Shankar Acharya trap

DR SHANKAR ACHARYA, FORMER CHIEF ECONOMIC ADVISOR

The Business Line

Shankar Acharya trap

Economics vs Physics

Economics and its history have been a limelight of economists and historians. Few economists made attempt to discover something which can be a constant action in everywhere irrespective of location but at the end nobody did to happen yet because unlike physics we are in social science. But is that the economists wanted to see economics as science like physics? Or something else they were trying to look at and say.   

There is an interesting article by T. C. A. Srinivasa-Raghavan on economics as he has been trying to understand where the subject stands and how it looks now. 

And he quotes economist Mr Solow which is more interesting than his narrative. 

The following is excerpts from a article published by Robert M. Solow in The American Economic Review, Vol. 75, No. 2, (May, 1985), pp. 328-331. 

• “For better or worse, however, economics has gone down a different path, not the one I have in mind. One consequence, not the most important one, but the one that matters for this discussion, is that economic theory learns nothing from economic history, and economic history is as much corrupted as enriched by economic theory. I will come to that, too, later on. 
  
• To get right down to it, I suspect that the attempt to construct economics as an axiomatically based hard science is doomed to fail. There are many partially overlapping reasons for believing this; 
  
• Unfortunately, however, economics is a social science. It is subject to Damon Runyon’s Law that nothing between human beings is more than three to one. To express the point more formally, much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity. Moreover, all narrowly economic activity is embedded in a web of social institutions, customs, beliefs, and attitudes. Concrete outcomes are indubitably affected by these background factors, some of which change slowly and gradually, others erratically. As soon as time-series get long enough to offer hope of discriminating among complex hypotheses, the likelihood that they remain stationary dwindles away, and the noise level gets correspondingly high. Under these circumstances, a little cleverness and persistence can get you almost any result you want. I think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief. Indeed, some of Fortune’s favourites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices. 
  
• If we are honest with ourselves and others. It would be a useful principle that economists should actually believe the empirical assertions they make. That would require more discipline than most of us now exhibit, when many empirical papers seem more like virtuoso finger exercises than anything else. The case I am trying to make concerns the scope and ambitions of economic model building, not the intellectual and technical standards of model building. 
  
• In his own methodological writing, Court made the point explicitly that men "living as they do in different societies. ..make their decisions according to different schemes of values and according to the habits and structures of the society they find themselves living in." Therefore an economic historian should be an "observer and re-creator of the codes, loyalties and organizations which men create and which are just as real to them as physical conditions."
  

Banana economists…….

T. C. A. Srinivasa-Raghavan is trained from Delhi School of Economics and he has lots of friends still over there. He says in his column in Business Line which is something interesting and questioning his friend’s works perhaps his own works also!

Take his recent column in which he says “...this is very much the case with the demand for economics courses. The best and the brightest, 90 per cent of the time, go off into the pure sciences, mathematics, and engineering. Those who can’t make it into these courses, often end up in economics.

As more students pass out of schools, and the number of seats in the pure sciences, mathematics, and engineering grows only slowly, there is a natural increase in the demand for economics. This much is simple”.

Of course seldom people takes serious about the advancement of any subject, like the one now is economics on which T C A has been dewing for quite some time. And I have been taking note it. Because the only reason which I employ is ‘open mind’. 

To be precise for me it is not only interesting to read the questioning style of his writings but the way he puts things in unfolding ideas of economics. 

“Sure, there are nonsense in his writings may be occasionally” as my friend Jayakamal use to describe.   

T C A has been questioning the whole body of economics development since 1970s. His focuses has also shifted from macro economics to other area as he writes in recent column “Through clever research funding economists were persuaded to ask questions that had not only been already asked and answered but also which had no real answers. Growth theory and development economics are excellent examples of this but almost all of economics is like this.”

Who toed whose line?

T. C. A. SRINIVASA-RAGHAVAN asks perhaps good question “Why is it that if India has an approach to something, Indian economists wait for it to be validated by the West before they accept it? Indeed, why do they attack the Indians who advocate that view before such validation is bestowed by the West? I genuinely believe that the Finance Ministry, which funded the Mistry report, and the Planning Commission, which funded the Raghuram Rajan report, have some serious explaining to do. As indeed do the economists who toed their line and kept up LeT like attacks on the RBI.”

