Macroeconomics is no longer good enough | Business Standard Column

Clipped from: https://www.business-standard.com/article/opinion/macroeconomics-is-no-longer-good-enough-121100501548_1.html

The world today is simply too complex for economists to comprehend in real time

R Jagannathan

In June this year, Tamil Nadu announced the setting up of an Economic Advisory Council to Chief Minister M K Stalin, which included high-profile names such as former Reserve Bank governor Raghuram Rajan and former chief economic advisor Arvind Subramanian. The hope is that the Council’s advice will “revitalise the state’s economy and ensure the benefits of economic growth reach all segments of society.”

Two months later, Finance Minister Palanivel Thiaga Rajan produced a white paper calling for a rationalisation of subsidies and “urgent course correction” so that the state’s deteriorating finances can be put on an even keel. But, without waiting for the Council’s advice, the state offered Rs 4,000 in cash to each rice card holder (never mind their actual economic status), Rs 1,000 monthly “assistance” for women, and free bus travel for them, among other freebies.

We can just shake our heads and move on. For, no matter what the experts say, politicians will be politicians, and getting elected is more important a goal than just fixing state finances or listening to economic advice. However, my point in bringing up the high-profile committee is not to prove its irrelevance in the context of political priorities, but to suggest that even if Raghuram Rajan & Co were themselves running the finance ministry (in Tamil Nadu or Delhi, for that matter), their knowledge would be largely irrelevant to policy-making.

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Given the kind of changes we are seeing today in technology, business models, society, and geopolitics, and given the challenges we face on every front (terrorism, climate change, elite wokism, et al), the world is simply too complex for economists to comprehend in real time. Their theories are outdated and not very useful for policy-making in a period of flux. So, the TN Economic Advisory Council will fail, and not only because politicians won’t listen much to its advice. It will fail because the real economy needs multi-disciplinary advice and insights from different players, including businessmen, technology players, climatologists, and sociologists, among others. If Tamil Nadu really wants to revive its economic fortunes and retain its No 2 spot in terms of state gross domestic product after Maharashtra (Uttar Pradesh has probably crossed it and Karnataka is pushing hard from below), it needs businessmen and technology advisors more than macro-economists.

Let’s be clear. Babus and economists do not have the foggiest notions on where an economy is headed, nor, for that matter, do they have the right tools to do something about it with blunt fiscal or monetary policy instruments. Real competence in understanding the real economy in real time lies increasingly with businessmen and technocrats, who can use artificial intelligence and other tools to forecast collective human behaviours. If I wanted to know what is happening in the world economy, or even the Indian one, would I trust the Prime Minister’s Economic Advisory Council or Google’s or Amazon’s algorithms? In my policy advisory council, should I have experts from these kinds of companies or economists alone?

The ancients had better insights on how to understand the world than us moderns. They intuitively realised that to understand the macrocosm, you need to know the microcosm better. To understand the universe, you need to understand the atom. Non-dualistic Advaita philosophy gives us the same insight: The Atman and Paramatman are one and the same, and understanding the Atman will help us understand the larger truths. Understanding the macroeconomy needs us to understand all the moving parts of the microeconomy, just as Google and Amazon try to understand what’s going on by collating the searches of billions of people.

Often, the intuitive understanding of an insightful individual can be as good as that of a busload of experts. Steve Jobs’ big insights on what kind of products to build came from personal intuitions, not market research. And if we assume that politicians have better gut instincts about what people may actually want or do, one should trust them more than charlatan economists who spout Keynesian theory or its foolish modern successor, the modern monetary theory.

So, what is the point of this rant? For one, economists have much to be modest about, and the assumption that economics can explain human behaviour through mathematical models or phony theories is seriously flawed. This is because the key to understanding larger economic outcomes lies with understanding what individual economic units and components of society will do, and not all these things are driven by economic logic. Man does not live by bread alone, and assumptions about economic rationality are outdated.

Secondly, the best way for political leaders to understand economic realities and options is by making their advisory groups multi-disciplinary in nature, with a hefty sprinkling of micro-economists who understand parts of the economy very well. If you understand the automobile economy and what creates or curtails demand, you will know more about what you need to do on many related policies (infrastructure, power, etc).

In many ways, this is what Niti Aayog should be used for: Developing expertise on multiple parts of the economy so that we get a better understanding of the whole. An economic advisory council without businesspersons, home-makers, technology experts, psychologists and sociologists will not deliver very good advice. You will get tunnel vision. The world is too complex for us to leave it to the understanding of experts and economists alone.

Post-script: India has benefited somewhat from having a prime minister who looks at economic advice as an optional extra. Most of his policies and schemes are the result not of expert advice, but his own intuitive understanding of the pain points of individuals, society and business enterprises. He has made mistakes, even big ones, but he has the ability to correct them or turn them to advantage (example: Turning demonetisation’s negative into a digital plus). Two other big mistakes corrected include the obsessive concern with eliminating black money in the first term, and the assumption that the public sector can function well in our politico-economic milieu. Both have been corrected.The writer is editorial director, Swarajya magazine

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