Mourn the Dismal Science

Dhiraj Nayyar is chief economist, Vedanta Ltd, and the author of Modi and Markets: Arguments for Transformation
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Economists can’t regain their credibility unless they give up their physics envy
Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One | Meghnad Desai | Collins Business | Pages 287 | Rs 399
Modern day economists envy physicists. They wish their dismal science could be a natural science. And they have made every effort in that goal, so much so that any graduate textbook of economics in a mainstream university is likely to contain as many mathematical equations as a physics text. The quest goes beyond the methodology of using equations. It extends to answering problems with the same certainty as physics does. Unfortunately, economics will never be a natural science; it will always be a mix of social science and philosophy (and its corollary of logical and intuitive thinking). But economists and economics are in denial, or perhaps hubris.

It is to Lord Meghnad Desai’s credit that after a lengthy career as an economist at the very mainstream London School of Economics (during which he made extensive use of mathematical tools), he is able to criticise his colleagues’ obsessive quest for a mathematically-provable ‘static equilibrium’ (usually characterised by plentiful employment, low inflation and no crises) when history shows quite emphatically that the (capitalist) economies of the world live through phases of ‘dynamic disequilibrium’, moving from one crisis to the next with varying periodicity. Only extreme arrogance can lead a subject and its professors to deviate so sharply from ground reality.

I have a lot of sympathy for the basic premise of Desai’s latest book. The economics profession woefully failed to predict the onset of the 2008 global economic crisis. Worse, it had few workable solutions to offer. The crisis still lingers on in advanced economies, the home of modern economics. Unfortunately, the book’s titular promise of ‘how to avoid the next crisis’ is seriously misleading. Desai’s book has no solutions. Rather, it seems to argue that it is unlikely that the world will escape the next crisis because the nature of capitalism is such that it goes through periods of boom and bust.

The merit of this book doesn’t lie in presenting a new paradigm for economics. Instead, what it does is take the reader back to the very beginning, to the origins of the subject in the work of Adam Smith and David Ricardo, of course, but also their intellectual predecessors like John Locke and David Hume. For some readers, the book may read like a textbook for a class or seminar on the History of Economic Thought as Desai moves from the work of the early philosopher economists to the later activist economists (Marx and Engels versus Hayek) to the pragmatic economists (John Keynes) to the monetarist free marketers (Milton Friedman) to the modern day mathematical economists. Indeed, the academic discipline may not be in crisis if universities still taught their students the history of economic thought. Because there is a world beyond mathematical modelling and there is a need to gain a philosophical, intuitive grasp of the functioning of economies in order to develop into a well-rounded economist who can predict or at least understand non-equilibrium crisis situations. After all, just as it wouldn’t be good enough for practitioners of medicine merely to understand the healthy human body, there is a need to know how things go wrong when they do and what can be done to put them right.

Of course, at different points in time, some economists seemed to have answers. Lord Desai takes the reader through these in simple, elegant prose which would appeal to an audience broader than his colleagues in economics departments. Starting in the 18th century, Adam Smith and David Ricardo provided the intellectual basis for moving away from stagnant feudalism to dynamic capitalism. Marx had an excellent understanding of capitalism and its booms and busts, but his prescription of socialism may have had elements of hubris, which is why it failed when experimented with. In the 1930s, Keynes seemed to have provided the definitive answer to recessions by propounding the role of government spending in reviving an economy. But his theory didn’t work in the 1970s. Friedman had the solutions then to unleash a boom which lasted until 2007, but then reality gave his prescriptions a rude reality check. As the advanced economies struggle to recover eight years on, neither Keynesians (who believe in government spending) nor monetarists (who believe in pumping up money supply) have a satisfactory solution. Economics needs a new saviour. Or does it? Perhaps all it needs is a re- reading of its own past masters and an element of self-doubt. Economists will regain their credibility the day they stop envying physics. Thank you, Lord Desai, for firing a powerful salvo.