T H E E C O N O M I C W E E K L Y

t h i n k in these terms o f t h a t o t he r b i r d o f the w i l d e m e s s — t h e skylark.

T h e elections are due. T h e cry goes r o u n d f o r a reo r ien ta t ion and reorgan isat ion o f po l i t i ca l w o r k , fo r p a r t y w o r k to be re-v i ta l ised and galvanised. T h e offices, so long ly ing in a v i r t u a l c o m m a , t ha t threatened to develop in to a f u l l stop, become suddenly beehives of ac t i v i t y . Vo lun teers are enro l led . S tuden t cadres are fo rmed fo r this o r t h a t par ty work . W h e n par ty members meet , th re is so m u c h of shop ( a n d non-shop) ta lk inter se, t ha t those in company , bu t outside the pale of the par ty l ine, suddenly become, as i t were , non- rx is ten t . N o w a t last, the count ry 's f u tu re w i l l be assured; now w i l l the maz-

doors and kisans come i n t o t he i r o w n : now a t least the we l fa re o f t h e masses w i l l become a fait accom-pli. W i t h al l this zeal a n d zest of par ty leaders and the rank and f i le fo r cap tu r i ng the po l i t i ca l mach ine of a coun t ry , whe the r i t be in Russia or among the Warlis, in T a m m a n y Hal l , U S A o r w i t h the now d o r m a n t Nazis and Fascists, in conservat ive B r i t a i n o r w i t h t h e French Right is ts under De Gau le , can there be o ther mot ives, o the r not ions, other in tent ions at w o r k , subconsciously perhaps, i f n o t overt ly? W h o knows? O n l y a psychoanalyst can answer cor rec t ly ,

and let h i m do so before the greatest exper iment in democracy shakes this coun t r y at the end of 1951!

Krishnamurti's Theory of Blackmarket Prices

A Rejoinder

Pravakar Sen

June 23, 1951

IN The Economic Weekly, A n n u a l N u m b e r , 1951, D r B . V .

K r i s h n a m u r t i a t tempted to re­state the theory of black marke t pr ices and to d raw, on the basis of his a t tempted restatement, certa in ra ther unor thodox conclusions, tor po l i cy . This re jo inder pleads, tha t those conclusions proceed f rom a false theory .

D r . K r i s h n a m u r t i ' s pos i t ion m a y be summar ised as fo l lows :

1. T h e p rob lem of b lack marke ts is the p rob lem of mu l t i p l e marke ts for the same c o m m o d i t y w i t h the legal marke t s i tuated at the one end of the chain where the c o m m o ­d i t y is sold at a cont ro l led pr ice. Hence the theory of d i sc r im ina t ing m o n o p o l y , wh i ch exp la ins the cond i t ions o f equ i l i b r i um in mu l t i ­ple marke ts , can be app l ied to ex-p la in the condi t ions of equ i l i b r i um of the b lack marke t .

2 . T h e i n d i v i d u a l seller produces tha t aggregate ou tpu t wh ich equate-the marg ina l revenue and the mar g ina l cost of p roduc t i on of the aggregate ou tpu t . T h e n he div ides this aggregate equ i l i b r i um output. between the con t ro l led , legal mar­ket on the one hand and the cha in of b lack marke ts on the other in such a, manner that the marg ina l revenues of his sales in the two types of markets are equal b o t h to one another and to the aggregate marg ina l revenue at the e q u i l i b r i u m level o f aggregate ou tpu t , fo r o n l y such a d i v i s i on w i l l max im ise his

617

what fo l lows, o n l y one b lack mar ­ket has been taken in to considera­t ion) .

