WHEN Adam Smith’s opus in 1776 took an increase in wealth as the desideratum of a nation’s policy, he was not suggesting that the question of income distribution between different classes did not matter. Likewise David Ricardo was by no means unconcerned with an improvement in the living conditions of the workers. But Smith and Ricardo ignored income distribution to focus only on the size of a nation’s wealth (capital stock), which determined in turn the size of its national income, because income distribution in their view was not a matter of policy. In fact Classical Political Economy generally saw wages as being tied to a subsistence level because it believed, in accordance with the Malthusian theory of population, that an increase in wages above subsistence would raise population growth, so that labour supply would increase relative to demand bringing wages back to the subsistence level. An improvement in income distribution therefore depended on the habits of the working population and was not a matter of state policy; the latter could only facilitate an increase in capital stock, and hence income.

The Classical preoccupation with wealth and income as the desideratum therefore was based on the belief that the state could do little about income distribution. The view that the state should be exclusively concerned with the size of income even when it could affect income distribution, indeed that it should be so exclusively concerned with the size of income that it should even engineer a worsening of income distribution if that raised the prospects of increasing overall income, is of more recent vintage; in fact it expresses the ideology of neo-liberal capitalism and can claim no classical roots whatsoever.

Since capital is globalized under neo-liberalism while labour remains confined to specific countries, a higher rate of accumulation is supposed to require the creation of a more attractive environment for capital compared to other countries; and lower wages constitute one major component of this more attractive environment. Countries pursuing neo-liberal capitalism therefore necessarily pursue an anti-worker policy to keep down workers’ wages and suppress workers’ rights in order to achieve higher GDP growth. It follows that defining economic development exclusively in terms of the growth of the gross domestic product can neither be justified with reference to Classical Political Economy nor is in the interests of the majority of the people; it represents merely the ideology of monopoly capital and hence of neo-liberal capitalism where monopoly capital reigns supreme.

This ideological position, namely the identification of GDP growth with economic development, was assiduously promoted by the Bretton Woods institutions, the IMF and the World Bank; and its ascendancy constituted the crux of a theoretical counter-revolution in development economics ushered in by them. The tragedy however is that even many progressive economists fell into this trap, sometimes under the mistaken impression that this is what Classical economics had taught.

A rejection of the identification of GDP growth with economic development must therefore be the very first step of any objective critical thought. This implies a complete rejection of the criterion by which not only agencies like the IMF and the World Bank, but also governments of the global South, judge the economic “success” of countries.

Indian governments in the neo-liberal era have used GDP growth as the exclusive criterion for judging economic “success” and have proclaimed the superiority of the neo-liberal regime over the preceding dirigiste regime on the grounds that the rate of growth of GDP accelerated under the former. They have done so despite the fact that income inequality and even absolute nutritional poverty have worsened greatly under the neo-liberal regime. According to the World Inequality Database for instance the share of the top 1 percent of India’s population which was 12 percent of national income at the time of independence, and had fallen to 6 percent by 1982, covering more or less the period of the dirigiste regime, went up during the neo-liberal period to over 23 percent by 2022-23; this is the highest level it has reached over the preceding one hundred years!

Likewise, the proportion of the rural population not having access to 2200 calories per person per day, the erstwhile Planning Commission’s benchmark for defining rural poverty, had remained roughly constant between 1973-74 when poverty studies began in India and 1993-94; it went up from 58 percent in 1993-94 to 68 percent in 2011-12. In 2017-18 it even exceeded 80 percent which was so high that the government of India withdrew the data for that year from the public domain and changed altogether the method of future data collection! The share of the urban population not having access to 2100 calories per person per day, the corresponding benchmark for defining urban poverty, went up from 57 percent in 1993-94 to 65 percent in 2011-12 (U.Patnaik, Exploring the Poverty Question). All these findings however are not supposed to make any difference to the claim that India has been witnessing very impressive “economic development” in the neo-liberal period!

The absurdity of the Indian government’s emphasis on GDP growth as the index of economic development comes out from another finding. The IMF has just come out with its estimate that the per capita GDP of Bangladesh for the latest year marginally exceeds that of India. By its criterion of defining economic development, it would follow that Bangladesh today is slightly more developed than India. And yet the entire Hindutva pantheon, from the Prime Minister downwards, has been crying itself hoarse over Bangladeshi infiltration into India, some even demanding that the infiltrators should just be “pushed back” into Bangladesh. The question this raises is: why should there be any large-scale infiltration from a more developed country to a less developed one, or even from one country to another with more or less the same level of development? Either therefore the claims of the Hindutva elements about large-scale infiltration into India from Bangladesh are wrong, or per capita GDP which the government swears by is a woefully inadequate index of economic development.

This then raises the question: what should be the index of economic development? We shall not answer this question here, but mention, for illustrative purposes, just one obvious index that is distinctly better than per capita GDP which is currently promoted by the Bretton Woods institutions and accepted by the government of India. In a country with a democratic Constitution, which vests political power in the hands of the people at large, a parallel process of economic empowerment of the people must be the essence of any notion of economic development. The average real income of the working people who constitute the overwhelming majority of the population would be a better index of such economic empowerment than the average real income of the population as a whole, for the latter can conceal enormous and growing divergence between the top 1 percent or the top 10 percent and the rest in a situation of unfettered capitalism.

There would of course be several problems in making estimates of the average real income of the working people. These however can be overcome: for a start, we can take the   increase in the average real income of the bottom 80 or 90 percent of the population as the index of economic development of a country. The difference this can make can be seen from an example. If we take on average 6.5 percent annual growth rate in real national income over the 40-year period between 1982 and 2022-23, and assume that the distribution of income estimated by the World Inequality Database is valid, then the annual rate of growth of per capita real income of the top 1 percent of the population works out to 5.5 percent while that of the bottom 99 percent works out to only 1.5 percent, with the average for the population as a whole being 2 percent. The gap between 1.5 percent and 5.5 percent clearly shows how misleading overall GDP growth rate can be as an index of development.

In any case, the contradiction between swearing by a Constitution that politically empowers people, and instituting an economic system which is deemed “successful” in promoting economic development even when it economically disempowers people, would have been overcome if we took the increase in average real income of the working people as our index of development.

B R Ambedkar in his final speech to the Constituent Assembly, while presenting the Constitution, had drawn attention to this contradiction and had rightly warned that unless it is overcome, political democracy would be imperilled. The very first step towards overcoming this contradiction would be to introduce into the country’s public discourse an appropriate notion of economic development.