It is a safe bet that not many readers have heard of the Post-Crash Economics Society (PCES). In case it reminds you of the slightly more famous Dead Poets Society—a classic film featuring Robin Williams as an iconoclastic teacher, then the people who are behind PCES will be pleased.
What is PCES? It is a body set up students at the University of Manchester in December 2012 who were dissatisfied with what they were taught in economics. They released a report recently, which called for a radical overhaul of the way economics is taught and its contents. The students wanted to be informed of various schools of economic theory, wanted to consider ethics and ethical consequences of policymaking and to be taught economic history. In short, they want to be thoughtful and intelligent students and purveyors of economics. Which teacher would disagree with that? Much to the surprise and disappointment of the students, the university rejected the students’ proposed curriculum.
In his foreword to the PCES report, Andrew Haldane, director-in-charge of financial stability at the Bank of England, wrote, “The economy in crisis behaved more like slime descending a warehouse wall than Newton’s pendulum, its motion more organic than harmonic.” He was referring to the physics envy of neo-classical economists who were keen to position (or believe that) the dynamics of the models of economics as “classically Newtonian, resembling the damped harmonic motion of Newton’s pendulum”.
So, more than the students, it is the teachers who need to become plural first. But, these changes are of enormous importance and will not happen easily. If economics did not rest on its neo-classical foundations and if the high priests of economics accepted that it was more of an inductive discipline than a deductive one, it would change everything from the importance of Wall Street to the American economy, compensation in Wall Street to international trade agreements and liberalization of financial services, etc., because context and history would begin to matter more than one-size-fits-all economic prescriptions and negotiating positions.
Sushil Wadhwani, once a member in the monetary policy committee of the Bank of England, recalled two experiences in his paper in the volume Future of Finance published by the London School of Economics in 2010. Lars Heikensten, now an executive director at the Nobel Foundation, in his paper presented at a Norges Bank conference in 2009, noted that both Britain and the US refused to consider higher bank provisioning and other measures to deal with housing bubbles and even refused to publish the report that suggested them. Second, the Bank of England was so committed to the belief in the efficiency of financial markets that suggestions to incorporate into macroeconomic models the empirical finding that there was systematic violation of uncovered interest rate parity encountered significant resistance from it on the ground that one should not assume such a departure from market efficiency.
As Haldane mentions in his foreword to the report of PCES, “Answering effectively public policy questions of the future requires an understanding of the past. It also requires eclecticism in the choice of methodology, knowledge of political economy, an appreciation of institutions, an understanding of money and banking.” Policymakers in the West have fallen short on these.
The big risk in writing an article such as this for an Indian newspaper is that vested interests would lap it up as a declaration of revolt against capitalism, making the same mistakes that Western academics and policymakers are making—forgetting context and history relevant to India. In India, organized labour and politically connected cronies are holding the economy back due to the pervasive role of the government in the economy, through its ownership of the banking system and financial repression, through its control of education sector and through antiquated labour laws.
Therefore, the fear that India may absorb the wrong lessons from the ongoing debate in the West on economic inequality and on capitalism is a legitimate one. That is what prompted Siddharth Singh’s review of Thomas Piketty’s book, Capitalism in the Twenty-First Century.
This fear also prompted my friend Nitin Pai, co-founder of the Takshashila Institution, to remark that rich overweight humans needed to diet and that it would be wrong to prescribe the same to the malnourished poor.
Teachers of economics in India continue to teach the relevance of dual exchange rates, advocate public sector banking for financial inclusion when other mechanisms are available, fault globalization for India’s failure to improve its manufacturing and advocate fiscal populism and controls on financial markets from reflecting the risk of India’s debt spiral. If you are in doubt about these, please check out this blog post I had written in July 2012.
Students of economics in Indian universities must talk to PCES without delay.
V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at email@example.com.
To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk
Follow Mint Opinion on Twitter at https://twitter.com/Mint_Opinion-