3. The aggregate demand curve f r o m wh i ch the aggregate marg ina l revenue curve is der ived is the algebraic sum of two curves, the negat ive ly inc l ined black marke t demand curve and the hor i zon ta l legal market " demand c u r v e , " so that the aggregate demand cu rve " slopes downwards t i l l i t reaches the end of the b lack marke t a n d ab rup t l y turns hor izonta l as i t enters the legal marke t , , "

4. Penalt ies on black marketeers cannot reduce the amounts b lack -marke ted , for the seller fixes the vo lume of his b l ack -marke t sales not w i th reference to the cost of b l ack -marke t i ng , bu t w i t h reference to the cost of p roduc t i on of h is aggregate o u t p u t ; that is, he equates the marg ina l revenue of his b lack marke t sales no t to his marg ina l cost of b l ack -marke t i ng , b u t to the marg ina l revenue of ins aggregate o u t p u t the cu rse o f w h i c h , i n e q u i ­l i b r i u m , intersects the curve o f the marg ina l cost of p r o d u c t i o n of

p ro f i ts . Finally, since the seller en joys in his black markets monopol is t ic or quasi -monopol is t ic powers. black marke t prices are

dents come because they think I am g o i n g t o be t h e i r examiner ; t he w o ­m e n come because o f t he s tudents ; a n d the off icers come because of t he w o m e n . "

O n e m a y have some, doubts , i f t h e causa causans of the students ' a t tendance was apprec ia ted i n a l l its p rope r perspect ive by the Pro­fessor, w h o was adm i t t ed l y n o t a savant in psycho-analysis. In any case, one can t race, to its l a i r the reason w h y , in spite o f the leaders' adv ice nowadays to students to keep away f r o m pa r t y pol i t ics, the la t te r are so anx ious to dabb le there in and d o p a r t y w o r k . N o t t h a t colleges, these days, do no t p ro ­v ide ample scope fo r the p rac t i ca l romancer , b u t the corr idors o f co l ­lege bu i ld ings are n o t as convenient as the passages of the edif ice of po l i t i ca l w o r k fo r excusable meets.

Occas iona l ly , po l i t i ca l w o r k and its consequence breed romance in qu i te ano the r d i rec t ion also. T h i s is based on the anc ient saying about the. (she ) mice p lay ing , w h e n the (he - ) , ca t is away. M a n y in l iving-m e m o r y are the instances of the p o l i t i c a l and the not -so-po l i t i ca l w i f e , t u rned grass-widow, t h rough the incarcera t ion o f her po l i t i ca l l y i nc l i ned worse-off , suf fer ing a n d sacr i f i c ing in the cause of the coun ­t r y , seeking solace outside the mar ­r iage vow . I f the m a x i m , " W h e n u p l i f t i n g , get undernea th " is one t ha t every social worke r should take to hear t , " See the better ha l f , h o w ­ever ha l f b i t te r she may be, safely beh ind i ron bars before m a k i n g a l i ke sacrifice fo r the c o u n t r y , " is a hea l thy p r i nc ip le in the pol i t ics o f any coun t ry , bu t special ly A subject n a t i o n .

The theses one is l abou r ing to p rove holds good even in the M o t h e r o f Par l iaments . The. l i fe and soul o f the I ndependen t L a b o u r Par ty was d ivorced by the. one to w h o m he was t i e d , " t i l l death do us p a r t , " before h imsel f d i v o r c i n g the I L P a n d go ing over to of f ic ia l L a b o u r . W a r , a f te r a l l is a more act iv ised, energet ic and m i l i t a n t f o r m of the. po l i t i ca l r umpus . A l l the mani fes­tat ions of peace t ime po l i t ics are, the re fo re , magn i f i ed a h u n d r e d t imes in the b l o o d , sweat, tears, to i l a n d t u r m o i l o f the w a r years. N i n ­c o m p o o p , n o w ex-son- in- law o f the versat i le t u rncoa t W i n s t o n C h u r c h ­i l l , never h a d a chance w h e n his w i f e j o i n e d the I T S o r some such W o m e n ' s A u x i l i a r y Services. Re­sul t? A n o t h e r d ivorce , w i t h the h u b b y becom ing yet ano the r b i r d i n t h e wi lderness, b l i gh ted and c u m ­bersome, even i f the poe t d i d no t

5. Penalt ies on b lack m a r k e t buye rs m a y reduce the amoun ts .b lack-marketed, b u t may a t t h e same t ime increase the b lack m a r k e t prices cons iderably by m a k i n g the black marke t demand curve no t on ly lower , but also steeper t h a n before.

