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Photo: Bloomberg

The delusions of economists

The 1991 reforms could have been carried out by an economist other than Manmohan Singh, or, indeed, by a non-economist

In preparing for a recently concluded seminar on the iconoclastic Indian economist B.R. Shenoy—author of the celebrated Note of Dissent (1955) on the Second Five-Year Plan—I came across an interesting note of dissent of another sort.

In a memorial lecture in honour of Shenoy, economist Peter Bauer critiques this famous passage from John Maynard Keynes’ The General Theory of Employment, Interest, and Money (1936): “The ideas of economists and political philosophers both when they are right, and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else."

This is a gem of Keynes’s wisdom that many economists—including myself— often cite approvingly. But Bauer then adds wryly: “If this claim were valid, the world would have been on free trade for decades or centuries, as the great majority of economists have been free traders since Adam Smith."

Now perhaps this is a little unfair, since economists have also probed the political economy of trade policy—to help explain why protectionist policies persist, despite their inefficiency—but Bauer’s larger point—that we economists tend to overestimate our impact on policy outcomes, especially when they go our way—is surely valid.

Bauer explicates this argument in the context of the many well-known economists who signed the Majority Report from which Shenoy dissented. In a shrewd passage which deserves to be quoted in full, he writes: “There is often a high correlation between the advice tendered by economists and the policy adopted without this indicating that the advisers exercise influence in any meaningful sense. They may only advise policymakers to do what the latter intend to do in any case. Indeed, they may have been selected as advisers because the policymakers anticipated that they would tender the kind of advice which makes it easier for the policymakers to carry out policies and measures which they had planned."

This is a sobering thought, and one can easily see the many contexts in which it may offer insight on the relationship between adviser and policymaker. When economist Lawrence Summers advised US President Barack Obama to pursue an expansionary policy in the wake of the downturn induced by the global financial crisis, and the administration pursued such a policy, can one conclude that Summers was influential, or merely useful?

Closer to home, it is often remarked that the 1991 economic reforms in India were spearheaded by an economist, Manmohan Singh, without noticing that the fact that he was an economist was largely incidental to his selection as finance minister—more to the point, he was a technocrat willing and able to obey orders. The impetus for reform came from prime minister P.V. Narasimha Rao—who deserves to be called its architect—and Singh was merely the agent. (Rumours suggest that Rao’s first choice may have been the late I.G. Patel, in fact.)

What is more, the elements of the reform agenda were well understood in 1991—economists such as my own great guru Jagdish Bhagwati and others had spelled out the essentials of what would be required to reform the License-Permit-Quota Raj. In other words, an already well-understood reform agenda in 1991 could have been carried out by an economist other than Singh, or, indeed, by a non-economist—an engineer with a background in public policy, such as Jairam Ramesh, would have done equally well. Bauer’s critique of Keynes carries bite, after all.

But is it possible that Bauer, in his zeal to debunk the oversized egos of economists and other advisers, who imagine fatuously and self-servingly that their ideas necessarily shape outcomes, might have underestimated the power of ideas—in the long, if not in the short run—to influence outcomes? That, after all, is the sense in which I, for one, read the celebrated passage from Keynes that Bauer finds fault with.

Indeed, Bauer’s own intellectual legacy belies his comment on Keynes, to the extent that his critique of development economics orthodoxy—which emphasized the role of the state and downplayed that of the individual—later became absorbed into the mainstream of thinking in the field—and in its practice.

Further, in the Indian context of the reforms of 1991 and thereafter, an underlying ideational bedrock existed—and had to exist—to ground policymakers and provide an intellectual rationale for, say, dismantling the licensing system which characterized Nehruvian central planning. Thus, Bhagwati did, after all, make his mark, some two decades after the original ideas has been articulated.

Of course, those opining vociferously today on the need for “second generation" economic reforms—the contours of which are well understood—should be suitably modest. Should the Narendra Modi government embrace them, many will step forward to take credit. Yet the real credit may well lie with economists of a generation ago, and the policymakers today bold enough to act upon those ideas.

Every fortnight, In the Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

Comments are welcome at views@livemint.com. To read Vivek Dehejia’s previous columns, go to www.livemint.com/vivekdehejia

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