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Thursday, July 18, 2024

Why Pakistan needs a new charter of economics

Economics focuses on the behavior and interactions of economic agents and how economies work. Microeconomics is a field that analyzes what's viewed as basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions.

Pakistan needs a charter of economics before a charter of the economy. Recently, there has been much debate on the need for all political parties to come together and formulate a charter of the economy for Pakistan. Proponents have argued that such a consensus is pivotal for the country to navigate its current crisis in order to bring forth a period of stability necessary to help Pakistan. But how would one go about formulating a charter of the economy? Perhaps a good first step could be to ensure all political parties have a common definition of economics.

They may decide to define economics as one of four definitions so all parties may exercise their democratic right to choose the definition they best see fit. Such a definition is important as it would help them determine whether they should bother to give much importance to knowing or reading or discussing classical texts in economics and historical case studies of their application in countries as part of such debates which is for example a common occurrence in China when formulating a “Charter of Economy”.

Read more: Geo-economics and geopolitics of US-China competition

Definition 1: Economics enables us to look at the grand political and economic changes in history and explain them using economic factors. In other words, it is a branch of historical materialism. Decisions driven by economic factors shape societies and make them change. In this case, we must discuss the classics and historical case studies of their application in countries.

Definition 2: According to Alfred Marshall’s definition, economics deals with our ordinary life and its objective is to improve that ordinary life, to make our incomes higher, allow us to have more free time, and make poverty disappear so that we can enjoy other activities that we like while having a satisfactory standard of living. Then, we should consider discussing classics and historical case studies of their application in countries but perhaps not as carefully as under the first definition.

Definition 3: Economics helps us in allocating scarce resources among alternative ends. Then we need to discuss only selected classic texts and historical case studies of their application in countries.

Definition 4: Economics is just what businesses and finances do now. Then perhaps we should not bother with classic texts and historical case studies of their application in countries.

If you think that these distinctions are too abstract, here is an example to show how they are very much concrete and are in reality applied right now. This is important because recently there have also been calls by Planning Minister Ahsan Iqbal that Pakistan ought to follow the Chinese model of economic development.

Read more: National security and Geo-economics: Pakistan’s economy and ending regional isolation

But is the model socialist or capitalist?

The socialist vs capitalist model

You can study China by asking the question of whether it is capitalist or not, whether its opening and marketization that began in 1978 are just one very long New Economic Policy or an irreversible change; whether Chinese economic history leads us to believe the country will evolve in one or another direction. You are then applying Definition 1.

Or you may not bother with decisions that led China to liberalize in 1978, but focus on policies that reduced poverty, increased its income, or widened disparities between the affluent and the poor. You are applying Definition 2.

Or you can discuss whether the state-owned Chinese banking system is allocating loans in the best way or not: here you are working under Definition 3.

Or you can write an article discussing if Evergrande will pay its creditors next week or not. You are in the world of Definition 4.

What is meant by these definitions? The first definition is clearly Marxist (not communist or socialist) in the way it is written, but substantively it is the same definition that can be found in works as far apart historically and even ideologically as Adam Smith and Kenneth Pomeranz. In this view of economics, its role is to illuminate economic factors that have led to systemic changes, to people moving from one way to organize production to another. So, it is not a predetermined ideological position, but the methodological approach that is important here.

The second definition (due to Alfred Marshall) is much more pragmatic. It looks at the ways of improving people’s lives. It is related to the first definition when, under the first definition, we believe that societies tend to choose more efficient ways of production over less efficient ones. Through the Darwinian struggle of different modes of production, the most efficient wins, and that most efficient mode increases people’s incomes the most. The second definition allows you not to worry about the grander historical forces but to focus, here and today, on how to make things better.

Read more: From Geopolitics to Geo Economics

The third definition is called Lionel Robbins. That definition narrows economics very significantly. Economics becomes similar to operation research. It is not interested in the succession of different systems, not even in improvements in welfare as such, but in optimization. It could be used under any system. It is not surprising that Tjalling Koopmans and Leonid Kantorovich, working in two different systems but both interested in optimization, came up with very similar findings. The “scarcity ends” definition can be used to best allocate inputs and people in a factory whether it is privately or state-owned, to maximize the work effort of inmates of a labor camp or of cotton-picking slaves.

The fourth definition is beyond pragmatic. It is concerned with own, or people one works for, immediate maximization of income. It ignores everything that is not useful for that purpose and blurs the difference between social science and the profit-making of a single business. It is Gordon Gekko in action.

 

 

The writer is an economist and strategy consultant who writes regularly for Forbes, LSE Business Review and Profit Pk. He also functions in an advisory capacity for the London School of Economics Lean Launchpad and is serving on the board of two global think tanks, GAIEI and IGOAI. 

The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.