I also hunch that partly or fully TCA knows the answer as his is a veteran of Indian economist’s views. But there are groupism views in India like he has been advocating Dr Reddy rule of Central Bank. 

At least it is not surprising me when he says "approach to something" and “they will land you in trouble” when ourselves prepared to land in trouble like the one ‘socialism’.

Economics, town and untrained economists………

In the morning I read three articles the subject of article vary from financial crisis to urbanization and false theory of economists. 

First, in today’s ET Joseph E. Stiglitz has article in which he says that “Trickle-down economics almost never works” it comes after doing a significant damage which the present academic community fails to understand and give up the theory. 

Second, fight over whether macroeconomics was advanced or not after 1970s. Typically T. C. A. Srinivasa-Raghavan says by quoting Keynes who said in 1931 that “If economists could manage to get themselves thought of as humble, competent people on a level with dentists that would be splendid.” 

And “he is also intensely critical of the tendency introduced by engineers-turned-economists to look on the real world as a sort of machine where pressing the right buttons leads to predicable outcomes.”

 In case of India it includes Raghuram Rajan also. 

T. C. A. Srinivasa-Raghavan earlier criticized Raghuram Rajan report on financial sector reform saying “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.” 

Third, in India many think Bibek Debroy is a liberal economist but some time seem to be a terribly Keynesian economist. He writes in today’s Financial Express “In the long run we are all dead.” Most people know this Keynes quote and most non-economists probably think it is from General Theory (1936). It is actually from A Tract on Monetary Reform (1923), written well before those troubled times. Given these troubled times, the subsequent sentence has relevance for the tribe of economists. “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

State is a “weak substitute” to Market…..

Almost, Mr TCA become a bogus analyst with horrified mind said a friend of mine. 

Well, if any one I wanted to call notorious in the analysis of Indian economy it will be “Cornell economist Kaushik Basu”. 

Mr Basu said in his Sage - Madras School of Economics Endowment Lecture (2007) “one undeniable factor is that India’s savings and investment rates had risen sharply from the late sixties to the late seventies. What caused this? Clearly, the nationalization of banks in 1969, with the state-owned banks being forced thereafter to open branches in remote areas of India, and the start of Unit Trust of India in 1964 were key factors in boosting the savings rate, which in turn was the first impetus for rapid growth”. 

Nonetheless, the question is important Mr. Basu “once asked why everyone held an opinion on economics but not on aircraft design. He was arguing that economics was a specialisation requiring technical skills that were no less rigorous than those required of an aircraft designer”. 

Some time back Mr TCA seems to be good analyst of economics and politics but now I realised that he also misdirected his readers. He simply scraped the India’s reforms of past 15 or more years. “….This was a big intellectual leap, made largely in the 1980s, which became mainstream faith in the1990s and in this decade. Its consequences confront the world now in the form of the financial disaster it has caused”. 

No doubt, I agree with at least this point that “It was that if you got the market design right, the danger of market failure was almost nil. This assumption led to the influx of engineers, scientists and physicists into a domain that superficially looked like their own but contained, alas, humans also, with all their foibles”. 

No matter how many business analysts, journalist, and other “…..harking back to Keynes now but nowhere did he say that the taxpayers should pay the price of private folly and greed via bailouts What he said was governments should buy goods and services when private demand fell short of what installed capacity could provide. He was treating a different problem, namely, the survival of the poor, not of the rich”. 

Our academicians including the economics departments of Indian universities are in deep sleep. They cannot back to Keynes nor look forward to Hayek or anyone else. 

It is no less folly to blame only “private folly and greed via bailouts”. Election after election, schemes after schemes, law after law, Acts after Acts, rules after rules, etc goes with publically announced “bailouts” in the name of “poor”  without mining whether it reaches or not. 

What remains a big mess is the Constitution of India which becomes focal point for everyone to speak but not to adhere, morally, mentally and physically and be responsible when get elected by people of this country.

