The Savant from Ithaca

Economists come in two stripes. There are policy advisors and policymakers, and there are those who craft killer theorems. In the former class come persons such as the University of Chicago economist Austan Goolsbee— who advised President Barack Obama at a very difficult time (2009) when the global economy was on a precipice. The example, closer home, is Manmohan Singh, who managed the Indian economy through a similar rough patch in 1991.

The other group—that of theoreticians with imagination— includes gifted minds such as George Akerlof and Roger Myerson. Their great quality is to observe day-to-day life and build cool models of what they see. The result is a deeper insight into individual behaviour under different circumstances and incentives.

Kaushik Basu is a rare person who has straddled these very different worlds—if not universes—with equal felicity. Currently the World Bank’s senior Vice-President and Chief Economist, he has served in government and universities with equal distinction. But he is much more than that. For those who can appreciate his academic papers, he is synonymous with some exceptional ideas of his discipline.

What makes him doubly unique as a thinker of his subject is his great concern for the well-being of the poor. Unlike most economists who champion the poor with policies that do little else than pour money into badly designed schemes, Basu is thoughtful. If he is aware of the numerous poor persons who are barely able to eke out an existence in India, he is also careful in not saying that policies that will ‘end’ inequality are an answer to grinding poverty. Of all the economic theorists who look at such problems, he is among a handful who have delineated a trade-off between poverty and inequality. The idea that one can tolerate inequality if poverty is to be reduced—first argued philosophically by John Rawls—has been carefully elaborated by him. Such thinking is anathema to India’s academic Left even if there was a grudging move towards it in West Bengal under the erstwhile Left Front government there. Perhaps it is this realism, even if it is tinged with sadness, that makes him welcome in policymaking circles.

The simplest differentiation between academic economics and the stuff that goes into policymaking is that the latter is about ‘what do I do, here and now’. The latter idea scares most academic practitioners of the subject. Take, for example, inflation—a problem Basu dubs ‘the emperor of economic maladies’. Policy economists—in governments and central banks—have ready answers, ones that even journalists have imbibed: raising or bringing down the repo rate (the rate at which a central bank lends money to banks). Is the answer so simple? Basu has a different answer.

The first task in tackling inflation is to have an accurate forecast of future inflation (there is little that can be done about inflation already at hand; it is only future inflation that can be tamped down). That is where the trouble begins: there is a trade-off between forecasting inflation and cooling it down. Any future estimate of inflation, once it is placed in the public domain, will not remain static: people will react to it. If you know that prices of goods that you hold (oil, food, manufactured goods, etcetera) will rise in the future, you will hold those goods for sale later when the prices are higher. There is a trade-off involved here. If you give an accurate forecast of inflation, it will lead to higher inflation in time to come. So if a minister states that prices will rise in the weeks and months ahead, you know what is going on.

Interestingly, this trade-off, reminiscent of Heisenberg’s Uncertainty Principle (first expounded in 1927) was first anticipated in economics by John Maynard Keynes in 1936 when he analysed fluctuations in stock prices as being akin to a beauty contest where a number of persons try to guess the most beautiful person in popular estimation by looking at photographs of the contestants. Using a technical mathematical result called Brouwer’s fixed point theorem, Basu has explained the trade-offs in inflation forecasts and policy measures to check it.

All these themes and much more are elaborated in Basu’s new book. An Economist in the Real World: The Art of Policymaking in India is so far his most accessible book. It also has tell-tale signs of a text that has evolved over time. There are, for example, usual staples such as the economic foundations of law (detailed in chapter eight). This is his third elaboration of the topic—the first one was in his book Prelude to Political Economy (2000) and second time in Beyond the Invisible Hand (2010). Similarly, the chapter on food and poverty (chapter six), has grown out of an earlier paper on the subject in the Economic and Political Weekly (EPW). Other chapters, too, follow from papers written by him earlier.

Does this rob the book of some novelty? No and yes. No because by his own admission this book is meant to reach a wider audience and that requires not only carefully weeding out as many equations as possible but also paying close attention to language—keeping it as simple as possible while not crudely simplifying what are complex economic issues. One good example is the chapter on food and poverty where Basu explains how the mess in India’s foodgrain procurement policies can be sorted out. There is not a single equation in the chapter.

In contrast to the paper in EPW—where in turn the math was kept at a rudimentary level by building a toy model that had a simple Cournot-Nash equilibrium—the book chapter is simple. The merit is that anyone with a school-level understanding of economics can figure the ideas that motivate policymaking.

Where this approach falls short is in a partial loss of realism and a deeper, model-based analysis of what transpired in India’s economic landscape during the years he was Chief Economic Advisor (December 2009 to July 2012). Those years were important in the country’s economic history for two reasons. One, the global economic crisis in the wake of the meltdown of Western financial institutions hit India adversely and two, those were also the years when the country experienced its infamous ‘policy paralysis,’ when the Manmohan Singh government found itself adrift, unable to impart any worthwhile direction to the economy. Basu was not only a close observer of what went on in the Finance Ministry at that time but was also a participant in deliberations that ultimately led to many decisions (or, more accurately, did not lead to many). This, Basu notes, is by choice: ‘My Delhi diary is too fresh to be published. There are also difficult ethical questions associated with such verbatim reporting so soon after having the privilege of an insider’s view. So while I have dipped into my diary occasionally, for an amusing incident here and an important policy conundrum there, strictly what is expected of a diary —the ‘revelations’ and notes on personalities—the reader will not find here.’

Most readers of Basu’s papers and books don’t expect him to do such a thing; he is too dignified for that. What was expected of this book was something similar to what he had done in a paper that he wrote almost two decades ago (‘On Misunderstanding Government: An Analysis of the Art of Policy Advice’, Economics and Politics, November 1997). There, he looked at the possibilities and limitations of policymaking advice through the prism of game theory. His secret diary and microeconomic theory promise to make a terrific combination. That will be a book to wait for.

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