In 1999, Nobel Prize winner Ronald Coase said: “Existing economics is a theoretical system which floats in the air and which bears little relation to what happens in the real world”.
Nearly two decades later, his statement bears more resemblance to reality than it ever did earlier. But this does not mean that economics as a subject has lost its appeal. In fact, it is now even more fascinating. The problem is regarding course content in the economics curriculum, political economy and ‘herd mentality’ of economists.
Economics has always been fascinating in terms of the diversity of opinions. In 2013, Robert J Shiller and Eugene Fama were awarded the Nobel Prize in Economics but they had opposite views on market efficiency. While Shiller holds that investors can be swayed by psychology/story of irrational exuberance, Fama contends markets are always efficient with people incorporating available information into prices.
Such a dispute is not merely academic. The deregulation of financial markets beginning in the 1980s was often justified by the notion of efficient markets. The rising home prices in the 2000s reflected the view that prices are inherently rational. However, in the aftermath of the financial crisis, the work of Shiller and other proponents of behavioural economics intensified financial regulation. Today, the financial sector is saddled with too many regulations.
My first problem with the economic discourse today is the course content in India’s colleges and universities. It is surprising that students in macroeconomic classes today are taught old models of schools of thought with little or no applicability to the real world and real-time data. For example, there are hardly any special papers at the graduation/post-graduation levels that help students to understand how to go through the Reserve Bank of India’s balance sheet, the government’s budget and government borrowings.
During demonetisation, I saw economists struggling to understand the difference between currency in circulation and currency with the public. This was a reflection of the gaps in our course structure. One way to improve this situation is to make it compulsory for students to do an intensive practical course with industry practitioners on different aspects of the data applications of economics and integrate that with classroom learning. This could be a fascinating exercise. Great economists such as Milton Freidman and Janet Yellen, the current Fed chairman, have been data practitioners.
The second problem with the course content is that there is an inherent bias towards models and policy-making that have a resemblance to developed economies. For example, there is too much debate on fiscal austerity in India. Unfortunately, the debate on fiscal austerity has stemmed from the euro zone and other economies that had recklessly ran up budget deficits and public debt as a percentage of the GDP.
Intriguingly, in the recent Fiscal Responsibility and Budget Management Act, 2003, the recommendations submitted to the Centre reiterated that public debt as a percentage of the GDP should be ideally 60%, a recommendation of the Maastricht treaty in 1992 that the European Union hardly adhered to. We must tweak the course content with particular reference to emerging economies.
In fact, some of the economic theories in the context of countries like India are even incorrect. Let us take the example of welfare. Econ 101 tells us that welfare incentivises laziness. But several studies have shown such effects are usually small. This is particularly true in the Indian context, where people want development and not doles and hence it may be incorrect to say that programmes that provide doles are bad.
Next, what about political economy? There is now too much of politics in the economic thought process in universities. While it is good to have a fair debate on such opinions, it is incorrect to impose it on students. We must agree to disagree, but not use it as an instrument of political anarchy.
Finally, herd mentality. In India, practicing economists mostly talk in one voice. If one economist says inflation will go up, others will follow suit without even looking at the data. This is intriguing and discourages diversity of opinions, a fundamental sin qua non for economics.
It is now high time that economists start looking at the data more often and perhaps refine their thinking in terms of real time data analytics. This could lead to more out-of-the-box thinking, a must for policy regulations and policy makers.
Soumya Kanti Ghosh is group chief economic adviser, State Bank of India
The views expressed are personal