6. Since penalt ies cannot cu rb b lack -marke t ing , it, is best to lega­lise the black m a r k e t , that is, to w i t h d r a w a l l penalt ies and at the same t ime to adopt a po l icy of subs idy -cum- taxa t ion . Subsidies are to" be given to buyers in the contro l led market enabl ing them to offer a, h igher pr ice for the commo­d i t y , so tha t the spread between the contro l led and uncontro l led prices diminishes and a larger sup­p l y is offered in the contro l led marke t . These subsidies are to be covered by two t ax measures. One is a par t icu lar tax on sellers in the uncont ro l led market wh ich they wi l l no t at al l be able to shift to buyers as they do not take the cost of sel l ing in the h igh-pr iced marke t i n to considerat ion in decid­ing the vo lume of their sales there and wh i ch w i l l therefore cut in to their monopo ly prof i ts . The other measure consists in in t roduc ing a h igher degree of progression in the income tax structure wh i ch leaves less money in the hands of con­sumers so that the-aggregate de­mand curve in the uncont ro l led marke t range is lowered, and as­suming the elast ic i ty of demand to have remained unchanged, sales in the high pr iced markets decl ine.

7 . T h e tax-cuin-subsidy me thod is not a subst i tute for, but a com­plement to , pr ice-contro l and ra t i on ing , for i f the lat ter are w i t h ­d r a w n , the condi t ions of demand in the contro l led sector of the mar ket represented by the hor izonta l " demand curve " w i l l at once be replaced by the monopol ist ic condi ­t ions o f demand h i ther to ru l i ng in the uncon t ro l l ed sector only , so that aggregate sales w i l l tend to be res t r ic ted and the benefit of subsidies to be conf ined to a smaller number of buyers than wou ld have been the case under pr ice con t ro l and ra t i on ing .

T h e theory of price d isc r im ina­t i on or mu l t i p l e markets is based on the poss ib i l i t y of a par t i cu la r t ype of market imper fec t ion . On the side of supp ly , th is t ype of imper fec t ion relates to the number of sel lers: there must be monopo ly o r col lus ion among sellers. On the side of d e m a n d , i t concerns cer ta in i ns t i t u t i ona l obstacles to compet i ­

t i o n among b u y e r s a l t hough the f t number m a y be qu i te l a rge : the to ta l demand must be capable of be ing sub-d iv ided in to markets w i t h di f ferent elasticit ies of demand since i t is possible to prevent buyers in the h igh-pr iced marke t f r o m shi f t ­i n g their demand to the low pr iced one and also to prevent buyers in the low-pr iced marke t f r o m resell­i n g their stocks to buyers in the h igh-pr iced one. To suggest t ha t the work ing of black markets can be explained in terms of the theory of price d isc r im ina t ion is to assume tha t the same elements of marke t imper fect ion as are found in the case of price d iscr iminat ion are also to be found in the case of b lack marke ts . To make this as­sumpt ion , however , as D r . K r i shna-m u r t i has done, is w r o n g .

Dr. K r i s h n a m u r t i deduces that the black market seller is a mono­polist f r o m the fact tha t in the b lack market " each t ransact ion is effected by the seller i nd i v i dua l l y and in a clandestine m a n n e r . " T h a t Ibis fact cannot real ly y ie ld the deduct ion w i l l be clear i i we reflect that under pure ly compet i ­t i ve condi t ions also each transac-t ion is effected by the seller i n d i v i -dua l l y and somet ime- in a clan destine man Her. In b u t , a black-marketeer may be a monopol is t , but he is not necessarily' so s imp ly because he is a b lack-marketeer . Clandest ine operat ions are not im­mune f rom the inf luence of marke t forces whatever the nature of these m a y be.

