Theo Vision Editorial Prologue

Theoretical Vision
B R Shenoy
Centre for Civil Society

New Delhi
editors note
ilton Friedman described B R Shenoy as a prophet
M unhonored in his own country. P T Bauer has described him

as a hero and a saint − a hero for resisting widely accepted
fads and fancies, and a saint for remaining serene in the face
of disparagement, neglect, and even abuse.
A few days before Professor Shenoy’s death on 8 February 1978 I
met him at the Gangaram Hospital, New Delhi, where he was undergo-
ing treatment for a heart ailment. He looked worried. He said to me,
"Amin, I feel sorry I could not change the mind of the government. I have
to see our country’s economy going to the dogs."
I replied, "Shenoy saheb, don’t worry. Truth always wins, you have
always spoken whatever is the truth. Surely, you are going to win."
Professor Shenoy was always tuned to ground realities. He never
built up empty economic models, he never ignored empirical evidence.
He was in fact, like a skylark which soars up in the sky but always keeps
an eye on the nest. While theorising, Professor Shenoy always kept
day-to-day problems of life in mind.
While delivering a lecture on national savings and industrial finance
at Kerala University, he described his role in the following words:
"Dialogue with industrialists, bankers, businessmen and other men
of affairs, and with subjects other than one’s own, especially students of
physical sciences, is always a rewarding experience. Men of affairs help
to weigh our ideas in the scales of realities of life, and may save us from
being catapulted away into speculative unrealities by false and imprac-
ticable concepts; and scientists remind us that every statement that we
make must survive the rigorous test of logic and proved data. This dou-
ble influence of men of affairs and of the scientific method is in evidence
in the trend of effort in all social sciences, in economics no less than in
other subjects."
Economics is not astrophysics. It deals with problems which have a
bearing on daily events and the circumstances which confront and sur-
round man and society. If economic theorising does not throw light on
these mundane problems of man and society, that is, if the theorising
does not explain and also help to prescribe, it is a waste of an econo-
mist’s own time and that of those paying attention.
Sometimes it is remarked that a certain proposition may be correct
in economic theory; but not in practice. But if economic theorising is not
scientific and realistic, it may not be worth the while. We have perhaps
i THEORETICAL VISION
the best results when economic theory is well-informed with the realities
of life and of the market and policy measures are well informed with the
guidelines provided by economic theories.
This suggests the need for − and the importance of − two things.
First, economists should gaze at the model of the world around them on
which to build their theories, instead of relying wholly or mainly on mod-
els of their own creation. They should use much more freely than some
of us seem to be doing the mass of statistical data now available on
almost every phenomenon of significance. Secondly, it is desirable to
have, not merely dialogues, as at seminars and lectures, between econ-
omists, men of affairs and administrators, but closer association of pro-
fessional economists, business, industry and administration, preferably
on a consultation basis.
Consultancy works better because there is a need to isolate the role
of an economic analyst from his role as an independent counsellor-
adviser. The merger of the two functions not only damages the stature
and dignity of the profession, it also detracts from the development of
the science and from the constructive contribution of economists to eco-
nomic and social progress. In the case of resident staff economists,
there is a danger of the two functions getting merged, and the role of the
adviser getting lost. Professor Shenoy was able to strike a balance
between the two.
Professor Shenoy was a brilliant orator. His lectures were lucid and
eloquent, keeping listeners spellbound. Normally,itisdifficult to keep an
audience riveted on financial subjects, but his voice was sonorous, his
style of presentation forthright and his arguments so convincing that the
lay public would be attentive, sometimes captivated by his lectures. His
writings were also frank, logical and supported by facts and data. That
is why even the lay reader can enjoy this book.
As I told him in his last days, truth ultimately wins. China introduced
economic reform in 1978. Margaret Thatcher introduced privatisation
and deregulation in England. Soon after, America accepted supply-side
economics and hard-headed socialist New Zealand introduced liberal-
ism in 1984. With the fall of the Berlin Wall in 1989 in a short span of
two to three years, all communist countries in Central and East Europe,
including USSR, gave up communism and became liberal democracies.
And last but not too late, India took a U-turn in 1991 and got rid of the
license-permit raj.
This is our attempt to pay homage to the great soul by keeping his
message alive through his writings.
B R SHENOY ii
prologue
ost of the theoretical writings in this volume date from 1932
M to 1953, the time when B R Shenoy was studying at the

