Saturday, June 21, 2008

Harmless Holes Combine them by Chandra

I first heard economist Raghuram Rajan when he was appointed as head of research at the IMF and first Indian economist under 40. When I was in my M A Economics in Madras University. Later I started reading his interviews and got to know he is researcher and professor of finance. Recently h headed a committee in India’s financial sector reforms. Which started as new financial order yet to dominate as one was earlier. Of many comments posted on his committee, the insightful and honest one is from economic journalist of India is really worth note. His comments are loosely important to the point of economic analysis which is radical need change by logic in the 21st century.

The major correlation of his comments is based on Rajan’s education background alone matter, but the ability to analysis equally matter. Rajan is an undergraduate in engineering.

Take a case of few paragraphs:

“But its chapter on macroeconomic policy suffers from a serious defect in method. This is that it is almost devoid of internally consistent logic. Even its understanding of macro theory seems flawed: how do you recommend a currency appreciation when a country is running a current account deficit? Or is it that you speak only on behalf of the financial sector, the real sector be damned?

In those days a knowledge of logic was to economics what the ability to run a regression is now. Thus, by the end of the 1970s, the dominance of logic as the driver of economic reasoning ceased.

One completely unintended consequence of this change was the sharp increase in the number of persons with an undergraduate background in engineering who became economists. Thanks to the low priority that is given to social sciences in engineering, they were and are largely innocent of the ambiguities and dilemmas of the social sciences, its methods of debate, its underlying non-linearity and, above all, its techniques of reasoning.

Any one who is interested in economic analysis must have essentially, two. One is deduction and the other is induction. Both have their adherents and critics. And as the Karl Popper-induced debates eventually proved, neither is wholly right or wrong. This means that the context also becomes important sometimes. Nowhere is this more true than in macroeconomics.

In deductive logic or reasoning, if I may remind readers, the conclusion depends on the premiss. If the premiss is wrong, the conclusion will be wrong. Deduction also goes from the general to the particular. For example, if your premiss is that the private sector must, regardless of the context, play a certain type of role in the economy you will also have a second premiss that all fiscal deficits are bad because they crowd out private investment. Then since all fiscal deficits are regarded as being bad, fiscal deficits for countries in specific contexts are also regarded as being bad.

Unfortunately, and thanks in a large measure to the data boys, especially those with engineering backgrounds, this has become a generalised problem in macroeconomic analysis and policy wonking. So even though they pour scorn on anecdotal evidence, the data boys have become guilty of the same methodological flaw. They confuse correlation with causality and use induction and deduction inter-changeably.

This absence of a strong logical foundation has resulted in the report being reduced to what some would call pre-conceived notions regarding how things should do. One expected better.”

It is true in Indian planning commission in every aspect’s of planning for corner of the country flowed differently. Read fully article here.

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