Secondly, D r . K r i shnamur t i ' s as­sumpt ion that the total demand is div is ib le into two k inds of markets w i t h dif ferent elasticit ies of demand — t h e legal market hav ing in f in i te elast ic i ty since the commod i ty is sold there at a constant , contro l led pr ice and the black market hav ing f in i te elast ic i ty since, the b lack -mar keteer is a monopo l is t—is not o n l y an empi r ica l l y fa ls i f iab le construc­t i on , it is logical ly impossible. E v e n if we concede that the legal marke t is one discrete market and the black market is another, such a concession is real ly rmwarrant -ab le—the above-ment ioned assump-t ion is nevertheless empi r ica l ly im­probable because the possib i l i ty of buyers in the black marke t sh i f t ing the i r demand to the control led marke t and that of buyers in the contro l led marke t resell ing the i r stocks in the black marke t can ha rd l y be ru led out . More f unda ­menta l l y , however , th is assumpt ion is i l logical because the legal and b lack marke ts are no t two discrete

marke ts , b u t are i nex t r i cab l y b o u n d up together. T h e b lack marke t i n a c o m m o d i t y is the logical outcome of pr ice cont ro l and is Therefore mere ly an extension of the la t ter . The same condi t ions of demand sur round wha t appear to be two d i f ferent types of marke t , bu t w h i c h , being in terdependent , are one and the same market . I t means that the to ta l d e m a n d is no t d iv is ib le i n t o these two parts, of the marke t independent ly of the ac t i ­v i t y of the seller or of the Govern ­ment . In short , the i nd i v i dua l seller cannot , as he can in the case of price d i sc r im ina t ion , take the d iv is ion of the to ta l demand between the two markets as a d a t u m .

In view of the above- i t is no t possible to exp la in the black marke t ease in terms of the theory of price d isc r im ina t ion . .But even if we held that the phenomenon of b lack marke t presents a. prob lem of m u l ­t ip le markets, i t wou ld nevertheless be possible to show that the tools of analysis D r . K r i s h n a m u r t i has used are ex t remely defect ive.

D r . K r i shnamur t i ' s ma in analy­t ical tool is the aggregate demand curve f r om wh ich is der ived the aggregate marg ina l revenue curve w i t h reference In wh ich alt posit ions of equ i l i b r i um are de termined. I t is argued that this aggregate demand curve is the algebraic sum of two curves of demand—the one for the black market is s loping and the one for the legal market is hor izonta l . N o w i t should be clear ly real ized that the hor izonta l , so-called legal market demand curve is not a demand curve at a l l—i t is ind icat ive of the price constraint which the i n ­d iv idua l seller faces in the legal sector of the market , but to wh i ch bo th he and his customers can show var ious degrees, of indifference de­pending on the presence or absence of procurement by the Government and of ra t ion ing . It is not the de­m a n d curve tor the legal market as seen by the i n d i v i d u a l seller because it does not , even supposing that there is compet i t ion among sellers in the legal marke t , represent the pr ice which equates marke t demand and market supp ly—the pr ice wh i ch the seller could regard as f ixed and at wh ich the demand for his p roduc t wou ld be in f in i te ly elastic. In other words , this hor izonta l l ine does not have any paramet r i c signif icance fo r the i nd i v i dua l seller and the la t ter can ignore the pr ice ind ica ted by i t . E v e n i f we agree that th is curve has a l l the at t r ibutes wh i ch D r . K r i s h n a ­m u r t i t h inks i t has i t w o u l d never­theless be a lmost impossible to j o i n

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THE ECONOMIC WEEKLY June 23, 1951

aggregate output "in the legal mar-ket range.

i t t o the b l ack m a r k e t d e m a n d c u r v e fa r , w i t h eve ry change i n i ts leve l , the b lack m a r k e t d e m a n d cu rve w o u l d change i t s pos i t i on a n d the resu l tan t aggregate d e m a n d cu rve w o u l d become unpred ic tab le . I t i s w e l l - k n o w n tha t cu rve A cannot be j o i n e d to cu rve B to y i e l d a i r v e C if curves A and B are in terdepen­dent and i f the i r in terac t ions are unpred ic tab le .

W i t h the re jec t ion o f the aggre­gate demand curve o f D r . K r i s h n a -i n u r t i , his aggregate ma rg i na l re­venue curve disappears leav ing his conclusions fo r po l i cy hang ing in the a i r .

