“Beyond the Invisible Hand”

Will change at the top of the World Bank mean change for its members?

Recently appointed the Chief Economist of the World Bank, what better time to revisit the work of Kaushik Basu, in particular his 2011 work “Beyond the Invisible Hand.”

In it, Basu argues that the selfish proclivities that underlie Adam Smith’s adage of the invisible hand are far too often left unquestioned, thus shaping the norms of capitalism as distinct from the demand for outcomes that would leave a more equitable and fair society. And while this critique is framed as “an intellectural road map for dissent”, the work is far from radical. In fact, save for two redistributive policy recommendations, Basu’s work largely shies away from the controversy that has marked his previous work. For the former Professor of International Studies at Cornell University as well as chief advisor to India’s Ministry of Finance, Basu has long skirted controversial approaches to economic and social development.

His most cited work is his 1998 article on “The Economics of Child Labour.” Therein he argues that in low productivity economies, a ban on child labour may in fact worsen family income and poverty. And while Basu’s analytical work defends this conclusion, it remains a moral challenge for many. The tension between norms and economic analysis is once again brought to the fore in his work on corruption, and the potentially beneficial effects of legalizing certain forms of corruption. While normatively against corruption, Basu argues that by legalizing the payment of what he terms harassment bribes, the balance of power between bribe-giver and bribe-taker is shifted to the giver, who by account of his or her ability to report the bribe-taker with no fear of legal recourse to themselves, and will thus lead to a decrease in overall corruption.

Across such works, Basu has sought to unpack orthodox approaches to economic analysis to highlight the presence of competing claims to knowledge and accuracy. In so doing he has sought to broaden what he terms the “central opinion” of economic knowledge, that is the “body of intellectual material that describes how a modern economy functions, and assures us that as a system, the current world economic order, found on individual selfishness and the ‘invisible hand’ of the free market, is right or, at any rate, the best among what is feasible.” His rebuke of the orthodox approach has positioned him as an unconventional thinker, unconstrained by orthodoxy and certainly not averse to rocking the proverbial boat.

His most recent work, “Beyond the Invisible Hand,” continues along this path, problematizing the policies and underlying economic theories that have largely failed to address dramatic rates of both inter- and intra-nation poverty and inequality around the world. In so doing, Basu seeks to excise the complacency that enables such ills to continue, their roots in the perversion of modern democratic practices and the capture of economic thought by hard and unbending doctrine.

Therein lie the roots of the book’s title, Beyond the Invisible Hand. Borrowing from Smith’s most famous and most foundational work on the role of the invisible hand in the creation of economic growth, Basu constructs a critique of orthodox economic thought and the doctrinaire claims that he sees as having “ossified into a hard and unbending doctrine, devoid of qualifier and warnings that Smith sounded.” Thereafter he goes to great lengths to respect the theoretical sanctity of Smith’s theorem on the invisible hand, noting its continued validity as a mathematical truism, and instead lays the blame at the feet of subsequent bastardizations that have “segued textbook models into the facts of economics”.

These facts, however, are far from indisputable and Basu sets out to prove so much in a manner that is accessible to economists and non-economists alike. In so doing he relies heavily on game theory to highlight the presence of pareto-improving alternatives to standard contemporary economic outcomes.  Poverty and inequality are not the fate of those who don’t work hard enough, he argues, but rather the product of a society that has accepted the presence of rules and theories that enable them.

Therafter Basu highlights in a series of examples that markets, contracts and even entire societies are constructed in a manner to enable discrimination and subsequent poverty and inequality. Thus the necessary role for government intervention in mitigating the worst effects of the invisible hand and its use as a tool to keep some members of society down. In so doing, however, Basu distances himself from radical/Marxist approaches to change, and instead uses mainstream theory to highlight that choice rather than fact has determined our direction.

And thus while Basu terms his approach “a roadmap to dissent”, it’s far less radical than such terminology is usually associated with. Acknowledging the precarious nature of “tax the rich schemes” and their potential to lessen the welfare of both rich and poor, he instead focuses on two low-hanging redistributive policies: estate taxes and profit-sharing. While the former have largely been stricken from developed economy fiscal regimes, their re-introduction would pave the way for increased transfer to the lower quintile thus attacking poverty and inequality head on, with limited impact on the incentives for current generation wealth accumulation.

His latter proposal is certainly more radical. For while acknowledging the overall benefits of free trade and the movement of capital and goods, he notes the deleterious impacts of labour arbitrage through offshoring on wage levels for affected sectors. He argues that this deflationary pressure has contributed to the increasing rates of income inequality that have driven protests across developed economies, most notably through the Occupy Movement. Addressing these effects should not be led by restrictions on trade or capital, but rather through a form of profit sharing to compensate affected labour, notably the lowest quintile. As profits increase through offshore arbitrage, the deflationary effect on wages and/or disappearance of jobs would thus be compensated with a share of those very increased profits.  This proposal follows a similar construction than Basu’s aforementioned theoretical work on corruption. For by shifting the proceeds of labour arbitrage to affected labour, it in fact lessens the benefits that accrue to the original holders of capital, thus lessening the original push for offshoring and maintaining domestic labour levels (albeit with wage levels that will necessarily decrease to maintain competitiveness). It goes without saying that such recommendations would face Sisyphean challenges in contemporary policy circles as the power of financial capital would bear down against them.

The feedback from such proposals is unfortunately not addressed by Basu, nor is the political economy of policy-making in either rich or poor economies that must be reformed to enact such changes and alter the normative framework that has driven contemporary economic policy. More generally, while Basu’s work is strengthened by its broad applicability in either developed or developing economies, this breadth is concomitantly confused given the distinct challenges facing developed and developing economies in the processes of economic globalization that are not addressed.

Such critiques, however, detract little from Basu’s core thesis – that balancing fairness and equality with contemporary economic theory is not impossible, and that the patterns of poverty and inequality that mark this most recent period of globalization are by no means necessary.  Like his predecessor at the Bank, Justin Yifu Lin, Basu’s appointment brings continued hope that the priorities and voices of developing countries, notably as it relates to unorthodox approaches to economic and social development, will be given more prominent and sustained attention at the intersection of H and 18th. Ultimately, his focus on inequality and poverty, and the potential solutions that exist in the portfolios of contemporary policy making, should bring optimism. For, as Basu notes in the final chapter of “Beyond the Invisible Hand”, while the path to progress through normative change will be a long one, it is one desperately worth fighting for.

Postcript: This review stems from a conversation with an impressive former peer at the LSE. One day he’ll be the President of the Philippines and will hopefully invite me for a visit.

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