Is economics still important?
AS an economist, I get a lot of criticism about the profession, the discipline, and its role in modern society. Some of these are pretty well known and I will mention three. One, we are too much into model building and do not provide any guidance to real-life problems. Second, most of our predictions are wrong and we are best at explaining why we failed after the fact. Third, economists never agree on anything, and policymakers often receive contradictory prescriptions from the same person.
A recent critic, one of our best, the French economist Thomas Picketty complains that we have a “childish passion for mathematics and for purely theoretical and often highly ideological speculation” and that our “obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the more complex questions posed by the world we live in.” Pretty strong words indeed!
Well, in spite of all the brickbats and name-calling, we have survived since the days of Adam Smith and manage to thrive even in the twenty-first century where everything is changing at breakneck speed. It would not be an overstatement to assert that economics is the only discipline that has managed to keep pace with the information technology revolution, globalisation of the world economy, and rapid changes in healthcare, medical science, and global warming. However, there are signs that we have now become too smug and might soon find ourselves in trouble unless we pay attention to a question that is often swept under the rug: “What is wrong with economics?”
Let me identify three areas which the profession needs to address in a more robust manner:
1. Income inequality
2. Environment
3. Basic human needs
Underlying the mess we find ourselves in is the belief that all these problems will take care of themselves if we give market forces a chance for a little while without any interference. Taking the three in my list, some of the more naïve amongst us still contend that income will be equally distributed as the economy grows and mouth the old dictum “the rising tide raises all boats.” Environmental degradation will be internalised if we let those who are adversely affected strike a deal with those who gain. And finally, to ensure basic needs, let all who are able to work do so and a free market will ensure jobs for everyone.
At the recent gathering of some of the world's most influential economists at the Annual Conference of the American Economic Association (AEA) in Boston, fortunately there was a feeble attempt to address these concerns. However, the factors that contributed to this current state of affairs are deep-rooted and might take more than one AEA meeting or simple nudges to correct this insufficiency. Ironically, a quick survey of the programme reveals not only the variety of issues that are currently on the plate, but also how exotic and outlandish are some of the themes which occupy the economists in their ivory towers.
So, what are the other symptoms of the malaise that afflict economists? For many years yet, it was well-known that economist dedicate an overwhelming amount of their effort to writing technical papers for obscure journals which often have very little real-world relevance. Some of the popular topics that get most attention are determined by what is fashionable at the moment: deflation, stock market bubbles, default swaps or some other issue of the day. Economics is almost like politics and election in some respects: only those with money or are able to raise money can compete. As we have seen, even in the richest countries in the world, all the firepower and brain have not been able to eliminate poverty, hunger, lack of medical care and homelessness. It would not be too much to compare this situation against the same in Cuba, one of USA's closest neighbouring countries.
Let me take the case of unemployment in some depth. Economists from developing countries have always been aware of the concept fashionable in the textbooks, full employment, unemployment and measurement of the unemployment rate. Currently, economists paint a very rosy picture for the US economy based on three measures: unemployment rate, number of jobless claims, and number of jobs created. However, anyone who looks around is aware that the job market is very soft. There are people who have left the job market, or have been unemployed for a long time. And then then are those who are underemployed or need more hours. Only, the long-term unemployed count in the jobless rate.
Recently, there was a feeling of rejoicing as the official unemployment rate notches down from 5.8% to 5.6%. Newspapers and media are gloating that good times are here again and that US is alone among its fellow nations in improving the lot of the “average citizen.” Really? Who are they and where can you find them? There are unemployed young college graduates (25%), African Americans of all ages, and in the large cities, to mention a few. In our concern with averages and some simple statistics, we have lost sight of the larger picture. Why not report income inequality, cost of health care and the number of uninsured, the growth of wealth concentration, or the share of 1%. When national elections go wrong in countries such as Bangladesh or Zimbabwe, the world media is screaming about the injustices caused by these infractions, but who speaks for the millions who go without a decent meal or can't find medical care? By taking measurements in GDP, unemployment rate and job created, economists are doing a disservice to the profession and downplaying the more important indicators of human welfare.
Let me take another example, USA is currently the envy of almost all other countries in the world for having come out of the Great Recession of the last decade and for posting decent GDP and employment growth in recent years. So the government and policy makers in Congress feel that everything is hunky dory. However, all other indicators paint a far more complicated picture: wages are stagnant, debts are higher, and people are finding that jobs are less available for the workers who are at the bottom of the rung. Hourly wages fell to $24.57 in December from $24.62 in November. The government's report did point to some weaknesses, notably in Americans' paychecks, which have barely kept ahead of inflation during the 5½-year recovery. Unfortunately, these caveats get buried in the footnotes.
Finally, let it be told that not all economists can be accused of “playing the fiddle while Rome burns.” Among the brave few, Larry Summers, the former secretary of the Treasury and president of Harvard University, has pointed to several negative trends in America: lower productivity, decline in new businesses, high household debt, slowing population and a persistent decrease of the economic growth rate. Another voice among those who refuse to act as cheerleaders for the government and the mainstream is Esther Duflo of MIT. Her work on Poverty Trap in India is an eye opener for many who have never worked with real people.
The writer is an economist with an interest in policy issues.
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