Are there any central tenets of capitalism? If so, they are better provided by academic observers than by business people, who are too busy trying to earn a penny or two – not the least over the season just past – to know. So I turn to a slightly offbeat application of economics. I refer to Paper No. 9639 of the Centre for Economic Policy Research by S Anagol, A Etang and DS Karlan, portentously entitled “Continued Existence of Cows Disprove the Central Tenets of Capitalism?

If the authors are right, what is disproved in the instances they examine is not merely capitalism but the central tenets of mainstream economics itself, in particular that familiar and much-vilified notion that people maximise their economic welfare by buying in the cheapest market and selling in the dearest and by minimising costs and maximising returns.

These tenets are meant to apply to any society that makes use of markets. Intriguingly, the authors’ field of research is blessedly far from western financial markets: they examine the returns from owning cows and buffaloes in rural India.

They find that if labour is valued at market wages, households earn a negative return, ie a loss, of 64 per cent from owning cows and of 39 per cent from owning buffaloes. If a household’s own labour is instead valued at zero – which may be a more realistic assumption in the underemployment conditions of rural India – the return from holding buffaloes rises to 13 per cent, but remains at minus 6 per cent for the unfortunate cows. Yet the ownership of cows remains abidingly popular.

The economists’ methods (or “methodology”, as they like to put it) are refreshingly simple. The rate of return per animal consists of the difference in the price per animal between the beginning and end of the year plus the profit from maintaining it, divided by the initial price. In calculating profit the researchers were very thorough, taking into account not only the value of milk and calves produced, but even the value of dung cakes.

The estimated average returns conceal even larger individual disparities than is usual among such studies. For example, these losses conceal huge profits of between 300 and 400 per cent per annum among the fortunate top fifth of farmers.

The high returns for a minority may help explain why so many farmers indulge in cattle ownership. But the huge disparity between the top and average returns makes this unlikely as a complete explanation.

A smattering of knowledge of India may point readers to a religious explanation, as “in Hinduism”, the authors remind us, “the cow is a symbol of wealth, strength, abundance, selfless giving and a full earthly life”. But that does not explain the buffaloes’ results.

They try to probe a bit deeper by examining the economics of religion. The results of their research, they say, would mean “that the long term evolution of a religion could find an equilibrium in which individuals worship a loss-inducing investment”. However, most economic models of religion predict that religious customs are “either beneficial or strengthen the group”.

The authors toy with other explanations. It is possible the farmers deliberately look for illiquid savings in order to avoid “temptation spending”, for example.

But the most convincing “economic” explanation is that the ownership of these animals is a form of saving. Indeed savings accounts with negative rates of interest have been found in other parts of the developing world. They were common in the west in the postwar decades before the much decried reforms of Thatcher and Reagan restored market rates of return. Some of us may even remember putting our pocket money into Post Office savings accounts with negative real rates of return.

The authors speculate on whether plunging transaction costs in the way of opening bank accounts in rural areas will lead to a siphoning off of the resources currently invested in four-footed beasts.

These findings cannot be dismissed as freak results from remote areas. India holds one-sixth of the world’s human population and an estimated one quarter of the world’s cattle population. The authors point to similar results for female-owned enterprises in Sri Lanka.

Nevertheless, I am not losing any sleep over the alleged failure of “Economic Man” postulates in India. As John Stuart Mill, the philosopher, pointed out in the 19th century, rational economic behaviour is but one aspect of human activity. The greater the extent to which such postulates do not apply, the more difficult it becomes to apply economic theory.

However, rather than engage in yet another attempt to overthrow academic economics, it is more important to help India’s rural poor improve their lot, based on what we do know about economics.

But meanwhile if you want to help the world’s poor you will do better to donate to carefully chosen organisations that provide cash and technical aid rather than those that claim to provide a cow or a goat or other four-footed beast, however attractive these creatures look on a seasonal gift card.


Letters in response to this column:

A cow is a valuable educational tool / From Prof Ira Sohn

Farmers are purchasing a call option / From Mr Matthew Phan

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