Fixing the rules of economy


From UPSC perspective, the following things are important :

Prelims level : Productivity of economy

Mains level : Paper 3- Reforms, productivity and technology to fix the problems of economy

The article discusses the three fundamentals which need an examination to fix the issues faced by the economy. 

Re-examining the fundamentals

  • India has an incomes crisis: incomes of people in the lower half of the pyramid are too low.
  • The solutions economists propose are: free up markets, improve productivity, and apply technology.
  • These fundamentals of economics must be re-examined when applied to human work.

Three solutions and issues with them

1) Freeing up the markets

  • It is suggested that markets should be freed up for agricultural products so that farmers can get higher prices; and freed up for labour to attract investments.
  • Without adequate incomes, people cannot be a good market for businesses.
  • In fact, it is the inadequate growth of incomes that has caused a slump in investments.
  • Ironically, the purpose of freeing up markets for labour is to reduce the burden of wage costs on investors just when wages and the size of markets must be increased.

2) Increasing productivity

  • Productivity is a ratio of an input in the denominator and an output in the numerator.
  • The larger the output that is produced with a unit of input, the higher the productivity of the system.
  • Improvement of ‘productivity’ is key to economic progress.
  • Economists generally use labour productivity as a universal measure of the productivity of an economy.
  • Humans are the only ‘appreciating assets’ an enterprise has. They can improve their own abilities.
  • The values of machines and buildings depreciate over time, as any accountant knows.
  • Whereas human beings develop when they are treated with respect, and are provided with environments to learn.
  • For capital-scarce and human resource-abundant countries, such as many developing countries, the correct ratio of productivity is output per unit of capital.
  • This must be the driver of business as well as national strategies.
  • This was the strategy of ‘Japan Inc.’ to make Japan an industrial powerhouse.
  • This was E.F. Schumacher’s insight also.

3) Use of technology

  • Schumacher, best known for his seminal idea ‘small is beautiful’ understood where capitalism powered with technology would be heading.
  • In his essay he wrote: “If we define the level of technology in terms of ‘equipment cost per work-place’, we can call the indigenous technology of a typical developing country (symbolically speaking) a £1-technology, while that of the modern West could be called a £1,000-technology.
  • The current attempt of the ‘developing ‘countries, supported by foreign aid, to infiltrate the £1,000-technology into their economies inevitably kills off the £1-technolgy at an alarming rate.
  • This results in destroying traditional workplaces at a much faster rate than modern workplaces can be created and producing the ‘dual economy’ with its attendant evils of mass unemployment and mass migration.
  • Schumacher had warned there was a malaise brewing beneath the drive to ‘Westernise’ and ‘technologise’ economies.

Way forward: Social contract between society and workers

  • Workers provide the economy with the products and services it needs.
  • In return, society and the economy must create conditions whereby workers are treated with dignity and can earn adequate incomes.
  • Good jobs require good contracts between workers and their employers.
  • Therefore, the government should create a good society for all citizens, must regulate contracts between those who engage people to do work for their enterprises, even in the gig economy.
  • Goverment should push innovation in socially more beneficial directions to augment rather than replace less skilled workers.


The power balance must shift. Small enterprises and workers must combine into larger associations, in new forms, using technology, to tilt reforms towards their needs and their rights.

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