Austrian economics and development: The case of Sudha Shenoy’s analysis

Abstract

The aim of this paper is to describe Sudha Shenoy’s use of Menger, Mises, and Hayek (she explicitly called them ‘the older Austrians’) to explain development and growth. Her aim was to show that the application of Austrian economics, based on the notions of capital structure and division of labor, embedded in a specific legal framework (common law), historically promoted development and growth (as in early modern England); and can promote development and growth in underdeveloped countries (her specific focus was India). Shenoy also claimed that any policymaking as well as government’s intervention are either useless or dangerous, having two main dysfunctional effects, which are often interrelated; namely, make development slower (or even stop it), and increase corruption.

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Notes

  1. 1.

    S. R. Shenoy, Ph.D. in Economics (New Castle, Australia, 2001), was educated at Mount Carmel School and St. Xavier’s College, Ahmedabad, India, the London School of Economics, the University of Virginia, and the School of Oriental and African Studies (University of London). Research Assistant at Queen Elizabeth House in Oxford, between 1971 and 1973; lecturer in Economics, University of Newcastle, Australia, between 1973 and 1974; lecturer in Economics at Cranfield Institute of Technology, between 1975 and 1976; and senior tutor in Economics, University of Newcastle, since 1977. She held visiting positions at California State University, George Mason University, and Ludwig von Mises Institute.

  2. 2.

    Since the beginning of the twentieth century, a group of Austrian women economists gathered around Wieser and Böhm Bawerk first, as well as Mises and Hayek thereafter. The first two generations were Viennese economists active between the early twentieth century and 1938 before the massive emigration due to the Anschluss. The first generation (up to 1919) received their academic degrees outside Austria due to the persistent ban against female students in Austrian universities, including Else Cronbach (1879–1913), Louise Sommer (1889–1964), and Toni Kassowitz Stolper (1890–1988). The second generation (active during the interwar period) finally had the opportunity to enroll in and graduate from the University of Vienna: formally students of Mayer, they were massively influenced by Mises, such as Marianne Herzfeld (1893–1976), Martha Braun (1898–1990), Helene Lieser (1898–1962), Gertrude Lovasy (1902–1974), Elly Spiro (1903–2001), and Ilse Schüller Mintz (1904–1978). The third generation of Austrian School women economists was no longer from Austria: it was formed by Hayek’s students at LSE (1930s–1970s) and by Mises’ students at NYU (1938–1960s: they were Marjorie Grice-Hutchinson (1909–2003), Vera Smith Lutz (1912–1976), Mary Sennholz (1913-), and Bettina Bien Greaves (1917-). A fourth more recent generation began after the so-called Austrian revival in the 1970s with the work of Sudha Shenoy. Austrian school women economists shared with their mentors and colleagues an economic theory focused on individuals' plan coordination and decentralized knowledge; the disutility of any monetary policy as well as of any governmental intervention to minimize distortions; the fundamental role of innovation to explain the link between growth and development, and a specific interest in the history of political economy.

  3. 3.

    B. R. Shenoy was a member team of the Planning Commission for the Second Five year Plan, prepared by the Indian Government in 1955. He was the only dissenting voice to the plan based on the following reasons: 1. The plan’s size: an excess of the capacity of the available real resources would have led to uncontrolled inflation and wastage; 2. Deficit financing as a mean of raising resources to make the plan work: a hard gap to fill between the size of the investment program and available resources; 3. A short-sighted policy: taxes on lower income groups, extension of nationalization, continuance of controls, and price support of agricultural produce, which would threaten individual freedom and democratic institutions; 4. Institutional implications of the plan itself: a very plausible source of corruption (Bauer 1998; White 2012; Prakash 2013; Anand 2015).

  4. 4.

    A methodological explanation: the term ‘category’ in this paper refers to the distinction made by Schumpeter (1954) between vision (an economist’s cultural framework, which deeply influences her theory) and analysis (the set of categories, which determines her economic theory). In Shenoy’s case, her Austrian categories are: capital structure, division of labor, common law, catallaxy, and their peculiar combination. Shenoy used these categories as real-types in Machlup’s terms; i.e., “categories of observation, classification, description, and measurement” (Machlup 1978, 258).

  5. 5.

    More specifically Rosenstein Rodan studied the causes of development, he recognized in four factors: an increase of population, especially in countryside, the so-called ‘agrarian population’; economies of scale; an increase of infrastructures (social overhead capital); and the increasing specialization of workers. He applied these factors to the case study of Italy, Latin America and India.

  6. 6.

    Contemporary to Shenoy’s contributions, another Indian economist, Padma Desai (1931-), wrote about development in India (Desai 1961, 1963). Different from Shenoy, Desai was in favor of a short-term plan for India: she adopted a neoclassical approach, focused on the problem of resource allocation in an underdeveloped county like India. In her model, the planning authority should fix exports, government expenditure, and gross capital formation, which are exogenous variables in order to enhance the distribution of expenditures on the variable of consumption amongst different households.

  7. 7.

    This element has an enormous impact on the economy of underdeveloped countries: the age to join the force work is around 8–12 with a life expectancy of 50 years and a high rate of infant mortality.

  8. 8.

    Shenoy considered entrepreneurship as the main attitude of literacy.

  9. 9.

    No import was permitted without a license, and prohibitive tariffs had been imposed on a large number of goods. Furthermore, all exchange earnings were fixed by the Reserve Bank at an official price, which was below the market price. Furthermore, it was forbidden to send rupees out of the country in any form.

  10. 10.

    Menger distinguished between “organic” as it applies to the natural world and “organic” that applies to the social sphere. The latter is, as Ferguson puts it, the results of human action, but not of human design. In Menger (1985), in the social realm, spontaneous orders that arise via human interactions cannot be reducible to a mechanistic approach as in physics.

  11. 11.

    Shenoy underlined that Mises’ analysis is far from the neoclassical notion of perfect competition, perfect markets, and Pareto-optimality.

  12. 12.

    Menger, Mises, and Hayek recognized that social phenomena could consist of two kinds: organization (designed by people) and organism (spontaneously arisen).

  13. 13.

    Shenoy pointed out Menger’s critique to Smith about the division of labor as the only cause for the wealth of a nation: according to Menger, reported by Shenoy, the division of labor can only increase specialization in goods already available. Only an increase in capital structure can introduce innovations in the market.

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Acknowledgements

I want to thank William Butos, David Harper, Shruti Rajagopalan, Mario Rizzo, Joseph Salerno, and other participants to NYU Colloquium on Market Institutions and Economic Processes, along with two anonimous referees, for their helpful suggestions and comments. All mistakes remain mine.

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Correspondence to Giandomenica Becchio.

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Becchio, G. Austrian economics and development: The case of Sudha Shenoy’s analysis. Rev Austrian Econ 31, 439–455 (2018). https://doi.org/10.1007/s11138-017-0409-9

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Keywords

  • Development
  • Capital structure
  • Division of labor
  • Catallaxy
  • Common law
  • Economic plan

JEL classification

  • B25
  • B31
  • B53