Because it has none in the informal sector

T. C. A. prescriptions for healing economy:

• “What is truly extraordinary is that the one thing that the government, as the largest buyer of goods and services can and must do, it is not doing. That is to place orders for steel, cement, computers, software, trucks, cars — you name it. Just fill the order books, if necessary with a proviso for later delivery, and see how the mood changes.
  
• It is puzzling why this simple solution can’t be implemented. Instead of all this grandstanding, all that the different ministries had and have to do is to just get on with buying whatever they were going to buy this year and next year”.
  

This kind thinking has already implemented in the six pay commission by embossing the informal sector where the majority of people dwells. 

Just is the growth rate of different sector in the Q3 (October-December) 2008-09. The manufacturing and agriculture and allied sectors were shown negative growth but the community, social, and personal services were shown as high as 17.3%! 

Of course, people who are in the formal sector will defiantly do “orders for steel, cement, computers, software, trucks, cars”…..etc.

Demand and supply of “Empty sum”

T. C. A. Srinivasa-Raghavan asks how the causality function? And “f, say, the demand curve for something shifts upwards, how do you know which of the following caused it: an upward shift in per capita incomes, a change in tastes and preferences, or simply a generational change?

Economists, with their certitudes, often carry on as if they know for sure. The truth, however, is that there is simply no way of telling”.

The Government and the RBI: Two Tale Tango (TTT)

T. C. A. SRINIVASA-RAGHAVAN writes, but rather old jokes of government politics and RBI politics. While the first para may include his part also.

“One only has to look at the financial newspapers (and columns by a few misguided economists with a touching faith in the markets even after they have so visibly and disastrously failed after the Lehman disaster) until mid-January to see how not just the Finance Ministry but also its pet economists had been behaving like those fellows who fire guns in the air during North Indian marriage festivities. It was triumphalism, pure and simple. 

Indeed, in November one very senior government functionary had even said to me, with a chuckle of deep satisfaction, that the RBI now had to take the Government’s permission even to go to the toilet. He had been having a running battle with the RBI — which he had mostly lost — for the last four years. So I suppose his glee was in some senses understandable. 

Only a few days after the current Governor took over in the first week of September, one member of the RBI’s top echelon had made it clear to the then Finance Minister that some of the statements he was making, especially in regard to the health of Indian banks, were uncalled for. He was ignored. The Finance Ministry also set up the liquidity committee — or some such creature — that it wanted to control. The snub to the RBI could not have been more public or more direct. The message to it was that it should either move or get out of the way — shape up or ship out. In the event, the committee met once or twice and then faded away. But the damage had been done. 

Another step was the series of meetings that the Finance Minister called with economists who had never run policy but who had opinions on everything under the sun. 

There were several directors of think tanks in this group and even one or two traders present during the meetings. Everyone was unanimous that the RBI was the problem, not the solution. 

Our political and intellectual leaders can sometimes behave extremely foolishly and this anti-RBI episode is a good example of that”.

Real tragedy of modern economics is too much false assumptions

Courtesy-The Business Line

T. C. A. Srinivasa-Raghavan writes in the Business Line but quite interesting in questioning the basics of economics which is often said as 'dismal science' nothing more on it in a rational way at least in the modern times. Note the following thought which has gone through years at least in his mind.

“As mentioned last week the purpose of this column is to suggest that economists no longer quite know what they are doing as a result of which economics has lost its way. This is proposed to be done with the help of examples from the research in economics.

Assumptions are central to any discipline of structured thought. Newspapers, for example, assume that readers are only interested in reading news but not reading per se. Psychologists assume that everyone is nuts unless proven otherwise. Historians assume that the historical material they use is true. And so on.

Economics differs in one very important respect. It makes more assumptions than any other discipline. One of these is (or used to be) that people and societies act rationally, where rationality consists mostly of consistency.

But after more than a century of using this assumption as a bedrock of their theories economists have now begun to abandon it in order to justify the discipline’s inability to come up with explanations that stand the test of time.

They are not saying that people don’t behave rationally but only that there can be no standard yardstick by which to judge an action as rational.

Thus, even though suicide bombing is regarded as completely irrational behaviour, to the bomber himself it appears to be the most rational thing to do.

