It was these seminal pamphlets that gave the impetus to the English Revolution of 1688, setting up a Constitutional Monarchy. It investigated the right of the subjects to disobey the King, placing the basis of royal power in social sanction. It was the birth of liberalism as a political philosophy. Locke was also among the first to relate inflation to the abundance of money. The Frenchman Anne-Robert-Jacques Turgot (1727-1781) wrote on money, exchange and value while also being a minister to Emperor Louis XVI. The Italian Ferdinando Galiani (1728-1787) wrote Della Moneta (On Money) on Neapolitan coinage and as an argument for freedom of trade in wheat, while also serving in high administrative positions.

Freedom of trade meant the freedom to move grain from one part of a kingdom to another without overdemanding regulations such as permits, taxes or controlled prices. This demand had become an important issue across Western Europe. Local regions used to be jealous of retaining their home produce within their boundaries, lest prices go up due to export of grain. Even if there was famine in one part of a kingdom, it was found impossible to bring in grain from a neighbouring prefecture in France. It was then that merchants in France famously told Jean-Baptiste Colbert (1619-1683), minister to Louis XIV, ‘laissez-nous passez, laissez-nous faire.’ Let us pass, let us do (as we wish to). Laissez-faire became a slogan which summarized the new attitude of merchants to take charge of their own affairs while convincing the King that it would bring prosperity to the realm and revenue to him.

In a way, there was a parallel, almost subversive, movement to order morality and social exchange without invoking divine sanction and conducting material and intellectual exchange without constant interference from royal power. It was as if, in one corner of the world, the population was growing up and seeking freedom to order its own life without the King or his Ministers being in loco parentis.

Before any attempt to throw off the yoke of authority, divine or royal, these questions have to be answered: Will it work without someone to order it? Will it not lead you astray or down a path of anarchy? How can things work on their own without external guidance?

The answer to those questions lay in finding out how societies had worked in the past. By the mid-eighteenth century, enough was known of other societies in Europe through history—the Greek and Roman civilizations, the nature of the Goth and Vandal hordes which destroyed the Roman Republic, the evolution of Christianity around the Mediterranean territories, the societies at a more ‘primitive’ stage across the Atlantic in America and in the islands of the Southern Hemisphere in the South Pacific—for historians to be able to ask further questions. People also knew of societies of Asia and of the newly discovered settlements of the Western Hemisphere and Oceania.

There was a pattern to be discovered, perhaps of evolution and progress. An ordering of societies hierarchically in terms of material development. What could explain the different types of political rule—the democratic Greek city-states or the Roman Republic, Kingdoms and Empires—across history? Did the nature of political rule depend on geography and climate, asked Montesquieu (1689-1755) in his Del espíritu de las leyes. Did Asian countries tend to despotism while Europe had reached less arbitrary forms of authority?

Was the story of civilizations one of growth of freedom from arbitrary rule? Was that the story of the British Isles? How had the British, during the seventeenth century, engaged in civil war, committed regicide, restored monarchy, exiled a king and replaced him with another chosen by the landed aristocracy? Was that a viable Constitution? Was the consent of the ruled necessary for good government?

Scotland was experiencing accelerated change in the first half of the eighteenth century. At the start of the previous century, in 1603, James VI, King of the Scots, had been invited to become King of England as well, becoming James I of England; the previous monarch, Queen Elizabeth, had never married and died heirless. (James achieved immortality by convening the committee of Biblical scholars that produced the King James Bible, a classic of the English language.) For the next hundred years, the dual monarchy continued despite upheavals of regicide and revolution. In 1707, his great-granddaughter, Queen Anne, proposed a union of Scotland and England.

As a result of the union, Scotland became connected with a much larger, more populous economy to its south. Not everyone was happy about this, especially those who sat in Scottish Parliament. Now, political power was concentrated in the south. The Scottish elite had to get used to London life. They had to learn to speak English, and speak it as the English did, if they were to be successful. Even so, there was a desperate attempt by the disinherited branch of the Stuarts to regain the throne in 1745. Bonnie Prince Charlie tried his best but was defeated. The union became irreversible (for a few centuries at least).

Enter Adam Smith

So it was that Adam Smith, born posthumously to a Scottish high official in Kirkcaldy in 1723, came to study in Oxford on a scholarship at the age of seventeen. He had already studied at the University of Glasgow since his fourteenth year and was recognized as an outstanding intellect. Oxford, in those days, was not a better place to study than Glasgow. But the scholarship afforded him free time and a good library to get on with his own education. As he was in England, he had to learn the language and speak it like the locals.

