After independence
After India attained independence in 1947, the country took the path of a socialist and centralized regime, largely influenced by the rise of Marxist-Leninist philosophy, ignoring the millennia-old indigenous traditions of Indian philosophy and cultural values.
Indian economic planning was initially modelled by P.C. Mahalanobis using the existing Soviet literature on planning techniques, with little opposition from most Indian economists. But as Milton Friedman said ‘there is only one prominent professional economist, Professor B.R. Shenoy of Gujarat University, who is openly and publicly and at all effectively opposed to present policies and in favour of greater reliance on a free market. He is a remarkable and courageous man'.Shenoy was a student of Austrian economist F.A. Hayek in the early 1930s at the LSE. In his book Post-War Depression and the Way-Out (1944) he pointed out the dangers of financing the Bombay Plan of government intervention through newly created money and bank credit, i.e. through massive deficit spending. Other important works by Shenoy include Ceylon Currency and Banking (1941), The Sterling Assets of the Reserve Bank of India (1953), Problems of Indian Economic Development (1958), Fifteen Years of Indian Planning (1966), Indian Economic Crisis: A Program for Reform (1968), Food Crisis in India: Causes and Cure (1974) and Economic Growth and Social Justice (1977).
For decades before the 1991 economic crisis, Shenoy advocated sound finance based on free market ideas, but his voice was ignored. His contemporaries had a blind faith in centralized planning, and these policies were responsible for creating a crisis in India's foreign exchange in the early 1990s. Shenoy died in 1978, after which the thrust of economic policy moved away from the worship of planning, and most economists now agree that India's long tryst with Nehruvian socialism was an economic disaster.
Initially, some Indian economists had argued in favour and some against neoclassical economics. The critics based their arguments on its suitability for the Indian economy. However, neoclassical economics eventually became the most popular of all economics in independent India. Indeed, Nachane (2008, 85) stated ‘belief that neoclassical economics is universal (widely prevalent among large sections of the Indian intelligentsia) is attributable the fact that the subject of Indian Economics... now survives only as an exotic species... the spirit of independent thinking that characterised the writings of 19th-century nationalists such as Dadabhai Naoroji and Mahadev Govind Rande, and of their intellectual heirs... has virtually disappeared from the current generation'.
D.M. Nachane (2008) pointed out the ‘virtually unshakeable position that neoclassical economics occupies currently in mainstream economic thinking'. But his view on ‘what exactly constitutes neoclassical economics and when it originated' is interesting. As pointed out by Nachane, ‘Dasgupta refrains from the appellation neoclassical while referring to the works of Jevons, Walras, Menger, J.B. Clark, Wicksteed and others, preferring to use the term marginalist instead'. Dasgupta believed the term neoclassical was suited only for Marshall, whose ‘analysis of equilibrium points to a dynamic element'. Further, in Nachane's words ‘Dasgupta's position is thus close to Veblen (1900) and contrasts strongly with the more inclusive use of the term neoclassical introduced by Hicks (1932) and Stigler (1941)'.
Nachane's basis for neoclassical economics was that ‘modern orthodox economics incorporating the important contributions to information theory, transaction costs and externalities by Arrow, Stigler, Stiglitz, Townsend, Coase, etc., does not constitute a departure from neoclassical economics, only its continuation and reaffirmation under more general boundary conditions' (2008, 82). Dissatisfied with the role of neoclassical economics in India, Nachane concluded that ‘the economics profession in India will overcome its traditional intellectual dependency on Western mainstream economics, and imbibe a little bit of the spirit of free inquiry and critical appraisal of dogmas, that characterised A.K.
Dasgupta's life and work'. Noted Keynesian economist A.K. Bagchi (1976, 81) also criticized neoclassical economics, arguing that it ‘has no tools for dealing with essentially non-capitalist social formations or their interaction with capitalist formations'.Amartya Sen (b. 1933) is undoubtedly the greatest economist of independent India and has contributed to both economic theory and policy. Sen is a product of the long tradition of West Bengal achievements, being the second Nobel Laureate from West Bengal after Rabindranath Tagore, who won for Literature in 1913. Bengal was the early powerhouse of colonial India before the British administration was shifted to Delhi. Sen's corpus of works since 1970 has fulfilled his basic objective to expand the scope and flexibility of three central tools of economics: the concept of preference, rational choice theory, and social choice theory (Anderson, 2005). He has also contributed to welfare economics on topics such as poverty, famine and inequality, this work re-energizing the field of development economics. In 1998, he was awarded the Nobel Prize for Economics for ‘his contributions to welfare economics'. In his Nobel lecture, Sen discussed the challenges faced by social choice theory, by sketching a perceptive view of the origin of that theory. His basic argument for expanding the scope, objectives and boundary of social choice theory were drawn from Kenneth Arrow's Social Choice and Individual Values (1951).
