The Telegraph
Since 1st March, 1999
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- Macro-economists are trying too hard to make things simple

Happily, many among our economists are now coming out to share their professional woes through the columns of India's leading national weeklies and dailies. This is a process of demystification that you want to see as much of, and as often, as possible. I find it exciting too, that more people are taking the forces working on the economy at least as seriously as those that work with pomp and splendour, often pointlessly, on the polity. Economists are seeking exchange of ideas, if not with hoi polloi yet, but certainly with other intelligent minds. That they are also doing so with considerable 'lan, without giving off a whiff of condescension, is what I admire most.

But let me also admit frankly that when I try to make sense of what is transmitted through this running commentary on the economy, I often cannot avoid thinking that our macro-economists are trying too hard to make things simple. In the process, sometimes, a basic question of social choice that should have been placed before the public goes missing. In a democracy, such questions, however complex, are, after all, for the expert to clarify and the public to take a decision about.

Have you noticed how many economists have started to see the major economic activities and outcomes in the Indian economy in terms of the unfolding of 'puzzles and paradoxes' without distinguishing between the two' I would plead with the experts not to gloss over a distinction between categories of problems that need altogether different kinds of attention from the public. Let me raise two questions here.

Firstly, are economists getting too bedazzled by science and too overcome by 'conventional wisdom' not to know a genuine paradox when they see one from a mere puzzle' In our times, if you could puzzle it out, it could not be a paradox. And if conventional theory did not cover the facts, you seriously considered discarding it.

Let me recall a well-known and simple paradox condensed in the two-word oxymoron, 'the living dead'. It is a paradox because the living and the dead are exclusive categories in two-valued (Yes or No) logic, if you are the one, you cannot be the other. Not unless, moving from one to the other, you are allowed to change your language. You can be allowed to be living in one sense (perhaps physical) and dead in another (perhaps spiritual) or the other way round. In other words, the puzzle in a paradox cannot be solved if you have to stick to one language. On the other hand, you have millions of puzzles that can be solved without changing the meaning of the terms that you began with or changing the rules of the game you said you wanted to play by. You solved it by finding the way out of the maze or the trick of untying the knot and so on. I know logicians will say I am hopelessly oversimplifying a serious matter that has worried philosophers over thousands of years but this is as far as I am able to go with my own intermediate-level economics.

Secondly, are economists going through a period of purposive socializing, being generally friendly and disarming to other invasive social-science disciplines as well as the public at large, and thereby absorbing intelligent feedback from parallel sources of intelligence' If so, I should think it would be a clever and commendable thing to do, particularly when all the accepted paradigms in our own discipline are under such heavy question marks. I even suspect universities wanting to move with the times would very soon be offering degree courses in different progenies of an earlier animal called economics that had so long been on view in the market. These new courses would be economics of this and economics of that ' the defining common factor being the almost complete lack of a mutually intelligible language of argumentation that economics once used to teach. It would not be a bad thing then to try that language for a last hurrah before economists finally have to break rank and leave a hitherto unfragmented common land for greener pastures.

To come to my point, let me produce two frequently encountered examples, one of a macro-economic paradox that has to be accepted as a fact of life and another, of a macro-economic puzzle that can be solved if you have got the right kind of expert to do it.

The paradox in our stylized example is a social-choice dilemma that the macro-economic policy- maker has to live with everyday, whether or not it is ever brought out into the open. It goes as follows: there are 10,000 young students in the country, all found fit to take, and some willing to pay for, an expensive advanced course in information technology. It is estimated that each aspirant has a 90 per cent probability of finishing the course with success, so that if all 10,000 are admitted, 9,000 will come out successful. But there are only 90 of the coveted highly-paid jobs going that each of the 9,000 would have been trained for. Each aspirant then has only a 0.9 per cent probability (p = .009) of success. However, the probable positive outcome can still be so large that every one of the initial 10,000 will love the prospect and go for it. The paradox then is: it is right by the logic of economics for each (individually) to want to do the course; it is wrong by the logic of economics for all of them (collectively) to be allowed to do it. Such being the case, how many should be admitted to the course' What is a fair number' Given that number, what is a fair way of deciding who should be the lucky ones' There can be random, but not conclusive, answers that can be generated from within the problem. You have to bring in extraneous criteria that can be decided upon only by the people in a democracy.

The second example is a puzzle of a more recent origin. I am giving a brief outline of it here, constructed from a note kindly sent to me by Professor Mihir Rakshit along with his own neat solution to it. One of the notable characteristics of India's macro-economy between 1997 and 2004 was the steep increase in deficit financing ' the fiscal and revenue deficits over the period averaging more than 9 per cent and 6 per cent respectively of the gross domestic product. In Rakshit's words, 'Despite recurring revenue and fiscal deficits of such magnitude over more than seven years the expected fallouts of persistent fiscal profligacy are conspicuous by their absence.' An increase in government borrowing tends to raise interest rate and crowd out more productive private investment, decrease saving and eventually adversely affect the economic growth of the country. This is generally accepted as the conventional macro-economic wisdom.

The puzzle is, nothing like this happened over the last decade in India though it did go like this in the early Nineties. The Indian macro-economy seemingly has disobeyed the laws of macro-economics over the more recent period. Rakshit's lucid solution of the puzzle rests on showing step by step how 'conventional macro-economics' works only when output reaches the 'full employment' or 'supply bottleneck' level. Until that point, presumably, the old-fashioned Keynesian theory (no longer called 'conventional') of deficit financing still holds. So we are not looking at a paradox!

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