Which is better: market fundamentalism or welfare economics? Which comes first: growth or redistribution? Which is an accurate depiction of economic transactions: efficient markets or behavioural economics? Can there be an economic policy to fight corruption? What is the role of tomorrow's Reserve Bank of India? Can India leverage its knowledge?
As we stand on the cusp of economic change, it would be wise to go back and see how economics itself has evolved. And while all the questions above may not have their answers, the world's top journal on the subject, American Economic Review, turned 100 and has brought out the "Top 20 Articles" it has published in its century-long history. Among these, I found three papers that Indian economic managers must read today.
Nothing could be more relevant to Indian policymakers today than Anne O Krueger's 'The Political Economy of the Rent-Seeking Society', a paper that sadly derived inspiration from the corruption in India; sadder still, nothing has changed. "A preliminary section of the paper is concerned with the competitive nature of rent seeking and the quantitative importance of rents for two countries, India and Turkey," Krueger wrote in this 1974 paper.
Corruption, has been the one constant India has lived with in the four decades since but has not been able to end. Krueger offered the rigour of academics for policymakers --- choose tariffs over quotas, for instance. The paper goes beyond India, however, and has "helped launch a voluminous literature on the role of corruption and governance (the key demands on the Indian government today) in the process of economic development."
The second paper that's high on its relevancy to India is Milton Friedman's 'The role of Monetary Policy'. "This paper changed my life," economist Ajay Shah said. "It woke me up." The new idea the paper explored in 1968 was the link between unemployment and inflation, the powerlessness of central bankers before prices and the direction they needed to take.
"…monetary action takes a longer time to affect the price level than to affect the monetary totals and both the time lag and the magnitude of effect vary with circumstances," Friedman wrote.
"As a result, we cannot predict at all accurately just what effect a particular monetary action will have on the price level and just when it will have that effect. Attempting to control directly the price level is therefore likely to make monetary policy itself a source of economic disturbance because of false stops and starts."
His conclusion, peppered with a humility that's rare to find in today's central bankers, is insightful even today: "…steady monetary growth would provide a monetary climate favourable to the effective operation of those basic forces of enterprise, ingenuity, invention, hard work, and thrift that are the true springs of economic growth. That is the most that we can ask from monetary policy at our present stage of knowledge."
The third paper I enjoyed reading and found to be key to the future of India is FA Hayek's 'The Use of Knowledge in Society'. Already functioning as a powerful knowledge economy, India has to work towards becoming a knowledge society. More than the paper itself - it addresses the "fundamental question of the nature of the economic system and its role in dealing with resource allocation- it is the humility I found touching.
"To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world," Hayek wrote in this 1945 paper. "…there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired."