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Recently, I read a paper, titled Overcoming the Tragedy of Super Wicked Problems: Constraining our Future Selves to Ameliorate Global Climate Change (May 2012), that presented a framework for tackling climate change. The paper was about how to win public support and participation and sustain it in the efforts to address carbon emissions, etc. It recognized climate change as a ‘super wicked problem’, as per the definition of Ritter and Webber in their paper, Dilemmas in a General Theory of Planning, published in 1973. Wicked problems defy neat solutions and linear approaches that are technocratic in nature. The paper acknowledges that path-dependent processes tend to happen by accident, and that they can even exacerbate super-wicked problems, rather than resolve them.

The paper contained references to two classic papers, God Gave Physics the Easy Problems, published in 2000, and the 1985 classic by Paul David, Clio and the Economics of QWERTY. Paul David’s paper on Qwerty Economics points to the influence of ‘software’ on hardware. Investment in skills required to type using the Qwerty keyboard created scale economies for it and entrenched it as the global standard, even though it did not optimize the efficiency of using both hands for typing. Neither did it keep widely-used letters of the alphabet apart to prevent manual-typewriter keys from jamming. Yet, it survived.

Separately, the authors of the first paper referred to here note that big questions in social science involve contingent and complex causality, and that the search for ‘laws’ and invariant causal relationships can be frustrating. It called for constructive humility in the current context of our attraction to deductive logic and falsifiable hypotheses. The advice is rather timely, given the deterministic statements that are frequently made about the path of institutional autonomy, the cause of liberty, and the role of businesses in influencing the two, etc. The advice is equally relevant to questions that financial investors and policymakers confront.

Two recent crises in financial markets illustrate the mistakes that continue to blight the policy approaches followed by central banks in developed nations for well over a decade (or three, depending on which one you look at). First came Greensill. A firm that offered supply-chain finance went broke. It brought back memories of 2008. Then, last week, a family business named Archegos fell victim to the debt and derivatives it had accumulated. More interesting than its failure was the evaporation on Friday morning of the cooperative arrangement that banks had agreed upon just the night earlier. It was the Prisoner’s Dilemma at work. So much for Homo economicus.

We have just entered a new financial year. The Reserve Bank of India (RBI) will hold its first monetary-policy panel meeting this week. In the spirit of the above discussion, it is appropriate to recall what Willem Buiter wrote in The Unfortunate Uselessness of Most ‘State of the Art’ Academic Monetary Economics (6 March 2009). He was one of the ‘founding’ members of the monetary policy committee of the Bank of England after it was given an inflation mandate by the UK Treasury. Given the extreme monetary and fiscal stimuli that pass for economic policy in the developed world, his observations will be useful for RBI policymakers as they look ahead to a new financial year.

Buiter wrote that the conventional economics training of academic and other professional economists at the Bank of England proved to be a handicap when the crisis of 2008 struck. They had to switch from targeting inflation under orderly financial conditions to dealing with conditions of widespread market and funding illiquidity. Such exigencies may not arise in India this year. But, it is possible that global financial markets would face such situations with spillover effects on India. In such a situation, will India’s inflation-targeting framework be an inconvenient shackle on policymakers? We should not forget that inflation targeting is a product of neo-classical economics that ignores the path-dependency of economic outcomes.

A recent presentation, Inflation Targeting: Much Ado about Nothing? Examining the Evidence (March 2021) by a group of distinguished policy economists had established that India’s inflation rate was coming down even before flexible inflation targeting (FIT) was introduced. Second, this was the case with other countries, too, that really had no FIT target. Third, they show that given the lopsided weight for food and related components in the Indian Consumer Price Index (CPI), the index was prone to overstating inflation when food prices were elevated, resulting in a more restrictive monetary policy than necessary. Fourth, this was one of the reasons for India’s growth underperformance in recent years.

India recently affirmed that it is sticking to its FIT framework for another five years with the very same parameters. The good news is that RBI is blessed with a leadership that interpreted the framework so flexibly in 2020 as to handle the risks of instability competently in the course of the year.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.

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