What is Wrong with Regular Economics?

Richard Thaler (2016), Misbehaving: The Making of Behavioral Economics, WW Norton & Company

Since Adam Smith’s time, the ‘invisible hand’ has ruled the dynamics of markets and equilibrium, at least in the academic corridors of economics. Real life economics, the way people make decisions from choices presented to them thinking about tradeoffs of their present selves with their future, of potentials gains with risks of losing has played out differently. People are not wholly rational- always knowing what is best for them, always knowing how to achieve what is best for them. If that were so, we would have less collision paths in the places we work, the people we marry and the investments we make. We think and feel, we are not intelligent enough to make balanced assessments of all options and so we make mistakes.

This idea of the blundering, floundering regular person is at the heart of Richard Thaler’s Misbehaving. When the stakes are high, the problems are complex and people are not experts, we make mistakes, we behave foolishly and we misbehave. The assumption of the pedantic rational genius is a myth, but it is also a costly myth. It is not just the accumulated mistakes of people that should worry us, but the assumptions that are made of us and the policies that are taken on behalf of us in the real world. Policy making is populated by experts who assume our rational boundaries and design structures that can trip us and confuse us. Ever since, Harold Lasswell called public policy the ‘policy sciences’ in the 1950s to the present day, discounting our irrationality and randomness of events has cost us wealth erosion, work place stress and general disharmony with the things around us.

Thaler’s enchanting narrative retells the story of how a group of young and vibrant minds began to question the neatness of the formulas and the elegance of the solutions by counter posing them with the clumsiness of understanding and confusion in vision. People behave through pattern recognition, swapping long and hard logic for short heuristic jumps, riskier and profitable options to safe loss-averse choices and making a penny’s worth by playing games that are not always moral or legal. In a world besotted with mental accounting, misremembering and biases, how can we still design public policies to make people obey traffic signals and encourage them to save more through pension funds?

Peppered with small and big milestones of understanding the real world through the eyes of economists, psychologists and sociologists, this narrative of the birth of applied behavioural science is both fun and deeply instructive. Questioning theoretical insights with the practical edge of wisdom, abstract rational powers with short sighted mistakes; it lays bare our incapacities to deal with the complex world. Therefore, what is at the disposal of an expert is sound evidence and some tricks to nudge and prod us into ways that might be good for us. In a world of bounded rationality, will power and resources, saving us from ourselves might be effective sometimes.  A wonderful read!

The Historian as the Detective

"It often seems to me that all detective work is wiping your false starts and beginning again.”
         -Agatha Christie, Death on the Nile

Over the century, the detective has managed to remain in his carapace, intact in idiosyncrasy. She may have gained a savoir faire of a new time, harbour new skills or exhibit stranger eccentricities. But her functional personality that houses- a keen sense of the narrative, the estimation and exploration of human nature, the unravelling of the story one layer at a time- remains intact. The acquired expertise to compete with conflicting narratives posed by the antagonist, knowledge of exacting depth and constant tendency to be an outsider make her both intriguing as story teller and endearing. So too is the reluctant but tenacious historian who peels off layers of a plot by the sheer tenderness of his labour and tenacity of pursuit. And this is what Siddhartha Mukherjee does by retelling intimate histories of maladies and human endeavours.

He has come upon us as a medical historian, the elusive counterpart of lawyer detective- the pugnacious logician and police hunter combined. His method is laborious as much as exacting like his choice of subject. He prefers intimate histories, counting each day of the story, taking tours and detours, chasing red herrings and stumbling upon the truth almost as an aside to the story. Both in his The Emperor of all Maladies and The Gene, this sense of serendipity that makes us party of stunning chance encounters and the weight of history that is laid with care on the reader’s purview makes it breathtaking and evocative. The duality of lightness and burden, accidents and intentions, mutations and inheritance, loss and gain also renders the stories he tells with a human voice. This voice is capable of being in awe at the endurance of human endeavours and quail in terror at the vicissitudes of life. We are witness to a battle of man v life, human v metastasis and inheritors v ancestors.

