By Amol Agrawal
The 2008 global financial crisis raised lots of questions on the ‘state of economics’. There were wide discussions on whether economics is resolving the world’s problems as it is claimed or creating the very problems. The earlier criticism was from mostly non-economists but today much of the condemnation is coming from economists including Nobel laureates. The International Monetary Fund (IMF) added to the growing chorus of criticism by publishing essays in its quarterly magazine Finance and Development (F&D) under the theme ‘How Economics Must Change’.
Gita Bhatt, editor of F&D, explains the rationale for the edition. She says that there has been ‘extensive professional soul searching since the global financial crisis of 2008’. The economists were called to not just fix macroeconomic policy but also focus on otherwise ignored economic developments such as rising inequality, worsening climate change, ageing demographics, etc. A need was felt to reorient economic thinking from production and profits to distribution and welfare. There was also a growing consensus on the necessity for economics to be open and integrate new ideas from other social sciences.
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use power to set wages and prices and influence politics to make economics rules work for themselves. Economics is devoid of philosophy and ethics
and equates economic well-being
to money and consumption. The empirical revolution has ignored the historical evolution of economic development. He says he has become sceptical of the economic dictums such as ‘free trade and immigration is good, unions are bad’, etc. He calls for greater engagement of economists with philosophers, historians and
sociologists.
Ulrike Malmendier and Clint Hamilton discuss new findings from behavioural economics which can be really valuable to design better economic policies. Michael Kremer, another Nobel Laureate, stresses the importance of innovation for driving economic development. He advises economists to join the burning issues of climate change and social needs not as passive advisers but as direct participants in the innovation process.
Jayati Ghosh reinforces the role of power in undermining social, political and economic institutions. She says that economics discipline has a significant and powerful lobby which has touted half-truths and even falsehoods on many critical issues: working of financial markets, role of fiscal policies, labour market and wage deregulation, etc. She also stressed how economics discipline continues to be dominated by the US and Europe ignoring insights and knowledge produced by economists in other regions. Economists continue to work with assumptions of rational humans and perfect markets which are highly unrealistic. As a result, economic ideas are presented as mathematical tractable ideas rather than reflecting the effects of history, society, and politics. In another article, Niall Kishtainy provides a short history of how economics shifted from classical word-driven economics into a mathematical discipline.
Diane Coyle writes on the need to reboot welfare economics. Today’s global production is happening on global platforms aided by digital communications and logistics. It is highly difficult to point to the location of production in today’s global value chain, making it difficult to measure and tax the production. She says that the world economy has changed a lot and economics needs to follow the developments. Earlier physical and human capital were a hindrance to growth, now the constraint shall be natural capital. There is an urgent need to develop statistics to measure natural capital and economic models should not treat nature as a mere externality problem. Kate Raworth, in another article, provides a new framework of doughnut economics which brings natural capital to the centre of the economics production function.
Atif Mian points to the world economy’s dependence on credit as a long-standing problem which needs course correction. He says financial sector is not intermediating credit towards productive investments but unproductive consumption by households and governments. These consumptions boost the economy over the short term, but in the long term the economy will be dragged back as consumption will be cut to pay back the debt. John Cochrane advocates the need to move beyond demand pushes highlighted by Mian to supply measures for increasing economic growth. The demand pushes have led to inflation as seen in last few years. He says we do not need new ideas but should go back to older ideas. There is a need to go back to relying more on markets and incentives rather than looking at governments and policies for resolving our economic ills.
To sum up, the IMF essays add to the long pile of articles written on the state of economics since the 2008 crisis. It is also interesting to note that of all institutions, it is the IMF which published these articles. The critics will argue that the IMF was at the centre of the very ideas that are being questioned by economists in the essays. In 1849, Scottish historian Thomas Carlyle used the phrase ‘dismal science’ to describe economics. One hundred and seventy-five years later, it seems not much has changed.
