Thursday, July 9, 2009

The Nature Of Economic Theory & Policy II

In my last post, I depicted, as clearly as I could, the dichotomy that between theory and policy that economic theorists have tried to maintain in order to ensure that theirs is a theoretical research programme that is as objective as it can be scientific.

As a result, there is a tendency to emphasis on the theory of growth and neglect the theory of distribution, such that formulators of distributive policies that less guidance on from theory and therefore the chances of distributive policy errors are high.

Of course, for those of us who know our economic growth theories, we cannot pretend to write a production function without being confronted with the implications on distribution of the output. It is this glaring neglect that we find ourselves talking senseless about growth without ignoring the reality of distribution right in front of our noses.

To be authentically economic, we cannot simply write a production function that is comprised of different races of people. We know the key factors of production to be land, labour and capital.

Theoretically, it requires a heroic assumption to say that race A has land, race B has labour and race C has capital. In all likelihood, every race of people has A, B and C in them. And this is why the theory of distribution inevitably falls back to class rather than race.

Land is without productivity which is embodied only in capital. Labour is without skill which is embodied in capital.

Capital, however, embodies skills, technology but I do not think it contains money. Money, as Keynes contended, is not there to earn interest. Money contends with uncertainty of capital value and hence liquidity.

Capital is that which links the past to the present and the present to the future. Without capital, we will be nothing but a subsistence living from day to day depending on our daily bread from providence and occasionally manna from heaven if we happen to have oil.

We should therefore take the bulls by the horns, if our research is to be realistic, by studying the impact of distributive policies on the accumulation of capital. (It does not bode well for a country which claims to be wealthy but having to resort constantly to foreign savings for capital.)

There should be research, especially empirical work, directed at the distributive inpact of growth policies to see whether a particular policy is sustainable or not over the long run. But there will be immense difficulty with this programme of research when even the measurement of wealth is a massive obstacle in itself.

This is an area of empirical research which I think Malaysia has sufficient data points to throw light on.

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