I t is no longer possible to say tha t penal t ies on sellers w i l l no t reduce b l a c k - m a r k e t i n g on the g round t ha i the marg ina l revenue of his b lack m a r k e t sales is equated to tha t level o f aggregate ma rg i na l revenue w h i c h is equal to the aggregate marg ina l cost of p r o d u c t i o n in the legal m a r k e t range, for the aggregate m a r g i n a l revenue cu rve does not ex ist . I t is also no t possible to say whether penal t ies on buyers w i l l reduce the amoun ts b lack -marke ted b u t at the cost of increasing the i r p r i ce , f o r a l t hough the b lack m a r k e t d e m a n d cu rve m igh t become steeper t h a n before as a result of penal t ies, the f inal ou tcome w o u l d depend on the ac tua l level o f the con t ro l led p r ice and ra t i on i ng po l i cy , i f a n y , on w h i c h also the e last ic i ty o f the black m a r k e t demand cu rve p a r t i a l l y depends.

A g a i n , wh i le there can be no ob jec t ion to D r . K r i s h n a m u r t i ' s sug­gestion for subs id is ing the consu­mers so tha t the legal marke t can offer a h igher pr ice to sellers, h is proposal to t a x b lack-marketers to meet these subsidies, on the g round tha t these later canno t t ransfer the bu rden of such a tax to b lack -mar ­ke t buyers because t hey determine the i r sales w i t h reference to aggre­gate cost of p roduc t i on a n d not to the cost o f b l a c k - m a r k e t i n g , m a y no t be accepted so enthus iast ica l ly i f i t is remembered t ha t the aggre­gate marg ina l revenue cu rve has d isappeared f r o m the p ic tu re leav­i n g the p rob lem of de te rm ina t ion of the aggregate e q u i l i b r i u m o u t p u t , f r o m w h i c h the b lack-marketeer was supposed to take gu idance, to ta l l y unso lved .

F i na l l y , to suggest t ha t r educ t i on of inequal i t ies of incomes t h r o u g h progressive income t ax m i g h t , under ce r ta in c i rcumstances, reduce the v o l u m e of b l a c k - m a r k e t sales," one need no t take the a m o u n t o f t roub le D r , K r i s h n a m u r t i has so coura ­geously taken , a l though, he seems to h a v e reached here a somewhat uncer ta in r esu l t . T h i s unce r ta i n t y

is due to the fact that he has sought to conf ine the effects o f be t t e r d is ­t r i b u t i o n o f incomes on the b lack -m a r k e t d e m a n d cu rve a lone where ­as in fac t bet ter income d i s t r i b u t i o n affects the cont ro l led leve l o f p r i ce f i rs t and t h r o u g h i t , the b lack -m a r k e t d e m a n d . I f incomes are d i s t r i bu ted on an equa l basis, p r i ce con t ro l becomes unnecessary, unless of course i t is sought to d isc r im ina te against p roducers , and the c o m m o ­d i t y is sold a t t ha t pr ice a t w h i c h m a r k e t demand is equal to m a r k e t supp l y , m a k i n g short w o r k o f b lack -marke ts .

W h e t h e r the tax -cum-subs idy me­thod is a subst i tu te fo r p r ice con t ro l a n d ra t i on ing remains , on the basis o f D r . K r i s h n a m u r t i ' s t heo ry , an open quest ion , a l t hough on general g rounds o f adm in i s t ra t i ve conve­nience w i t h w h i c h his theory has

be accepted.

I n dea l i ng w i t h b l ack -marke ts i t i s necessary to remember t h a t t he m a r k e t imper fec t ions associated w i t h t h e m are m a n y a n d va r ious . I t i s we l l -n igh impossib le to exhaust a l l these va r ious k i n d s o f imper fec ­t ions by analys is a n d one can a t the most construct a few s imp l i f y ­ing models dea l ing w i t h some o f these imper fec t ions . To c l a i m genera l i t y f o r a n y single mode l is , i n v iew o f the w ide v a r i e t y a n d c o m p l e x i t y of these imper fec t ions , comp le te ly ou t o f the ques t ion . Howeve r , D r . K r i s h n a m u r t i ' s m o ­del is unacceptable no t because i t is unreal is t ic , b u t because i t is se l f -cont rad ic to ry . N a t u r a l l y , some o f h is conclusions f o r po l i c y a re non-sequitor.

