Engines of growth
Manas Chakravarty in his recent article in the Mint (14 April 2014) has analysed the history of economic development of India, UK and other Imperial powers like Soviet Union and Modern China. In all these cases capital was accumulated by favouring capitalists in land acquisition, allocation of natural resources, endless supply of cheap labour and preempting the resources of state-owned banks. Since this crony capitalism is unsustainable in a truly democratic setup with rising aspirations of all constituents, the process of economic growth he feels is not maintainable in India.
Dani Rodrik, in the same issue, elsewhere pointed to the common occurrence in the developing world of a large difference in productivity between large scale sector and SMEs. Economic development occurs through structural shift of movement of workers and farmers from low productivity sectors to modern factory work and services having higher productivity. But the movement has become increasingly perverse preventing economic growth. He is therefore afraid that the
process of growth of economy is running out of steam.
While ‘primitive accumulation’ initiated the growth of capitalism, the advance of capitalist production develops a working class, which by education, tradition, habit, looks upon the conditions of that mode of production as self evident laws of nature. The organisation of the capitalist process of production, once fully developed, breaks down all resistance and is self-sustaining.
Economic growth can primarily be broken down into two categories: extensive and intensive. Extensive growth refers to the increase in output due to an increase in the factors of production; for example, by expanding the workforce – as has happened in many periods in the history of capitalism through the growth in the population, the use of migrant labour, the introduction of women into the workforce, or in modern times by increasing the retirement age – and increasing the amount of capital in proportion to this expanded workforce. As Rodrick said, this process may have reversed during periods of depression. Intensive growth, by contrast, is the increase in output for a given size of the workforce. This reflects an increase in the productivity or intensity of labour – what Marx refers to as an increase in ‘relative surplus value’ in terms of capitalism. The difference between ‘extensive’ and ‘intensive’ growth, therefore, is a difference of quantity and quality: extensive growth merely increases the quantity of the productive forces; intensive growth increases their quality.
What both the earlier quoted analyses miss out is that the main engines of growth is technology, together with entrepreneurship and good governance. Technology increases productivity, entrepreneurship widens opportunity area and good governance ensures realisation of productivity, opportunity and profit. The three in conjunction does work miracle particularly in times of depression.Because while technology adds productivity, entrepreneurs ensure proper utilisation of technology and good governance facilitates entrepreneurship. The three together catalyse both extensive and intensive growth with effect more pronounced in the latter.
Some, however, claim that behind the obviously apparent and relatively recent ‘Great Recession’ lies a less obvious long term decline in the contribution made by technological progress and innovation towards economic growth – a so called ‘Great Stagnation’. But this is not borne out by the following account of the progress of the US economy. The continuous growth with increasing employment and high wage level of US economy except briefly in periods of depression is a good pointer. Good Governance led to independent and effective politicolegal and judicial system with equity and fairness and growth conducive environment for entrepreneurs.
The author is a retired banker and a commentator on economy and governance