Returning to Scotland in 1746, Smith soon became part of an intellectual circle of philosophers, lawyers, judges, high officials, authors and poets in Edinburgh. There was David Hume, Scotland’s most famous and, being an atheist, much criticized philosopher and historian who also had served as secretary to the British ambassador in France. There were Adam Ferguson who founded Sociology, William Robertson the historian, Colin Maclaurin the mathematician and others. Henry Home (later Lord Kames) persuaded Smith to give public lectures in Edinburgh in 1748, which soon proved to be a popular annual occasion. In 1751, Smith was invited to be Professor of Logic at the University of Glasgow, moving almost immediately to the Chair of Moral Philosophy. He also lectured on jurisprudence.

At Edinburgh, Smith had begun with lectures on rhetoric and origin of language. He wrote on astronomy as he was influenced by the work of Sir Isaac Newton, whose discoveries and methods were the object of universal admiration among the scholars and philosophers of the Scottish Enlightenment. In Glasgow, Smith lectured on moral philosophy and wrote his first book, The Theory of Moral Sentiments. It ran to five editions in Smith’s lifetime. His lectures on the history of jurisprudence were unpublished during his lifetime. He left them unfinished among his papers as a manuscript and requested his executors to destroy the papers. But later, two copies of lecture notes taken by students were discovered: one from 1762–63 and the other from 1763–64. The 1764 notes were published in 1897 by Edwin Cannan, Professor of Economics at London School of Economics. Both versions were collated, re-edited and published as Lectures on Jurisprudence on the occasion of the bicentenary of the publication of The Wealth of Nations in 1976.

The Theory of Moral Sentiments (TMS) is an inquiry into the basis of mutual social exchanges. Why do we feel sympathy for others? What makes our conduct worthy of social approbation? What is the basis of the complex web of interpersonal relations, of social morality? Smith wrote in a tradition that searched for a basis for social morality independent of God or superhuman control. A society had to be self-regulating in approving good and discouraging bad behaviour. Could this be done? And, if so, what was the mechanism? The answer Smith gave can be summarized in terms of the device he invented to explain the mainsprings of other-directed behaviour. This was the idea of an Impartial Spectator, whom we consult to check whether our behaviour towards others is appropriate. Thus, there is a hidden mechanism, approved by our selfish nature, which makes our social behaviour such as to sustain social relations.

For Smith, the grand project of the ‘Science of Social Astronomy’ would have been the combination of The Theory of Moral Sentiments, what was to be the finished product of the Lectures on Jurisprudence and, of course, The Wealth of Nations. Having written The Theory of Moral Sentiments at the age of just thirty-four, which earned him an international reputation, Smith was yet to polish up the Lectures on Jurisprudence and develop and write his treatise on political economy. (I have used the idea of social astronomy in my book Marx’s Revenge: The Resurgence of Capitalism and the Death of Statist Socialism; Verso, 2002.)

In 1764, Smith was asked to be personal tutor to the son and heir of the Duke of Buccleuch, a substantial figure in the Scottish landed aristocracy. (As recently as 2021, the family was the largest landowner in Scotland). The task was to take the young man on a tour of Europe and instruct him as Smith thought appropriate. The reward was so substantial that Smith did not need to work again for a salary. (In modern parlance, he got a lifetime research professorship.) This pleasant task took him to France (Paris and Toulouse) and Switzerland (Geneva) where he met the philosophers and economists who knew of him and had read TMS.

Smith returned to Scotland in 1766 and settled down in his native Kirkcaldy to write his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations (WN, hereafter). Published in 1776, it was an instant hit, read by statesmen and scholars alike. The story goes that Smith was even invited by Prime Minister William Pitt the Younger to 10 Downing Street, where the entire cabinet stood for him in the cabinet room. The Prime Minister said they were all Smith’s pupils and would not sit in his presence.¹

It took Smith ten years to write WN in his Kirkcaldy study. Of course, he was known widely and consulted about issues of policy by friends in high positions in London. Thus, the question of what to do with the rebellion in the American colonies and misgovernment by the East India Company in Bengal were among the subjects of his correspondence.

As it is, WN became the founding text of political economy. As Smith made minor revisions in the text, two more editions were published. These were followed by two reprints, making up a total of five editions in his lifetime. It was his longest work, stretching into two volumes. The Glasgow Bicentenary edition had 947 pages.

WN starts with Part I on the ‘Causes of Improvement in the Productive Powers of Labour’, moves on in Part II to ‘Nature, Accumulation and Employment of Stock’, followed by Part III on the ‘Different Progress of Opulence in Different Nations’. Part IV is on ‘Different Systems of Political Economy’ and Part V, the final part, is on the ‘Revenue of the Sovereign or Commonwealth.’

We shall look at the content in detail somewhat further below. But one can see that the first concern is of productivity of labour. This is because the principal message is that the wealth of a nation is not in its treasure of gold and silver but in the productivity of its labour and the total amount produced as measured by its value. Value itself was to be measured by the amount of a labourer’s time contained in the product. Division of labour is the