Slide No. 10 of Paul Krugman’s Nobel Prize-winning speech has two suggestions for researchers. One is to question the question. The other is to dare to be silly. Bare Talk is taking his advice seriously.

All social theories—economics is firmly one of them—have value only within a particular context. Attempts to slap an enduring value on to them result in disastrous consequences. The global financial crisis and its handling are two examples.

Now that the world is facing a severe economic slowdown next year, the name of great British economist John Maynard Keynes is invoked by one and all. It is forgotten that Keynes was the product of the Great Depression, when industrial output contracted by at least one-third and one-fourth of the US labour force was without a job. Environmental impact of growth was a remote concern and global warming was unheard of, as was peak oil. Hence, it was natural for him to exhort governments not to wait for the natural curative forces of the economy to work, but to hasten the recovery.

The context is different today. The world is running out of crude oil and global warming is a growing threat. Countries such as India used up fiscal policy when times were good, instead of conserving it for occasions such as now. There is a potential cost of using fiscal policy in such circumstances: growth today versus growth tomorrow. The question needs to be asked.

Similarly, let us consider rate cuts. No central bank cuts rates by less than 75 basis points these days. Some of them did not raise rates in a hurry when prices of commodities were rising last year and early this year. They argued about relative price increases and about temporary versus permanent effects. Now, when they are cutting rates aggressively, no questions are being asked if the current disinflation would be temporary or permanent. If they are likely permanent, is monetary policy the correct answer or is it the only answer?

For instance, India benefited from copious capital inflows in the last three years. They allowed the country—and many other emerging nations—to grow beyond potential. The capital flows were not put to use in such a way as to lift the growth rate the country could sustain without stoking inflationary pressures. Those flows are now reversing even as domestic savings are declining. This retreat of global capital and drop in domestic savings is rendering interest rate cuts ineffective. In fact, they may even aggravate the situation. We can do better.

How about unleashing privatization and overdue economic reforms by co-opting the main opposition party, if necessary, in a display of bipartisan cooperation? Whatever little capital flows there are in the world, India will be staking a strong claim to them and the statement that such policy leadership will make to the world about India will carry tremendous value in these times of uninspiring global response to the crisis.

Thus, more worrisome than the present crisis is the portents its handling holds for future crises. Any questioning of conventional wisdom (e.g., by Angela Merkel or by the European Central Bank) is ruthlessly dismissed without serious discussion. Commentators lament the absence of warnings but when someone warns, they are treated with contempt and derision.

In this context, it was good to see the Reserve Bank of India governor raising some pertinent questions at a seminar held in Hyderabad recently on the global financial crisis. Among other things, he asked about the correct role and place of the financial sector versus the real sector.

Indeed, the reason the financial sector has gotten out of line with the real sector is due to the exalted importance given to open capital flows. Interestingly, Keynes felt very strongly about it and, when he designed Bretton Woods I, fixed the exchange rate architecture: “Control of capital movements, both inward and outward, should be a permanent feature of the post-war system". Economists have ignored this strong preference for capital controls that Keynes had.

Some economists are engaged in a tortuous exercise of trying to find out if financial globalization leads to improved total factor productivity or risk-sharing. They cast debt flows as the villain while giving a relatively clean chit to cross-border equity flows. It is hard to accept that when the mindless herd-like behaviour of cross-border equity investors has pushed up global equity market correlations to near 1. That can only be destabilizing.

As much as policymakers, economists have a lot to answer for their role in the present global crisis. I think the RBI governor grabbed the opportunity that Krugman missed—to begin the introspection that practitioners of the dismal science have failed to engage in, so far.

V. Anantha Nageswaran is head of investment research, Bank Julius Baer and Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at