In 1953, Sen was only in his late teens when he went to study in Cambridge at Trinity College for a BA in Economics, although he already had a BA in Economics from Calcutta University. After finishing the BA he enrolled for a PhD. But he later returned to Calcutta on a two-year period of leave from Cambridge and was appointed as Professor of Economics and founding Head of the Department of Economics at Jadavpur University, Calcutta. At that time, Sen was ‘not yet even 23' years old, and this created a storm at the university.
After two years at the department he returned to Cambridge to complete his PhD. Sen wrote his thesis on ‘The Choice of Techniques' under the supervision of Joan Robinson.When Sen was at Cambridge, a heated debate between the Keynesians (Richard Kahn, Nicholas Kaldor and Joan Robinson) and the neoclassicals (Dennis Robertson, Harry Johnson, Peter Bauer and Michael Farrell) was occurring. But Sen had ‘close relations with economists on both sides of the divide', and he maintained this position throughout his career. However, he did make greater criticism of the neoclassical school, and it seems that Sen underwent a significant ideological migration (Briggeman, 2013). Both the left and right have claimed Sen, but he said that he had read the writings of both and agreed with neither (Goyal, 1999).
Sen's first major book was The Choice of Techniques published in 1960, based on his PhD thesis. It explored choices over the optimal combination of techniques for industrial production, whether to use more labour-intensive methods of production or capital-intensive methods, assuming there was abundant labour and scarcity of capital (Atkinson, 1999). Sen criticized purely market-based criteria for choice of technique and criteria that sought to modify the market solution only by taking account of market failures in the static allocation of resources. But he recognized that market prices and costs should shape planners' choices, when such prices could not be altered without imposing too high a fiscal burden or social cost (Bagchi, 1998).
In 1970 Sen published a book on Collective Choice and Social Welfare, which was concerned with investigating the dependence of judgements about social choice and public policy on the individual preferences of members of a society. He argued that, just as social choice was based on individual preferences, the latter in turn depended on the nature of the society in which they occurred. Thus, rules of collective choice were linked to specific social structures.
Another contribution of Sen was on the behavioural theory of self-seeking egoistic agents which he called rational fools (1977). His theory of rational fools combined two different philosophical schools, the rationalistic school and the phenomenological school. Sen argued that adopting too narrow a definition of ‘rational' behaviour neglected important factors such as commitment, but in a way that neglected the distinction between reason as such, and knowledge as the basic problem of human activity. Thus his criticisms were mainly targeted at the neoclassical rather than the Austrian approach.
Sen's work on the ‘capabilities approach' to development created a new methodological debate among economists. Capabilities are the alternative combinations of functionings that a person is feasibly able to achieve. Sen argued for five components in assessing capability: the importance of freedoms in the assessment of a person's position; individual differences in the ability to transform resources into valuable activities; the multivariate nature of activities producing happiness; a balance of materialistic and non-materialistic factors in evaluating welfare; and concern for the distribution of opportunities within society. This work helped to make the capabilities approach a paradigm for policy debates in human development. Sen refined Adam Smith's principle of sympathy and added a modernised concept of the impartial spectator in the form of commitment (Eiffe, 2008). Sen drew not only on Smith's Wealth of Nations, but also on The Theory of Moral Sentiments. These two books were the main instruments for redefining a different approach to human progress.
Unlike liberal economists like Ambirajan (1976, 1978), Sen argued in his book Poverty and Famines (1981) that it was not the decline of food availability, but the ‘failure of exchange entitlements', which caused famine. Thus, such failures can arise when the rate at which products or labour power can be exchanged against food turns sharply against the producers and labourers (Patnaik, 1997). Sen remains India's most well-known economist.