Contemporary Macroeconomics

Amitava Bose, Debraj Ray, Abhirup Sarkar (ed)

Oxford University Press

342 pages/Rs 595

This is a festschrift of ten essays for Prof Mihir Rakshit of Presidency College, Kolkata. The editors and contributors are mostly former students of economics at the college who are now at universities and research institutes in different parts of the world.

The book is divided into five sections, each containing two essays. The first essay by Pradip Maiti on national income is a recap of national income accounting theory with an application to India.

It is useful both as an introductory course and for practitioners who often need to look up CSO’s definitions in its National Income Accounts publication. In fact, in this chapter I found something I had been planning to look up just last week — the sixteen items I need to add and subtract to move from GDP at market prices to personal disposable income!

The second essay is a research paper rather than the exposition of a standard theory. Essentially theoretical in nature, it discusses the deficiencies of net national product (NNP) as a measure of economic welfare. NNP includes both consumption and investment.

Following Weitzman, the authors argue that while it is clear that consumption promotes welfare, it is not obvious why net investment should be included in a measure of welfare. They suggest methods to revise NNP while accepting that there may be difficult issues involved in translating these suggestions into practice.

The first essay in the section on development develops the closed economy agriculture-industry linkage model that has features of Kalecki’s and Kaldor’s models. It is written in the spirit of the work of Prof Rakshit. It shows how agriculture poses two kinds of constraints on industry: the demand constraint and the wage goods constraint.

Output and growth in industry are dependent on agricultural growth. Relative stagnation in agriculture restricts industrial growth by reducing the demand for industrial goods as a larger proportion of income get diverted to price inelastic agricultural goods.

Agricultural stagnation results in a higher price of food that leads to higher industrial wages. A larger share of wages squeezes industrial profits and hence investment and capital accumulation.

The second essay in the section on development examines the impact of free trade on the wage gap between skilled and unskilled workers. It draws one’s attention to the point that it would have been much more interesting had the model in the first essay also been developed in the context of an open economy.

Indeed with the opening up of the economy and the removal of QRs on agricultural commodities, such models that were built essentially to understand agriculture-industry linkages in developing countries with a large agricultural sector, become irrelevant unless followers of that tradition keep them alive by constant innovation.

The first essay in the section on dynamics has an exposition of the new growth theory. As the editors point out it is essential for an introductory course because the literature is large and technical. Dasgupta has provided an accessible account of the pioneering contributions in endogenous growth theory, using a simple demand and supply framework.

Again in sharp contrast, the second essay is an advanced technical discussion of the nature of policy functions of dynamic optimisation models. Written more along the lines of a research paper in Econometrica (where Mitra has later contributed a paper containing more definitive results) it makes one wonder what level the book is targeted at.

The difference in levels between the first essay on national accounts and this one is too great for both to be suitable for one volume.

Among the essays in the following two sections on finance and institutions, Moitra’s paper on sovereign debt develops a simple intertemporal model to address the issue of the enforcing repayment in a sovereign debt contract. The other three essays must have been contributed to the volume, no doubt, as a tribute to Prof Rakshit. Good papers in their respective fields, but they do make the title of the book rather misleading.