Atanu Dey On India's Development

The Importance of Producing Stuff

To my mind, the ability to make distinctions is one of the more important characteristics of a fully civilized human being. Savages, very small children and animals do not share that characteristic. An untutored person will not be able to distinguish between two related but separate concepts. Indeed, the ability to do arithmetic depends on the ability to distinguish numerical information. I cannot stress enough the importance of being able to do arithmetic because those who refuse to do (or cannot do) arithmetic are doomed to speak nonsense. A bit of arithmetic is often all that is required to demonstrate the idiocy that pervades public discourse around the world.

Take the matter of poverty, for instance. If one were to think about it for a moment, one immediately realizes that the simple division operation throws much light upon the issue. Here is what I mean. You aggregate the stuff available in a specific period and divide by the number of people. If the result is a small number as opposed to a large number, you have poor people as opposed to rich people. Stuff matters. What is stuff? Things that you find, things that grow, things that you produce, and so on. At the very bottom of the structure of any economic system is stuff. Economists call it “goods”.

This does not appear to be quantum mechanics. But it might as well have been quantum mechanics given the widespread ignorance of that fact that goods – or stuff, as I like to call it – lie at the foundation of the economy. Sure there is “services”. Haircuts, dentistry, advertising, computer programming, and so on are services. But underlying any service you can imagine, there is stuff. If there wasn’t stuff, there would be no services. For instance, I sing you a song (hypothetically that is, because my singing is nothing to write home about) and you pay me for it. That payment is just a simple transfer of claim to resources that finally end up in stuff. I take the money and buy stuff to eat or to wear or some such. That transaction we can call ”transfer”, since we have not produced any more stuff, only you have transferred your claim to stuff to me.

Stuff matters. The aggregate amount of stuff available to a population matters. Like I said, you could just find it (oil in the ground, fish in the oceans), or you could grow it (in farms and orchards), or produce it (factories). Only when you have stuff can you indulge in transfer (via services rendered) or exchange (trade). Pure exchange does not increase the aggregate amount of stuff available. Taking from Peter to pay Paul does not make more stuff available.

Stuff is produced using land, labor, and capital – the factors of production. Advanced industrialized economies use relatively more land and capital (and use them more efficiently given that they have advanced technologies) and relatively less labor and produce a lot of stuff. The average amount of stuff available is therefore high because they have fewer people to divide the stuff among. So they are rich. They are rich not because they have more money, but because they have more stuff per capita. Since they can produce a lot of stuff using less labor, all of the labor is not employed in producing stuff and so the surplus labor can produce services. and the labor involved in services can be given a share of the aggregate production of goods. That share is called “income”. And this income is denominated in monetary terms. Money, in this case, is for facilitating accounting of the stuff produced and who gets how much. If you don’t have stuff backing the money, it is useless. That is, handing out money to people does no good unless there is some stuff behind it all.

Production of stuff matters. That labor is required to produce the stuff is an unfortunate fact of life – so far at least. In a perfect world, robots would produce stuff and people would be unemployed, free to compose music or watch the grass grow or whatever. In the imperfect world we live in, we have to use labor to produce stuff. But the less labor we use to produce stuff, the better off we all are – with the obvious caution that we have to distribute the stuff equitably, of course. But the problem of distribution only arises after we have produced stuff. If little is produced, little can be distributed on average and therefore on average we will be poor. Distribution is a less taxing problem than production.

Now here is the point that I am building up to. If an economy produces a heck of a lot, and yet a significant percentage of the population is poor, then we know that there is a problem of distribution. In that case, we can improve the situation by a better distribution through transfer of stuff to those who are poor. But if the aggregate production of stuff divided by the total population is a small number, the economy will be a poor one irrespective of the distribution. Merely taking from Peter to give to Paul makes no difference to the aggregate amount of stuff available.

