by Rashedul Islam
For many years, people have studied economic theories to better understand growth, transition of growth, development, transition of development, economic self-reliance, economic benefit for business, trade and commerce, economic well-being of people, overall improvement of life, standard of living and way of life. At the beginning of the 21st century, some loopholes have been identified in some of these theories, which are discussed below.
Saving-investment equality or identity confusion: In undergraduate courses, it is taught that, in ex-ante sense, savings may not be equal to investment but, in ex-post sense, savings and investments are always equal and identical. Three kinds of investments are known to us: physical investments in factories, equipment, machineries, plants, hotels, etc; financial investments in shares and stocks and short-term and long-term loans; and inventory investments in purchase of raw materials, assessment of works-in-progress and maintenance of the stock of finished goods.
It is safe to say that entire savings are not usually invested. Therefore, not only in ex-ante sense but also in ex-post sense savings and investment are not equal.
Five factors of production instead of four: In undergraduate classes it is taught that there are four factors of production. In reality, however, five factors have been identified. Our known four factors of production are land, labour, capital and organisation. But in the production process, for example in farming, we usually use some inputs such as seeds, seedlings, saplings, chemical fertilisers and insecticides or pesticides, etc, which do not fall in line with the four factors. Therefore, five factors of production have been identified and the name of the new factor may be called ‘input’.
Investment is a function involving three vital independent variables: In undergraduate courses, it is taught that investment is a function of only one independent variable which is rate of interest. If the rate of interest rises, investment will decrease or may decrease. On the other hand, if the rate of interest decreases, investment will rise or may rise. But, in reality it is found that dependant variable investment has a functional relationship with three other independent variables. These are (1) prospective demand of goods and services that will be produced; (2) existence of skilled entrepreneurs, (3) existence of social overhead capital and physical infrastructures.
Resource constraints and optimum size of population: In every country or economy, land resources, forest resources, mineral resources, sea resources and also water resources are limited. Therefore, while assessing the available resources, every country should maintain optimum size of population. Consequently, it can be hoped that desired optimum size will not foment economic crises because import from other countries may not be always feasible due to various reasons.
Money circulation and materiality or concept of physics: It is visualised that local currency and foreign currencies are circulated whereas matter or material things are transformed into matters. In most cases, we are constrained by matters which are physical resources. An example may be used to make this notion clear. Suppose, with a view to producing timber we initiated tree plantation in a certain area. We had nurtured 1,000 big teak trees for long 40 years. From those trees we could produce a 30,000 cubic feet timber. From 30,000 cubic feet timber we made furniture worth 3 million dollars. It can be seen that at every stage we have added value through ‘value-added’ process of production. No doubt, value of money is increasing at every stage, but those 1000 teak trees or 30000 cubic feet timber remain constant or fixed. Therefore, our requirements or demand are constrained or blocked by physical resources or matter. Although this process is not 100 per cent similar to the concept of physics, it is a bit similar to the concept of physics.
Use of mathematics in economics as a logical language: Economics is a branch of social science which considers human behaviour, human psychology, social psychology and non-economic factors. This discipline is not pure science in the way Physics and Chemistry are. In economics we make mathematical assumptions to explain a theory, model or hypothesis. Through logical steps or logical sequences we come to a conclusion or a result. Since economics is a branch of social science those assumptions do not remain constant or still. In reality, those assumptions sway or oscillate. As a result, derived conclusion or result will also sway or oscillate; but it is expected to stay within a certain range. With the result or conclusion that we get through mathematical derivatives or mathematical steps, economic issues can be better understood.
Welfare economy is better than extreme capitalist economy: In an extreme capitalist economy we face some problems which may trigger social unrest. Two examples are given here. Suppose, a person has been starving for two consecutive days because of some reasons or other. In order to satisfy hunger, that person will be ready to pay 20 dollars for a meal the actual price of which is 10 dollars. Still, that person is having consumer surplus according to economic theories or concepts. Secondly, we should enact consumer protection act or law in order to ensure that the price which a seller is charging for his/her goods and services includes only normal profits. He/She is not taking super normal profits.
Human capital and its importance for development: Capital is defined as a produced means of production which is used for further production. But in my opinion, expertise in any field knowledge that is found in scientists, specialist physicians, skilled surgeons, expert engineers and architects, knowledgeable professors, barristers, reputed litterateurs, cultural personalities, reputed economists and bankers should be termed human capital. Without human capital a country will not be able to harness, tap and utilise its own resources for growth, development and self-reliance.
Since economics is applied in both public and private sectors, in international financial institutions, state-administration, foreign relations and diplomacy and in politics, students of economics should know a bit of law including international laws, functioning process of the government, international relations, diplomacy, native and world history, political science, sociology, anthropology, human psychology and of course some mathematics and statistics.
Rashedul Islam is deputy comptroller and auditor general (reserve), The Article Published in the Daily New Age, dated 20 March 2010.