A Veritable Kaleidoscope

An Economist’s Miscellany, 2011, KaushikBasu, OUP, 240 pages

Kaushik Basu is that rare being- an economist with the flourish of a litterateur. As a professor of Economics at Cornell University, former Chief Economic Advisor to the Government of India and presently the senior Vice President and Chief Economist of the World Bank, he has adorned many roles. In each of his passing act, he has left an indelible mark of individuality and impression. After a long series of serious academic work and popular essays for the common reader, this book comes as a potpourri of the many threads Basu holds close to his heart.

This book is a delightful mix of the various interests in Basu’s life that spans economics, sociology, art, literature and philosophy. It has essays on an array of fields of academics, musings on everyday life, travel memoirs and impressions, translation of two classic Bengali short stories from the nineteenth century, introduction to two engaging games created by the author and even a play set in an academic world! In its scope and diversity, this volume transcends genres and its lightness and brevity, it excites the reader to foray into a number of worlds held together by Basu’s wide interests and inimitable humour. Written at a juncture in life when he was moving from his comfort zone of academics (with a fairly predictable routine) to the mind boggling world of policy making as he took up the challenging job of Chief Economic Advisor, this book also offers a unique glimpse into his inner world including the many surpirses that he encountered, his apprehensions, hope and expectations.

Reinventing the world around

Basu delivers on his usual cocktail of  political economy, foreign affairs,  trade and economics obliquely shedding light on the inner world and workings of professional economists and researchers. ‘Philosophy has to be deductive, poetry romantic, plays and fiction humorous, and politics intriguing if they are to catch my attention,' remarks the author as he prepares to lead us into the book. This is a presage of things to come since the book is a veritable kaleidoscope of crossing boundaries among different sketches of life Basu paints in his vast canvas.

He begins a section with essays and commentaries on the contemporary world including a comparison between China and the emerging India. After a few delightful essays covering some of his work, he moves on to draw personalities like AmartyaSen and Paul Samuelson with a few deft strokes. There are anecdotes and tales about ‘personnages’ that Basu has come across in far away land. What I enjoyed the best are the travel memoirs, including the one in which the author uses the logic of game theory to nab a pickpocket on the streets of Europe. Witty and eloquent, these stories reveal economists as a special ‘species’ with a vision of their own, viewing the world and its conundrums differently from others.

An Economist’s Miscellany is a playful book that questions our assumptions about the world and life around though the eyes of a versatile intellect. In disarming generalisations and provoking new thoughts and ideas, it succeeds through a conviviality of making the reader an accomplice and an active partner in discussing and engaging with Basu’s ideas.

Deconstructing Financial Crisis

The Myth of the Rational Market, Justin Fox, Harper Business, pp. 340

Justin Fox is the editorial director of the Harvard Business Review Group and a contributor to Time magazine. In this fascinating historical narrative of the financial crisis of 2008 and the events leading up to it, Fox dissects ideas, people and their behavior. The perception of risk and the belief in market rationality is part of both economic thought and cultural history that consolidated the modern world of finance and investment. What the financial crisis did was, not only demolish fortunes, but also ideas put forth by intellectuals who battled to bring in a particular brand of capitalism.

Tracing history

The book is divided into five parts. This section-wise division elaborates the timeline leading up to the financial crisis. In the beginning of the twentieth century, it was unusual to associate the idea of market with rationality. The first serious attempt to apply the logic and reason of science into economics began with Irving Fischer. In his time, the idea that man was infinitely selfish and infinitely far sighted prevailed. Fischer took this assumption by the horns and argued that the uncertainty of the future could be ‘tamed’, if not eliminated. This was the beginning of modeling the future outcomes with variables available in the present.

Fischer’s work was taken a step forward by Harry Markowitz, who introduced the ‘statistical man’ to the market with the help of quantitative approach to investing. The world events of the time prepared such intellectual pursuit because of the emergence of strategic thinking in the Second World War. About a decade later, it was Paul Samuelson, who wrenched the idea of rational market that was on the fringes of the economic thought into the centre stage of academic research. Samuelson, who was in the habit of reading every paper that was published in the Quarterly Journal of Economics, came across the idea of ‘market randomness’. In a case of remarkable serendipity, a doctoral thesis of Henry Bechelier filled with dense description of market behavior caught his attention. He immediately recognized that the randomness of market mathematically described was similar to what Albert Einstein described about the Brownian motion of random particles. This paved the way for the belief in the market as rational and random.