The detected soon assumes a compelling role as the narrator, exhibiting the fallacies of the original detective, man. The ever truant cancer cells multiply in utter defiance of the laws that govern the biological world; the genes bury their secrets in reams of junk letters and codes. It seems that anything worth investing has this truancy of its own that refuses to be captured in a single human story.

Therefore, the story that Siddhartha Mukherjee painstakingly narrates is many stories folded into one book, it has as many truths as there are readers. It divides and combines the vantage points, always shifting, always transient to make the victor vanquished and the dead alive. His narrations are magnificent and compellingly human- the protagonists are everyday heroes, housed in the everydayness of their work and life except that one fine day they were called to witness some miracle and were easily compelled to embark on a journey to understand it.

As in his The Emperor of  all Maladies, a biography of cancer, he repeats the same tenor and vigour with The Gene, an intimate history of man. Here’s a historian turned detective, who remarkably solves one case and leaves open many questions difficult to answer. 

Exploring the Conscience of Art

The Noise of Time (2016), Julian Barnes, Jonathan Cape

I was waiting for Barnes’ new novel for a while now after the Man Booker winning ‘The Sense of an Ending’. This new novel explores the conscience of the Russian composer Dmitri Shostakovich through an intimate third person narrator who meets him at three crucial moments of his life- as a man awaiting the repercussions of a dictator in the beginning, an ambassador of the same regime to world in the second and the torn lonely artist making his private tribulations into music praying that death liberates his art from life in the final moment. What interested me was the way we wind up with Shostakovich as he is thinking to himself what it means to be him, an artist, a Russian, a man hounded by power in public and art in private. We see with him how it all began on the wrong note for him with his name a mere echo of his father and how he shuffled through his life into the inevitable tragedy of betrayal that life set up.

We are faced with two impossible choices- to be honest, brave and dead or to be deceptive, fearful and alive. That is the kind of duality with no middle ground when power of that kind as we found in Stalinist Russia pervades life. There is no meaning to freedom and all roads lead to deception. Shostakovich’s encounters with Soviet tutors are some of the best parts of the book. They are sent to be patient with the genius, deliberately working through his stubborn mind ridden with guilt of living with such uncompromising vicissitudes. How the first tutor of the Stalinist world teaches him to begin with obeisance through remembering what it means to be part of history by teaching it to oneself. And how the last tutor encourages him to forget the past when he has barely begun to forgive. Caught between memory and forgetting, courage and cowardice, life and death, Shostakovich drowns the noise of time with music.

The larger questions we are posed with are who does art belong to? And how do you speak truth to power? Art belongs to everybody and nobody at the same time. As Shostakovich reminisces the posterity is free to do what it wants with his art, his music. It is both theirs to judge and not theirs to understand. That is because the truth in art stands all time while the truth in life is dealt with in small measures till it resembles no truth at all. With these interesting questions to explore, I found the novel intimate and interesting.

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.

A LIFE THROUGH THE AGE OF EXTREMES

‘Many years later, another Marxian rephrased this as the choice between socialism and barbarity. Which of these will prevail is a question which the twenty-first century must be left to answer.’

                                                               

                                               -Eric Hobsbawm

Having seen a century come alive with ideas and hopes of humanity, Justice V.R. Krishna Iyer touched so many lives wandering in many worlds- as a lawyer, jurist, minister, writer and humanist. His was a time and age both enriching and challenging, it was an era of two worlds battling out for narrow supremacy of ideologies and he stood by those who were left out of as the vanguard of justice and the voice of the voiceless. His reading of the overarching architecture of justice was through the mind of a meticulous philosopher but also with eyes that acknowledged human struggles. Towering personalities of his generation have left us a legacy and a message that the purpose of life is a life of purpose. The miracle of life is not to fly but to walk on earth. To wipe a tear and to bring a smile has been his mission in life, a literal translation of Gandhi’s Talisman. To fill what is empty, we have to empty what is full; as the Bible says, ‘If the clouds be full of rain, they empty themselves upon the earth.’ 