W h o Owns US Corporations? W i t h the excep t ion o f a few i n ­

dus t r ia l p lants t ha t are o w n e d en­t i re ly by a f am i l y , or a s im i la r smal l g r o u p , A m e r i c a n corpora t ions are o w n e d by stockholders whose n u m ­ber may range f r o m a few to seve­ra l h u n d r e d thousand. A m e r i c a n corpora t ions have , on the average, more stockholders than have E u r o ­pean corproa t ions . I n a l l , the Fe­dera l Reserve ( B a n k ) Boa rd esti­mates, f r o m seven m i l l i o n to e igh t m i l l i o n i n d i v i d u a l Amer i cans o w n shares of stock.

O n e reason to r this b road owner ­ship is the A m e r i c a n an t i - t rus t legis­l a t i o n , w h i c h has done m u c h to reduce i n t e r l o c k i n g in indus t ry , and thus has forced more and more stocks of corpora t ions on the f ree marke t . T h e cour ts i n the U n i t e d States can force a b ig s tockholder whose hold ings v io la te the a n t i ­t rus t laws to sell a pa r t or a l l of his stock in a ce r ta i n co rpo ra t i on .

I t is a g r o w i n g prac t ice of US corpora t ions to g ive shares of stock to the i r workers as p a r t o f p r o f i t -shar ing plans. E a s t m a n - K o d a k , a l ead ing m a n u f a c t u r e r o f p h o t o g r a ­ph i c equ ipmen t , i n a u g u r a t e d such a system 38 years ago. Since then i t has pa id o u t more t h a n $75 m i l l i o n to its employees as t he i r share of the prof i ts .

T h e l i v i n g s tandard o f the. A m e ­r i c a n people has r isen so m u c h in the f i r s t h a l f o f this cen tu ry t h a t no t on l y the m i d d l e classes, b u t also large segments of labour , are able to accumu la te savings w h i c h they c a n invest in stocks. As a conse­quence, the shares o f v i r t u a l l y a l l

the large, w o r l d - f a m o u s A m e r i c a n indus t r ia l corpora t ions are he ld p re ­ponderan t l y by the m i d d l e - i n c o m e and lower - income groups,

F o r example , o f the m i l l i o n stock holders o f the A m e r i c a n Te lephone and T e l e g r a p h Co . , w h o o w n a to ta l o f 29 m i l l i o n shares, more t han 900,000 are smal l owners w i t h less t han 100 shares. A b o u t 750,000 have only 50 shares or less, and about 300,000 stockholders c w n no more t h a n l ive shares. S i m i l a r l y , 74 per cent of the stock of US Steel C o r p o r a t i o n , ano the r b i g concern , i s o w n e d by persons w h o have a m a x i ­m u m of 100 shares. T h e stock o f the Genera l M o t o r s C o r p o r a t i o n , the largest A m e r i c a n au tomob i l e company , is owned by more t h a n 400,000 persons, o f w h o m m o r e t h a n 90 per cent o w n less t h a n 100 shares.

Wor ld Cattle Wealth

T h e w o r l d to ta l o f cat t le a t t h e beg inn ing of 1951 has been est i­m a t e d by the U n i t e d States O f f i ce o f Fo re ign A g r i c u l t u r a l Re la t ions a t 806.3 m i l l i o n head . I t ind icates a n increase of abou t 2 per cent over the revised est imate f o r 1950 (790.9 m i l l i o n h e a d ) a n d 8 pe r cent above the 1936-40 average (743.1 m i l l i o n ) . O f the to ta l o f 806.3 m i l l i o n h e a d , N o r t h A m e r i c a has 118.3 m i l l i o n (o f w h i c h U S : 84.2 m i l l i o n ) , E u ­rope 101.7 m i l l i o n , the U S S R 57.2 m i l l i o n , As ia 289.1 m i l l i o n , S o u t h A m e r i c a 129.5 m i l l i o n , A f r i c a 90.3 m i l l i o n a n d O c e a n a 2 0 m i l l i o n .

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nothing to do, his conclusion may