“Economists do not have a systemic solution for the ‘poly-crisis’”
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The Indian government is grappling with three economic challenges at the same time. One is management of inflation, interest rates, and exchange rates, for which the Reserve Bank of India is expected to find a solution. The second is negotiating bilateral and multilateral trade agreements that protect the interests of India’s farmers and workers, for which coordination is required amongst the Ministries of Commerce, Industry, and Agriculture. The third problem that is affecting all citizens is secure employment with adequate incomes, which involves all Ministries and all State governments. The third one is linked with the other two: it has become a principal cause of social tensions and political conflicts in the country.
Economists do not have a systemic solution for this “poly-crisis”. Consensus among them has broken down even about solutions to its separate parts. They are divided on whether central bankers should operate independently of governments; whether inflation should take precedence over employment; whether imports should be made less costly for consumers or protection of workers’ incomes should take precedence to increase their purchasing power; and who is hurt by the depreciation of the rupee.
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Lessons from China
Economists agree that more investments will boost growth. Therefore, there are lessons in China’s history. China and India opened their economies to global trade around the same time, some 35 years ago. Both countries had similar levels of per capita incomes then, and similar levels of industrial technologies. Since then, China attracted foreign investment that was many times more than in India, and the incomes of its citizens increased five times faster. Moreover, China became an industry and technology powerhouse, which the United States is being threatened by. The West wants to encircle and contain China. Since wages in China have become much higher, India seems well-placed to attract global investors. To attract investors, India must compete with other countries. Vietnam is often cited as a country that is proving to be more attractive than India to western and Japanese investors. Therefore, after China, economists are turning towards Vietnam also to understand why.
Western neo-liberal economists have attributed China’s remarkable economic growth to its adoption of free trade policies, and they seem to see only this as a cause for Vietnam’s recent spurt. However, when looking into Vietnam, they rediscover what was learned from China. When both countries opened to foreign investors — China before Vietnam — they had already attained high levels of human development, with universal education and good public health systems. Whereas even 10 years ago in India, trade-and-growth economists like Jagdish Bhagwati were dismissive of economists like Amartya Sen who advocated the human development theory of growth. Jagdish Bhagwati said the size of the economic pie must be increased before it can be redistributed. They had the order wrong. Basic human development must precede growth because it is the means for growth. Moreover, incomes must be increased simultaneously to enable more consumption and attract more investments.
The problem with the current paradigm
The clock cannot be turned back. India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits at the same time. The current paradigm of economics cannot provide solutions. It is too linear, too mathematical, too mechanical. Economists have also separated themselves from other disciplines into their own self-referential silo. They should break out of it and examine the emerging science of complex self-adaptive systems. It provides a way for economists and policymakers to comprehend complex socio-economic systems in which many forces of different sorts interact with each other — some of which are not easy to quantify.
There are some fundamental flaws in the current paradigm of economics. Economists often cite Tinbergen’s theory, which states that the number of policy instruments must equal the number of policy goals. This justifies the necessity of independent monetary institutions for managing inflation, separate trade and industry specialists, and separate policies for environment management and agriculture. This is a mechanical and linear view of how a complex system works. In complex organic systems — which all natural and socio-economic systems are — root causes contribute to many outcomes. Moreover, outcomes circle back to feed the roots too. Therefore, the behaviour of the system cannot be explained by linear causes and effects. The causes interact with each other, and effects also become causes.
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All complex adaptive systems (which all biological, natural, and socio-economic systems are) take different shapes in different places and at different times, even if they have the same constituents. Though every human body has the same organs, every human being is different. Good doctors know this; good doctors listen to understand their patients’ problems every time before prescribing treatments.
Crises and the inadequacy of the system
Macro-economists search for global solutions. Trade and monetary policies that fit the United States, China, Vietnam, or India will not fit the needs of others. Their needs have emerged from their own histories. Economists arrive at solutions by comparing data trends of different countries. They run their equations on computers. In their models, people are numbers. Economists do not listen to real people, whereas politicians try to at least. Indian economists complain that bad politics is coming in the way of good economics. Whereas bad economics could be coming in the way of harmonious progress of the country.
Einstein said that working harder to solve systemic problems with the same thinking that caused them is madness. Global solutions and economic theories invented in the West have caused problems, for which new solutions are essential. The inadequacy of the current paradigm was revealed by several crises in this millennium: the 2008 global financial crisis; inequitable management of the global COVID-19 pandemic; and the looming global climate crisis (in which, clearly, one solution cannot fit all).
‘Vasudhaiva Kutumbakam’ (One Earth, One Family, One Future) is the theme of the G-20, which India is leading this year. A new economics is required. A movement to change the paradigm of economics’ science to bring perspectives from the sciences of complex self-adaptive systems has begun even in the West. India’s economists must step forward and not just follow these developments. They must lead them too.
Arun Maira is the author of ‘Transforming Systems: Why the World Needs a New Ethical Toolkit’
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