Nations exist not only as a testimony to territory or integration of a people but also to the aspiration of something more inclusive and just. This re-ordering of the social system is what is envisaged through a ‘transformative’ Constitution like that of India. Our Constitution is unique in having the just reordering of the social order as its ‘grundnorm’. Our lives are horizontally and vertically divided by the hierarchies of gender and caste, but the vision document and the well spring of law speaks of an egalitarian world and the well being of the poorest through not only Fundamental Rights but Directive Principles of the State Policy. That it is a directive to the state and speaks about the outcome of governance is often forgotten. Justice Krishna Iyer’s judgements on the bench reflected the highest ideals of this aspiration whether it be trade union rights or Muslim personal laws. His verdicts brimmed with the melody of justice along with the felicity of the English language itself.

No country is perfect let alone a country like ours of gigantic proportions. It is simply unacceptable that 400 million go to bed hungry every day and only about 3% children make it to post-graduate level education. The nouveau riche is in a stupor from which they do not want to wake up. The ones in the squalor are crying hoarse yet we build our edifice of development razing down the hovels of the poor to conquer the earth and beyond. A partition in our souls will be more dreadful than the partition of our soil and an India that belongs to only a few will easily become an India that belongs to none.

To build a just and fair world, the beginning lies not only in imagining the future but also in re-imagining the past. The past is the mirror that holds us in firm stead of actions- it is the ashes from which we are reborn as new. In an age when idealism is slowly fading away and armed violence and wilfully created epidemics are invading our vision of future, Justice Iyer’s presence will remain an assurance and inspiring example of never retiring from being human and humane.

Rethinking Poverty

Poor Economics: Rethinking Poverty and the ways to end it, Abhijit V Banerjee and Esther Duflo, Random House India, 2011, pp.404

Development Economics has grown in content and importance in the last few decades. With the ushering of the Human Development Index, a distinct way of looking at development began that encompassed not only improvements in economic indices but also in human life indices. This picture sometimes complemented the GDP sketch but often contradicted it. Ideas regarding national economic policies, allocation of resources and the role of the state and market have undergone tremendous transformation. So have our assumptions regarding poverty and especially how the poor live, think through and make choices in their lives. This ‘othering’ of the poor and the generalizations that we make of them in economic and social theory and literature are at best plausible guess and at worst complete misunderstanding. ‘Poor Economics’ is an important book that brings the narrative of the poor from eighteen countries to the poverty story, as the dramatic personae of history, source of creative thinking and as human beings with agency and power who are as sophisticated and as capricious as everyone is. It is in capturing this complexity and richness without reducing those who are economically poor, that the book succeeds.

Lives and Choices of the Poor

The celebrated economists Abhijit Banerjee (MIT professor and Infosys Prize winner) and Esther Duflo (winner of the prestigious Clarke Medal and the Infosys Prize this year) have pioneered the use of Randomised Control Trials (RCTs) that are basically experiments with people as they live their lives. RCTs are used in medicine to test new drugs and by imitating them in Economics, we can analyse policy prescriptions and judge their efficacy. By observation method, the authors argue that it is possible to make good judgements and accurate assessments of what life situations impact the poor and what does not, through the evidence of their own lives. For instance, in the chapter that explains why schools fail, it was found that the schools do not expect the students to do well in the first place. Changing expectations required a little commitment, expendable energy and effort of the teacher. Despite laws and policies in place, if this simple human factor is missing, the policy will be a huge failure on the ground. Often, it was small changes that made all the difference to a policy and not complete overhaul or rethinking.

Policy Implications

This study has policy implications as understanding the real causes of poverty will help channelize global resources through the appropriate projects of alleviating it. Placing distributive (government services) and redistributive (welfare schemes) of the government and donor aid and support in context, the book discusses different policy issues - poverty trap, public health issues like malaria eradication, education policy and the Constitutional framework, pensions for the elderly- with real time case studies and some accessible solutions.