Age of Assumptions

      The decades that followed were notable for two major achievements. Modigliani and Miller came up with a simplifying assumption that argued that the market behaves only based on real considerations of how an investment would actually perform, and not on the packaging of the investment. Eugene Fama, a doctoral student of the Chicago school, proposed that the investor’s choice took random positions along a bell curve. The metamorphosis of the market from being rational to random and from there to being perfect was established. It was this cherished belief that was shattered in the financial crisis of 2008. Alan Greenspan, the chief of the Federal Reserve for 14 years admitted that the economists failed to anticipate the crisis and invite government intervention because ‘it (the market) has been working exceptionally so well’.

This book is an engrossing read that pays rich tribute to well-known and lesser acknowledged economists and thinkers of the twentieth century. The history of ‘risk and reward’ that the book captures brings out a lively account of the protagonists in the financial world and the anatomy of the financial markets.

The Limits of Rationality

Economic Fables, Ariel Rubinstein, Open Book Publishers, pp.253

Introduction

Economic Fables is part memoir, part description of a work life that single-mindedly engaged with one of the most fascinating fields of Economics- Game theory.  Rubinstein began his incessant engagement with this field since he was thirteen, learning the importance of mathematical logic, the construction and importance of economic models to explain reality and the most difficult variable that all game theorists had to grapple with- human behaviour. Rationality is only one of the many ways of understanding human choices and financial gain is only one of the utilities humans consider while making decisions. While Game theory has had wide implications in understanding and demystifying human decision making, it is also important to separate the myths of what economics can perform from the magic of the actual power of the discipline. In a way this book cautions us from applying neat theories to reality with a caveat that the difficulty is not capricious human behaviour that overrides rationality but the values that people hold of which rationality is only one. In another way, this work is a generous acknowledgement to those that went before Rubinstein- from John Nash to Amartya Sen, Amos Tversky to Daniel Kahneman.

The Idea of Models as Fables

The heart of the book is the idea of Economics as a kind of story telling that helps us understand the world better. ‘In economic theory as in Harry Potter, the Emperor of new clothes or the tales of King Solomon, we amuse ourselves in imaginary worlds,’ explains the author. Rubinstein’s somewhat eclectic introduction to the theory is responsible for this way of thinking. Speaking of his earliest influences, he acknowledges a teacher whose lucid mathematical proofs he devoured along with Sen’s Collective Choice and Social Welfare.

This simultaneous engagement prodded him to explore the vistas of modelling with the traps that comes with uncritical attitude. He elaborates that models might seem simplistic and even unrealistic, but it is the only way ‘to clarify concepts, evaluate assessments, verify conclusion and acquire insights.’ However, since the storytelling takes place in the house of Mathematics, formal language can be both clarifying as well as clouding. The meaning of clarity does not necessarily mean the idea of scientific temper. Mixing up these two, the common perception is that whatever is modeled has predictable value. Rubinstein cautions against this belief by illustrating modeled examples to real world situations in economic crisis and geo-political contentions.

Meeting Nash

The most interesting part of this book is the implicit references and vignettes on John Nash, the most important contributor to Game theory in recent times. Rubinstein encounters Nash metaphorically all through his academic life and finally one winter morning in 1994, the year Nash wins the Nobel prize, actually strays into him. In this wonderful encounter, Nash is revealed as an absorbed genius rambling through the Princeton landscape, always surprised at the impact of his own work on others. The author ponders as he teaches Game theory whether it would lead the students into self-centred deviousness. In the last part of the book, the entire discipline is prismatically analysed through interdisciplinary realm.

This book is written in simple yet provocative style and it never fails to engage and amuse the reader. Economic conundrums are placed before the reader with powerful illustrations. In the end, the book tries to critique both the powers and limitations of the growing discipline that Economics has become in the twenty first century.