I might add that whether or not that is the case, suicide bombers certainly take care of one of the most used definitions of rationality in economics, attributed to John Muth of Chicago University, an economist of great standing.

His definition was simple: people don’t make the same mistake twice. With suicide bombers, of course, we never get the chance to find out if this is true.

The question that needs asking but which no one is asking is: by diluting the rationality requirement, has the subject gained or lost? Having thought about it a lot during the last two decades, I would say that one way or another, it has not made any difference.

Therein lies the real tragedy of modern economics”.

Seminal Economics

T.C.A. Srinivasa-Raghavan just started column titled ‘Empty Sum’  The Business Line   Newspaper. He writes in his first piece: 

• “Economists will protest, more than somewhat shrilly, that I am making far too many sweeping statements. That is to be expected. But, after spending a lifetime with them, I know that in their heart of hearts they agree that this is exactly true of most of post-war economics.
  
• Techniques in econometrics have, of course, improved. But useful economic theory has made virtually no progress. Much of microeconomics stays where it was in, say, 1945, except in the matter of its dress. And as we are seeing now, macroeconomics hasn’t gone beyond Keynes, who published his seminal work in 1936.
  
• My view is that the post-war period can be divided into two clear segments. The first comes roughly up to the mid-1970s when economic theory grew increasingly distant from real life and more-or-less merged into advanced mathematics. The second phase was a sort of reaction, and comprises the empiricist phase where, gradually, the mere presence of a data set has meant that anyone who knows a little regression can become an economist. Thought and thinking have both exited.
  
• The trouble with empiricists, as opposed to empiricism whose importance can’t be denied, is that they can’t tell the difference between correlation and causality. I once wrote an article showing how every change of party of government in the US after 1945 has been accompanied by a recession.
  
• The correlation was easy to establish but causation, in either direction, is another kettle of fish altogether. Even after having been advised early not to fall prey to it, they make the classic post hoc, ergo propter hoc (after this, therefore because of this) mistake.
  
• The triumph of mindless empiricism has seen the advent of a menace called the policy economist. This tribe is to economics what ‘non-state actors’ are to security: guided missiles but with commercial intent. These economists flourish in think tanks which, if you ask me, are like those camps in Kandahar, Muridke, PoK, etc. But more about them in the months to come.
  
• Overall, the swings between the two extremes — of economics posturing as physics so that it can use advanced mathematics, and data-based vacuity which has no roots in politics, custom, institutions, law, etc — have led the discipline into a state of meaningless tarkam and vitarkamwhere scoring petty points is mistaken for scholarship and where debate becomes an end in itself”.
  

Keynes solution unlikely to do so

These are good questions actually but bad time to ask for action.

T. C. A. SRINIVASA-RAGHAVAN writes “After all, why should a taxpayer be made to pay for the mistakes of some bad decisions by directors? Even if there was a genuine error of judgment about the likely business environment, why should the cost of helping them out fall on the taxpayer when he or she was not sharing the benefits when the times were good?

True, a person could have become a shareholder, but that would have meant exercising a choice, which is right. But now taxpayers are not being allowed to do so. Whether they like it or not, their money is being given away to small groups of persons, some of whom may well have avoided or evaded taxes and, thus, become richer than those who paid their taxes”.

Except the above questions all other questions the author asked in the article was clear in the public debate.

Ghastly pink Drs Sen and Singh description

T. C. A. Srinivasa-Raghavan writes about Chacha Manmohan Singh and Amartya Sen “the two men share a quality that is absolutely central to their success but which, at the same time, makes it hard to form anything but a very blurred image of them and which makes them all things to all men”.

“Tehzeeb ki kami hai”

T. C. A. Srinivasa-Raghavan writing is always s mixed veg curry one could taste in different way. Is all that good to tease one’s actions when he comes to public office?  Here are few lines from his recent article in the Business Line. 

• “Left to himself he would have balanced the Budget but he served Sonia Gandhi a bit too well and allowed the fiscal deficit to go up to around 10 per cent when you take into account the off-budget tricks he played. 
  
• one should ask him the question: politics may impose compulsions on a minister but does it also impose compulsions on the soul?”  
  

May be good question but never be a wrong time.