Can the economy keep up with the new demands placed on it?
When sitar maestro Ravi Shankar and Nobel Prize-winning economist Amartya Sen were awarded the Bharat Ratna, India’s highest civilian honor, a journalist allegedly asked them: “Between you two, who is more talented? is in many ways meaningless. But Shankar offered an interesting response: “Teach me economics for a week and ask me to give a lecture; I’ll get there without making a fool of myself. Now teach my friend Amartya to play sitar for a week and ask him to give a public performance…. “
The story is probably apocryphal. Nonetheless, it highlights a distinctive feature of the economy. In many academic disciplines, it is difficult for someone who does not have a reasonable grasp of the subject to give a lecture without embarrassment, even to a lay audience. This is not the case with the economy. Generally speaking, the average layman cannot easily tell the difference between a good economy and a bad economy, not least due to the wide range of content and the disparate methodologies of the discipline.
Economics has the merit of welcoming those who are immersed in abstruse mathematics and axiomatic methods (Léon Walras, John Nash and Kenneth Arrow) alongside those who delve into the problems of the world without resorting to symbols (Adam Smith, Thomas Schelling and Gunnar Myrdal). But such a large canvas tends to leave room for erroneous brushstrokes. And in deeply uncertain times like the present, as the world is turned upside down by the covid pandemic, climate change and the digital revolution, it’s easy to see why many lay readers would be enraged by the claims of “economists.” How can the non-expert separate the wheat from the chaff?
This feeling of worry should prompt some introspection within the discipline. Even if the criticism is unwarranted, a little self-examination cannot hurt. Indeed, I would say that many mainstream economists fail to understand that grasping reality and making sound policies cannot be purely about data and empiricism. No matter how carefully we collect, organize and analyze our data, the information we obtain should be used in conjunction with common sense and intuition.
Likewise, someone who views their own predictions as expressions of pure science is as dangerous as someone who is guided by superstition. There is no way to predict with certainty what will happen tomorrow. When we talk about the future, we have no choice but to use our intuition to decide when we can extrapolate from past data and when we can’t. We hope that we, as a species, have developed a hunch that is at least somewhat reliable.
Another problem is that the necessary mix of hard science and intuition or judgment tends to differ across economic specialties. In some industries, such as auction design, economics is close to engineering, while in monetary and fiscal policy areas it depends heavily on perception and judgment. When outsiders extrapolate from the performance of one branch to make inferences about another branch, errors can quickly accumulate.
Beyond these philosophical questions, economic theory also requires a fresh look. Certainly, the rise of data-driven scholarship (through big data or randomized controlled trials) is extremely important. We need data to help us spot hidden patterns, if only to strengthen our intuition. Nonetheless, the growing tendency to view these results as universally critical is cause for concern.
Economics would not be the valuable and exciting discipline it is today without great theoretical ideas such as Smith’s seminal intuition that order can emerge organically without the need for the leadership of prime ministers. or state (Leviathan). “It is not from the benevolence of the butcher, brewer or baker that we expect our dinner, but from them for their own sake,” said Smith.
But a caveat is in order here. While Smith’s seminal observation was that the “invisible hand” can bring order, the neoliberal view that the invisible hand always does is a travesty. You don’t have to read more theory to understand this. The Trial of Franz Kafka, for example, offers chilling representations of how evil can be perpetrated without a perpetrator.
Another reason to come back to theory now is that the ground is moving under our feet. Traditional economics has always relied on both explicit and implicit assumptions. For example, textbooks tell us that the efficiency of trade and exchange depends on individual preferences satisfying diminishing marginal utility, technology being convex, etc. But they don’t bother to mention that people also need to be able to communicate. This requirement is taken for granted, as are many behavioral standards that are crucial to the proper functioning of a market.
But as technology advances and the environment changes, some implicit norms and assumptions will change, sometimes with devastating effects on the economy. In our world of social media and public statements, the meaning of what we say is starting to change. With globalization, we also have people with different standards operating in the same economy and the same market. Our theory is ill-equipped to analyze, let alone regulate, such markets. To understand these developments, we need the kind of major theoretical breakthroughs that have brought the discipline to where it is today. I don’t equate theory with mathematics. Neither Schelling’s prose nor the research of Nobel Prize winner Elinor Ostrom had much math, but that hasn’t stopped them from grappling with some of the world’s most basic problems.
The risk now is that the ground is moving faster than economists think. It takes the scientific imagination of economics to rise to the challenge and examine not only the state of the world but also that of the discipline. © 2021 / Project union
Kaushik Basu is the former Chief Economist of the World Bank and Chief Economic Advisor to the Government of India, and currently Professor of Economics at Cornell University.
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