The insights of the book have implications both to policy design and implementation. The authors agree that eradicating poverty through creative interventions is extremely important on two counts- the moral imperative that it is unacceptable for so many not to have a dignified life and the economic imperative expressed by Amartya Sen as ‘intolerable waste of human talent’. The reasoning of the book is by pondering over specific questions as opposed to broad strokes of universal preoccupations. Secondly, the work stresses on the evidence from the ground not only as empirical but also the only litmus to theoretical understanding.

The message of such an exhaustive and interpretative analysis is that ideology and ignorance should not blind policy makers to scientific rigor, openness to learn and understand with fresh perspective and prioritise those policies that are relevant to the lives of the poor. It is in bridging the gap between the expert and the public through nuanced understanding of human lives that this book sets a trailblazing trend.

THROUGH THE LOOKING GLASS

Ha Joon Chang, the Cambridge economist enjoys myth busting. His engaging work ’23 Things they don’t tell you about Capitalism’ explains how the economic system works in an increasingly capital intrusive world while deconstructing myths and beliefs about it. This book is both important and persuasive for this reason, and leads the way to open up other ways of understanding the global economy and how nations perceive it , act and interact in it. The financial crisis of 2008 was the second largest economic crisis in human history and paved the way for a systemic change in responding to perceived economic laws. There was a huge drive world over and significant pressure on the developing countries to reduce budgetary deficits through the curtailment of welfare entitlements and public investments. This push has been the result of a particular brand of capitalism called the ‘free market ideology’. This school of thought puts faith in the unlimited rationality of individuals and the capacity of the unfettered market to bring out just and efficient outcomes. The belief in the capability of the unrestrained individual and the market comes from the idea that wealth creation benefits everybody. It is this credo that espoused credit fuelled consumer boom and it is this line of thought that Ha Joon Chang’s work attacks.

Toward Active Economic Citizenship

23 things proceeds like a user manual to understand and critique free market ideology by dissecting 23 points that counterpoises general received wisdom about the economic system. The objective of the book, the author claims, is to equip the average citizen with enough robustness of judgement to question ‘expertise’ so that eventually capitalism works for all of us in a better way. The author begins with the important disclaimer that attacking the free market ideology is not the same as attacking capitalism itself. Capitalism is the best form of economic system that humans have invented so far. But the main challenge is to make it work for everyone, the developed and the developing, the expert and the novice, equally well. This calls for an active economic citizenship that enables each individual to defend her interests well.

In order that the way to enlightened economic participation begins, 23 different myths about our beliefs are engaged with in a lively and pertinent manner. These 23 things include the mundane, the abstract and everything in between. For instance, ideas about capital, capitalism, decisions of governments and the working of technology are discussed with trenchant examples and contrasts from different parts of the world. Propositions like whether the washing machine has revolutionised the world more than the internet has been taken afresh and debated with the logic of the economist and the author’s inimical humour. Nothing escapes the rigour of economic thinking. The instances are from everyday lives of peoples and nations, even though the explanations are lucid and the examples extra ordinary. Every myth begins with a statement of the obvious thinking and an analysis of that in the following passages with examples that prove the contrary. Active agency is implied throughout the work beginning with ‘what they tell you’ to the responsive counter arguments.

Chang does not just stop with critiquing the present model but goes a step further and proposes an alternate model for rebuilding the economy. He does not believe in the tinkering of the existing system through regulation, codes of transparency or restraints. What he challenges is the fundamental premise of such an economic thinking and hence looks for systemic overhaul. He believes that in order to organise capitalism in a more efficient and rigorous manner, recognition of the limits of human rationality, presence of human agency and the significance of moral core of humans is important. We have to separate the financial from the real economic activities. The emergence of a strong government and active economic citizenry is important in this respect. This deceptively powerful work is both a commentary on the present economic system largely followed in the world as well as a vision document for an alternate future.  

(This review was published in The CSR Analyst, November 2014)