Where is Economics Heading?

Great Depression of ‘Economics’

The other day, I was listening to an Economic discourse on the Television by a group of Harwardians who were discussing the debt trap that America was in after a wash out of mortgage pledged by the house owners in what is known as sub prime lending. Like nine pins, many Banks began to feel the tremours of collapse of the financial system, albeit revisiting the old days of the Grand Depression of 1929. They used a variety of theories of eminent economic thinkers like Prof Gal birth, John Maynard Keynes, Friedrich August von Hayek Simon Kuznet, Amartya Sen, Alfred Marshall, and Karl Marx,etc and tried to adopt them to the current situation. In the end, all of them agreed to disagree, the usual trade mark of Economists. That itself was a great achievement.

Indian Government keeps on telling the people there is enough money byway of liquidity. They go on raising the interest rates, at least a dozen times during the current fiscal to tame inflation. They said, good monsoon, progress in rabi and kharif crop, bumper yield, yet continue with excessive import like never before. The Forbes List of millionaires reveal that Indians in the list have enlarged. Many companies have made record profits. Finance Minister says economic growth is around 8%. He says food inflation has been tamed but it is likely to hover around 9-9.5% for some time before settling at 6%. The headline inflation is little shaky because of international economy, and Indian economy is safe and sound, he says. Planning Commission Vice Chairman says the growth is unprecedented and long term planning will yield long term results. Commerce Ministry says that our exports is booming and has surpassed our expectations. In July 2011, it grew by 85%. Incredible, it says. Change isn’t necessarily progress, Union Ministers looking after economic ministries will tell you. Does value have any real value anymore; people ask and get no answer.

Many of the powerful forces that help business, hurt business, and shape our civilization today stem directly from the theories formulated by economists in the past, put into practice in the real world. The field of economics has suffered from a lack of respect since its formative years; Scottish essayist Thomas Carlyle dubbed it “the dismal science” in 1849. Today, when economics makes headlines, it’s typically as a whipping boy (“Why Economists Failed to Predict the Financial Crisis”) or as part of a sales pitch (“Prominent Economists Support Changes to Medicare”).

And to think, when I stuied 50 years ago as an undergraduate student at the Maharaja’s College, Ernakulam, Economics has been delivered to n an off-putting package of mathematical equations and unintuitive charts, and it’s no surprise that most people tend to see it as a difficult subject producing dubious results. We were told that economic inequality increases overtime while the Country is developing, then after a certain average income is attained, inequality begins to decrease. In the early stage of development, investment in physical capital is the main mechanism of growth, inequality encourages growth by allocating resources towards those who save and invest. Human capital accrual as an estimate of Cost that has been incurred but not yet paid, takes place of physical capital accrual as the main source of growth and inequality slows growth by lowering educational standards because poor people cannot afford education.

Feminist Beatrice Webb (1858–1943), who formulated the idea of the social safety net in the 1890s, and American economist Irving Fisher (1867–1947), who presciently discovered portfolio theory, countercyclical monetary policy, and index numbers, as well as inventing the Rolodex and founding the company that became Remington Rand. Economics has progressed to the point where it can explain definitively how to avoid the kinds of economic catastrophes that produced the Great Depression. All the nations that have grown steadily in recent years, are following the basic economic playbook that began to take shape as Marshall visited the factories of Britain’s Industrial Revolution, whereas countries that ignore those lessons are doomed to failure. But the dismal science has less to say about how to balance the roles of governments and markets or how to determine the optimal level of taxation.- the United States and Sweden, two countries with very different policy and fiscal profiles, but very similar — and enviable — standards of living.

India has overtaken Japan and is in the 4th place, economic papers will tell you. How that improves the lot of people, you may well ask. There is various growth patterns in Economics- V shaped, U shaped, double dip, zero, etc. What do all these mean to the person who gets a monthly pay less than Rs 5,000 and have to feed four people in addition to attending to the schooling and his aged mother.

Petrol prices will go up and up in India, like the interest rates. When the international price of Petrol drops, and when the parity between Rupee and Dollar is in India’s favour, our oil companies will add the price saying devaluation. Gross Service tax in the Country which was just Rs 600 Cr in 1990-91, has gone up to Rs 40,000 Cr per annum. Direct and indirect taxes have been levied to the fullest extent leaving no lee way. The budget said that Rs 40,000 Cr will be added through disinvestment. Not one paisa has been collected through disinvestment, due to reasons known only to Government.

The financial crisis has shattered the main street’s belief in scientific economics; Economics that doesn’t consider economy’s human element will remain inexact Science; and the fact that economics as a Science can go wrong explains the rise of Popular Economics. After mastering Economics with a First Class, four and half decades ago, I understood that the Economics which we were taught has fundamentally changed and scientific economics which can always go wrong has taken over Economics.