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Our economics textbooks are mostly flawed – here’s why!

Most economics textbooks have perfect theories, but those theories do not work well in developing nations like India. Debarghya Deb, an aspiring economist and student of class XI (The Levelfield School, Suri), explains why.

SNS | Kolkata |

Let me make one thing clear at the outset – I am a mere student, studying in class XI, and I am not here to talk about the flaws in the economic theories propounded by the great economists of the past era.

The theories are all perfect — a little too perfect — and that is precisely why some of them do not work well in a nation like ours.

Most economics books talk about economics from the point of view of developed countries. In the developed countries the law and order works; the countries are normally stable and peaceful, and there is very little corruption in the government. This makes the environment quite conducive for the economic theories to work perfectly.

But most countries don’t have the necessary environment for such perfect economic theories to work. The laws of supply and demand are not allowed to work without government intervention, property rights are not respected and there is corruption in every step.

Now let’s take some theories and see how they work differently in underdeveloped countries.

The first thing taught in economics is that prices of goods are determined by the forces of supply and demand. But things are very different in underdeveloped countries.

Instead of the invisible hand, is often the guiding (or misguiding?) hand of the government that sets the prices. For example, a few years back in Kolkata, a limit was put on the price of bus tickets. Bus owners started making lesser profits, many buses went out of the market creating a huge shortage. The remaining buses were not maintained well (because it was unprofitable to maintain them), so public transport became much worse.

As a result, many people had to pay a lot more money to travel in a cab or autorickshaw. The policy which was supposed to ‘benefit’ the common people left them worse off.

Mind you, I am not talking about public transport here – these are privately operated buses that the government sought to regulate. Similarly, the government often seeks to regulate fees in private schools and hospitals – as a result, the benefit of the invisible hand of the market does not reach the people.

As a second example, let’s consider how government contracts are won in underdeveloped countries. According to economic theory, the suppliers who provide a service at the lowest price are able to sell the service.

In underdeveloped countries, however, contracts are often won by a different process; there is often underhand dealing between policymakers and suppliers.

The politician is happy to earn money for a future election campaign, the contractor recoups his bribe by cutting corners in materials and quality, and in the end, it is the people who suffer.

They get pothole-filled roads, collapsing bridges and other poor quality infrastructure.

Textbook economics also claims governments can improve market conditions by stopping a company from becoming a monopoly and increasing competition.

But most governments in underdeveloped countries do the exact opposite. Most of the monopolies are created and supported by the governments. The governments make sure that no other companies join the field and increase competition.

But what do the governments get in return? Simple: election campaigns cost a lot of money and these election campaigns are funded by these monopolies which help the government to remain in power.

You might argue that at least the chapters that do not deal with policy but deal with measurement are correct. For example, we had several chapters on measuring key economic variables like GDP, inflation and unemployment. Alas, there too, our textbooks fall short.

Data does not lie but it can be made to lie. Most of the data that comes out of underdeveloped countries are not trustworthy.

Half the economic activities happen in the underground economy and as a result are not recorded. Some governments use accounting tricks to improve their numbers.

Often governments manipulate data is by changing the way something is calculated. Such differences are too subtle for common people to notice – who celebrate a year of great GDP growth, or record low inflation.
Another big problem with our economics textbooks is they focus too much on finer debates.

For example: ‘Does minimum wage laws end up hurting the people it is supposed to serve?’ or ‘How much government intervention should be there in an economy?’ The books forget that in most countries the condition is so sub-normal that these debates don’t make any difference – they are mere academic debates.

Minimum wage laws might be put but in most countries but they are not enforced. We might endlessly debate whether an import quota or import tariff is better – but then we have a president who wants to put up a wall between two countries!

The list does not end here. For every economic theory that’s out there, you can find examples of real-life situations where it’s subverted by governments. I hope that someday, somebody will write an economics textbook which will reflect our reality more accurately.