Amol Agrawal, The author teaches at Ahmedabad University, Views are personal
By Amol Agrawal
The 2008 global financial crisis raised lots of questions on the ‘state of economics’. There were wide discussions on whether economics is resolving the world’s problems as it is claimed or creating the very problems. The earlier criticism was from mostly non-economists but today much of the condemnation is coming from economists including Nobel laureates. The International Monetary Fund (IMF) added to the growing chorus of criticism by publishing essays in its quarterly magazine Finance and Development (F&D) under the theme ‘How Economics Must Change’.
Gita Bhatt, editor of F&D, explains the rationale for the edition. She says that there has been ‘extensive professional soul searching since the global financial crisis of 2008’. The economists were called to not just fix macroeconomic policy but also focus on otherwise ignored economic developments such as rising inequality, worsening climate change, ageing demographics, etc. A need was felt to reorient economic thinking from production and profits to distribution and welfare. There was also a growing consensus on the necessity for economics to be open and integrate new ideas from other social sciences.
Nobel laureate Angus Deaton makes the startling observation that economists can be accused of having a vested interest in the way capitalism currently operates. He says current economics focuses too much on free markets and ignores the role of power. We currently see how the big firms
use power to set wages and prices and influence politics to make economics rules work for themselves. Economics is devoid of philosophy and ethics
and equates economic well-being
to money and consumption. The empirical revolution has ignored the historical evolution of economic development. He says he has become sceptical of the economic dictums such as ‘free trade and immigration is good, unions are bad’, etc. He calls for greater engagement of economists with philosophers, historians and
sociologists.
Ulrike Malmendier and Clint Hamilton discuss new findings from behavioural economics which can be really valuable to design better economic policies. Michael Kremer, another Nobel Laureate, stresses the importance of innovation for driving economic development. He advises economists to join the burning issues of climate change and social needs not as passive advisers but as direct participants in the innovation process.
Jayati Ghosh reinforces the role of power in undermining social, political and economic institutions. She says that economics discipline has a significant and powerful lobby which has touted half-truths and even falsehoods on many critical issues: working of financial markets, role of fiscal policies, labour market and wage deregulation, etc. She also stressed how economics discipline continues to be dominated by the US and Europe ignoring insights and knowledge produced by economists in other regions. Economists continue to work with assumptions of rational humans and perfect markets which are highly unrealistic. As a result, economic ideas are presented as mathematical tractable ideas rather than reflecting the effects of history, society, and politics. In another article, Niall Kishtainy provides a short history of how economics shifted from classical word-driven economics into a mathematical discipline.
Diane Coyle writes on the need to reboot welfare economics. Today’s global production is happening on global platforms aided by digital communications and logistics. It is highly difficult to point to the location of production in today’s global value chain, making it difficult to measure and tax the production. She says that the world economy has changed a lot and economics needs to follow the developments. Earlier physical and human capital were a hindrance to growth, now the constraint shall be natural capital. There is an urgent need to develop statistics to measure natural capital and economic models should not treat nature as a mere externality problem. Kate Raworth, in another article, provides a new framework of doughnut economics which brings natural capital to the centre of the economics production function.
Atif Mian points to the world economy’s dependence on credit as a long-standing problem which needs course correction. He says financial sector is not intermediating credit towards productive investments but unproductive consumption by households and governments. These consumptions boost the economy over the short term, but in the long term the economy will be dragged back as consumption will be cut to pay back the debt. John Cochrane advocates the need to move beyond demand pushes highlighted by Mian to supply measures for increasing economic growth. The demand pushes have led to inflation as seen in last few years. He says we do not need new ideas but should go back to older ideas. There is a need to go back to relying more on markets and incentives rather than looking at governments and policies for resolving our economic ills.
To sum up, the IMF essays add to the long pile of articles written on the state of economics since the 2008 crisis. It is also interesting to note that of all institutions, it is the IMF which published these articles. The critics will argue that the IMF was at the centre of the very ideas that are being questioned by economists in the essays. In 1849, Scottish historian Thomas Carlyle used the phrase ‘dismal science’ to describe economics. One hundred and seventy-five years later, it seems not much has changed.
Amol Agrawal, The author teaches at Ahmedabad University, Views are personal
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