London School of Economics, till the Indian Republic took its
first steps on the road to economic development. After 1953,
his time was taken up by practical policy issues and he became one of
the most trenchant critics of the Indian government’s policy measures,
which ran counter to his dearly held beliefs about proper functioning of
an economy. These writings offer the theoretical framework underlying
his empirical analyses and policy critique.
Thus Section A provides the Context in which he wrote, which
includes his basic philosophy of the Economic Constituents of a Free
Society, and the Measures of Economic Progress he considered impor-
tant. Readers might be surprised to learn that this included such
humanistic concerns as reduction of inequalities − surprised because
such concerns are usually associated with the socialist approach.
Professor Shenoy was unique in that he did not lose sight of India’s
poverty and the need to eradicate it. But he repeatedly hammered the
point that free market policies and not centralised planning were the
means to that end.
Section B, the section on Savings, focuses of the fundamentals of
Classical Theories of Saving from the time of Adam Smith and Malthus,
and goes on to dissect Static Equilibrium theories of saving. Since the
Theory of Savings is the main basis for evolving an economic policy,his
comprehensive surveys of saving theories is invaluable, and also
unique. The chapter on Possible Sources of Finance which precedes
these, and that on Indian National Savings which follows, bring to light
one of Shenoy’s greatest worries − the path that India was taking of
economic development through deficit finance instead of real savings.
These worries are elaborated to a greater degree in his book Post-
W ar Depression and the Way Out published in 1944. He demonstrated
dangers of financing the Bombay Plan by newly created money and
bank credit. In Section C, on Money Management, he explains the
International Investment Gap and the Dangers of Inflationary Finance,
going on to dissect inflation and corruption. Included are the articles An
Equation for a Price Level of New Investment Goods and A Note on the
Interdependence of Price Levels, first published in the Quarterly
Journal of Economics. These articles point out the deficiency in the fun-
damental equations presented by John Maynard Keynes in his book
i THEORETICAL VISION
Treatise on Money published in 1930. As soon as Keynes realised that
his fundamental equations were defective, he stopped the publication of
the second edition of his book. But the equations presented by
Professor Shenoy in lieu of the ’fundamental equations’ still hold true.
More evidence of Professor Shenoy’s sound grip of monetary eco-
nomics can be found in Section D, which focuses on
Gold/Currency/Banking. It takes the reader back to the Essentials of a
Gold Standard, which was prevalent in important countries in the begin-
ning of the 20th century. India during the 1930s had both the gold stan-
dard as well as the gold exchange standard. During this period, there
was a controversy whether India should keep to a sterling-linked stan-
dard or have an independent standard based on gold. And secondly if
India should have a link with sterling, what should the rate be? This arti-
cle answers all these questions.
The banking community will be enlightened by the facts he alone
unearthed about Abortive Central Banking Schemes which preceded
the establishment of the Reserve Bank of India, and also throw light on
the indigenous bankers or shroffs of whom India can still be justifiably
proud. He had a sound knowledge of operational banking and wrote
several articles on India’s money market, China’s silver standard, the
Ceylon rupee. His welcoming of the long overdue Devaluation of the
Rupee in 1966 will interest young readers. The chapter on Evolution of
Currency in India and Ceylon is just a sample of the extensive work he
has done in this field, and will delight students of history and econom-
ics alike. It is taken from his book Ceylon Currency and Banking, which
throws light on the early currency history of India also.
B R SHENOY iv

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Theoretical Vision

Centre for Civil Society

M unhonored in his own country. P T Bauer has described him

M to 1953, the time when B R Shenoy was studying at the

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