What do policymakers and politicians do when those whom they look to for ideas and solutions say that they don’t have them? Where do they go for intellectual solace when the world’s top economists and thinkers, three of them Nobel laureate, candidly confess their own intellectual failures? How do you react when you hear luminaries, whose words exemplify the cutting edge of knowledge, say that they may only know what to do once the ongoing credit crisis is over, but not how to end it? Bring in the shrinks, I would suggest.
A bystander at the high table of economics, I was dazzled by the sheer expanse and depth of knowledge reflected in the elegant arguments that reviewed, critiqued and took forward the work of Nobel laureate Amartya Sen at an international conference held in Delhi. There are simpler ways of wishing Sen “Happy 75th Birthday”, but characteristic of their profession, 77 of the world’s top-ranked economists, philosophers, historians, policymakers and social scientists got together to offer him their best wishes, by writing 58 papers, now bound together into two brilliant volumes titled Arguments for a Better World, released by Prime Minister Manmohan Singh last week — a must-read for policymakers.
The themes ranged from identity and growth through poverty and gender to politics and history. But no one could escape the underlying menace of the credit crisis and the resultant global meltdown. Nobel laureate Joseph Stiglitz of Columbia University, better known for his critiques of US economic policies, said that this was not merely a crisis of capitalism but equally a “crisis in how we approach economics”. His contention was that, in order to be like the US, well-regulated countries across the world have imported the worst practices of under-regulation or no regulation from the US.
While Edmund Phelps, another Nobel laureate at Columbia, brought capitalism into the boxing ring (capitalism, he said, “now has a big black eye of a spectacular failure”), Lord Meghnad Desai of LSE, was at his witty best. “Economists,” he said, “know what to do when the patient is out of the ICU, but will it get out of the ICU?” And when billions of dollars are being doled out to banks and companies behind this catastrophe, I wonder whether we are giving a blood transfusion to a haemorrhaging patient.
Bringing the infusion home, just how much money would be enough? As I explored in my last column, irrespective of the amount of money being poured into corporate coffers through fiscal concessions (where taxpayers like us forego revenue to serve a higher objective like kick-starting the economy through higher consumption or saving jobs), and however low be the interest rates (they are a hair’s breadth away from zero in the US), all we hear is one whine — not enough. So, in the unfolding drama of bailouts, we see unacceptable ironies: aviation turbine fuel prices are down 55 per cent but airlines will not cut air fares; interest rates have been cut to induce housing demand but real estate firms will not give up their 50 per cent margins; excise duties are down across the board but not the prices of consumer durables (cars are a noble exception).
Amartya Sen said as much. Giving money to banks to do what you want done is not enough, he said. Incentives - that first axiom of economics — are essential. He too was critical of US policies: “The reactions of the US government have given us very little reason to believe that they are pursuing the right policies.” He reminded us that most government interventions have been, and continue to be, for the rich. So, I’m not surprised that private jets continue to fly, carrying fat cats washing down cheese with wine, as they seek taxpayers’ money to keep their bonuses intact.
And that, I believe, is the underlying deformity that needs to be reformed. At the level of economic philosophy, more than structures of products or micro-regulations to monitor them and smother innovation, policymakers need to get out of their denial mode and address the single most important issue squarely: the incentive structure which, unfortunately, they have been brushing under the carpet. Along with the reform of multilateral institutions like the International Monetary Fund, with increased participation from India, China and Brazil — an unlikely scenario, despite global enthusiasm for the G20 meet in April 2009 — we need to reform the incentive structure, so that it protects consumers, encourages innovation and punishes deviants.
How do you do that? The best brains of traditional economics (their views and methodologies may vary, but not the fundamental essential that man is a rational being) have thrown up their hands. They collectively suggest that merely improving the old structures through greater, deeper and better regulation will not work. A new order needs to be sculpted not by the traditional economists alone, but by merging the rigour of economics with the insights of psychology and the nuances of culture theory, while addressing the concerns of the masses above all. My suggestion: bring in the behavioural economists, get them to work alongside the econometricians and devise a new world order that tames this animal for good.