Solutions by the people, for the people

  • IASbaba
  • October 13, 2022
  • 0
Economics, Governance
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  • Economics is a social science that focuses on the production, distribution, and consumption of goods and services, and analyses the choices that individuals, businesses, governments, and nations make to allocate resources. Economic science determines the way an economy functions.
  • There are debates related to Economic science such as between “Keynesian” economists and “Friedman” economists; between “welfarists” and “monetarists” who want to let an “invisible hand” produce good outcomes for all.
  • Demands to include the needs of ‘People’ in economic policy are becoming louder. The “3P” slogan — People, Planet, and Profit — demands a paradigm shift in economics.

Theories of Economics:

  • In 1776, Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations. He observed that in a “commercial society” each individual is driven by self-interest and can exert only a negligible influence on prices. The sum of all individuals’ separate actions, however, is what ultimately determines prices.
  • The “invisible hand” of competition assures a social result that is independent of individual intentions and thus creates the possibility of an objective science of economic behaviour.
  • In 1817, David Ricardo wrote Principles of Political Economy and Taxation. Ricardo invented the concept of the economic model—a tightly knit logical apparatus consisting of a few strategic variables—that was capable of yielding, after some manipulation and the addition of a few empirically observable extras, results of enormous practical import.
  • At the heart of the Ricardian system is the notion that economic growth must sooner or later be arrested because of the rising cost of cultivating food on a limited land area.
  • Malthusian principle defined in Essay on Population” (1798) – As the labour force increases, extra food to feed extra mouths can be produced only by extending cultivation to less fertile soil or by applying capital and labour to land already under cultivation—with dwindling results because of the so-called law of diminishing returns.
  • As land prices were increasing, Malthus concluded, the chief beneficiaries of economic progress were the landowners.
  • Karl Marx had espoused a “labour theory of value,” which holds that products exchange roughly in proportion to the labour costs incurred in producing them
  • He added to it “the theory of surplus value,” which rests on the axiom that human labour alone creates all value and hence constitutes the sole source of profits.
  • Value of Labour – it is socially undesirable for some people in the community to derive their income merely from the ownership of property.
  • Keynesian Economics of 1930s: John Maynard Keynes was interested in macroeconomic aggregates i.e., level of national income and the volume of employment.
  • “Demand” in the Keynesian model means the total level of effective demand in the economy, while “Supply” means the country’s capacity to produce.
  • When effective demand falls short of productive capacity, the result is unemployment and depression; conversely, when demand exceeds the capacity to produce, the result if
  • The Keynesian model of effective demand consists essentially of three spending streams: consumption expenditures, investment expenditures, and government expenditures.
  • Milton Friedman earned the Nobel Prize in economic sciences in 1976 for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy.
  • Monetarism: A monetary economic theory which focuses on the role governments play in controlling the amount of money in circulation and determines business cycles and inflation.
  • He argued it was monetary policy, and not a failure of free-market capitalism, that led to the Great Depression. Friedman concluded that the Federal Reserve was a main cause of the depression because it curtailed the money supply by over a third between 1929 and 1933. This contraction caused a crash that extended into a depression.

Need for a shift:

  • In 1972, far-sighted thinkers showed that pursuit of GDP growth was destroying the earth’s capacity to renew itself and provide resources for unbridled economic growth.
  • They introduced the health of the planet into calculations of profit and growth.
  • Meanwhile, economists continue to treat the natural environment as external to the economy. Pleas by communities to protect it are dismissed as impediments to “ease of doing business” and GDP growth.
  • Needs of citizens who earn their livelihoods by work, not investments of money, were relegated in national economic policies wherever the “Thatcher-Reagan-Chicago” model of neo-liberal economics prevailed.
  • The 2008 global financial crisis revealed the fragility of insufficiently regulated markets. Governments of the G7 (later G20) collaborated to stabilise the financial system. They bailed out the “too large to fail” institutions while millions of common citizens, who lost homes and livelihoods, were barely compensated.
  • In fact, some solutions to stabilise the global financial system, such as the austerity package imposed on Greece, harmed common citizens even further.
  • While the ideology of “minimum government”, with balanced budgets and low inflation has continued, waves of protest have erupted around the world.

Out of box economics – A new approach:

  • An outline of five systemic solutions for simultaneously improving People, Planet, and Profit is provided in Earth for All: A Survival Guide for Humanity.
  • They do not model the economy as a closed system as macro-economists do. Rather, their ‘whole system’ model includes feedback loops between the economy, the natural environment, and social systems.
  • Five tracks for their solutions are: ending poverty; addressing gross inequality; empowering women; making food systems healthy for people and ecosystems; and transitioning to clean energy.
  • The report projects outcomes in two forms – if the present pattern of solutions continues versus systemic change in approach. The present path is called “Too Little Too Late”; the other, “Big Leap”.
  • Business as usual for present gains will lead to environmental and societal collapse later this century.
  •  “Big Leap” evolves a more equitable distribution of economic wealth and social power; it avoids a need for disruptive political revolutions. It advocates equitable access to technologies, and in the ways the technologies are incorporated by local actors into solutions fitting their own contexts.
  • The model forecasts that by 2050, on its present trajectory, India will be the most unequal society in the world. Mistrust in institutions:
  • Two novelties in the model are the Social Tension Index and the Average Well-Being Index.
  • Social Tension Index: If social tensions rise too far due to policies related to income redistribution, societies may enter a vicious cycle where declining trust causes political destabilization, economies stagnate, and well-being declines. In that situation, governments will struggle to deal with rolling shocks let alone long-term existential challenges like pandemic risk, climate change, or ecological challenge.
  • Effect: Disillusionment with democratic institutions is increasing in light of social tensions. Authoritarian governments are coming to power in many countries, often supported by citizens, as alternatives.


  • People are not just numbers, nor merely resources for the economy.
  • On the economic front, recoupling monetary policy with fiscal policy is necessary but insufficient.
  • GDP must also be recoupled with nature and society.
  • From a vertical process of experts at the top trying to understand complex systems through numbers and then imposing solutions on the people, to a lateral process of problem solving by deliberations amongst diverse disciplines and dialogue amongst experts and citizens.

Way forward:

  • The socio-political world will break into more fragments before the planet becomes too hot because of the ways in which solutions are being found to global problems is unfair.
  • Voices of less powerful people are not listened to.
  • Policy-making at all levels has to become more inclusive and less dominated by the powerful and the wealthy, while a paradigm shift is needed in problem solving at global and national levels.

Source: The Hindu


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