So here is the basic question we need to ask: Will a proposed scheme or policy produce more stuff or not? If the answer is no, then we have not solved any problem. Take internet kiosks in rural areas. From what I gather, they are being mainly used for astrological charts, internet chat, e-governance services such as the printing of caste certificates (whatever that is supposed to be good for), “learning computers” and other such services. If internet kiosks in rural areas does not directly, or indirectly, lead to the production of more stuff, it is pointless. Or take the “Employment Guarantee Scheme.” Merely giving people employment does no good if in the end more stuff is not produced. Might as well get people to dig holes in the ground and then fill them up again for all the good it does to the overall economy.

We need to distinguish between employment and production, between money and income, between aggregate production and distribution. India’s economic policies have stressed employment and not production. That, in no small measure, is why India is poor. Until India’s economic policies shift away from employment and towards production, India’s fortunes are unlikely to change.

  • Walker

    Good post. There are some who say that India can skip the “manufacturing led” growth phase and specialize in services. The points you made in this post help show why such a strategy will be ineffective. If a society is to have more “stuff” it can either make it or trade for it. But since manufactured goods are generally more tradable than services, the using a service surplus to fund a goods deficit is a losing proposition. This is why service-heavy ecnomomies like the United States and Britain run large trade deficits, and it is also why if India is to get more stuff it must be able to produce for itself.

  • http://tarunsblog.blogspot.com TTG

    Hi,
    I came across your blog thru the IndiBlogs nominations. While agree with you on the Employment guarantee act, I totally disagree with you on the internet kiosk issue.
    1) Somebody has to be employed to run that kiosk
    2) Somebody has to assemble the computer.
    3) Somebody has to sell it

    These are, as you say services, but they put money in people’s hands

    Second you mention that the kiosks will be used to for e-governance services. This is humongous, if implemented properly. Farmer A living in village B needs to take a bus/bullock cart/train to get to the nearest town to obtain some form/permit or the other, also being exposed to touts, and having to shell out some stupid fee to some official. If the kiosks are implemented correctly, then it requires a simple printout, and time saved. Farmer’s time saved = farmer’s production increased. Of course this is very hypothetical…

    But yes, manufacturing in the country is stunted. And that is because we refuse to shift to a free market. We are still stuck in the goonda raj of socialism when it comes to manufacturing, and the sooner we step out of it, the better.

  • http://www.deeshaa.org Atanu Dey

    Walker, thanks for the point about the goods deficit cannot be funded by a services surplus in a large economy.

    Tarun, thanks for taking the trouble to write the detailed and thoughtful comments.

    I am glad that you disagree because it gives me the opportunity to engage in debate with the view to reaching a better understanding of

    the issues.

  • Ramesh

    My knowledge of economics is not so great, but would like to put forth my opinion.

    You say divide stuff by ppl to get an idea of ‘poorness’. My understanding of this ‘stuff’ is ‘wealth’, not goods like you say. Wealth comprises both goods and services. For instance, if India earns revenue by being the world’s back office, we use that revenue to buy goods from say, China. So we increase our ‘stuff’(your definition) using services. So, exchange does increase stuff/goods for one nation, though not for the whole world. Why are goods more ‘tradeable’ than services? I-banking vs. sweatshops??

    Services do need goods as the basis, I agree, but the definition of the ‘system’ isnt so clear. The global economy cannot have only services without goods, I agree. But cant India/any one country skip the manufacturing cycle and get to services first? I think its possible.

  • Grag

    What is an activity performed by 40% of all people at a party?
    Snoop in your medicine cabinet. – a joke

  • http://oltsm.blogspot.com Abhijit Gadgil

    Isn’t this a bit tricky? In most of the economies of the developed nations “Service” sector constitutes the largest percentage for GDP, followed by a much smaller percentage by industry and “miniscule” by agriculture. So ironically most of the developed countries consume more stuff (produced by developing countries) than they produce and yet they are at the head of the list. Why is this so?