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D. Murali

ECONOMICS is the study of production, distribution, and consumption of goods and services. The preoccupation with resources that are scarce and requirements that outbeat them. A powerful science, yet misunderstood much, says Diane Swonk in The Passionate Economist, published by Wiley. For a change, the book is about "finding the power and humanity behind the numbers".

Economics is about data and charts, numbers and tables, but Swonk brings in `feelings' to reveal how economics is not a hard science, but a behavioural one built "on the foundations of human activity".

For the chief economist of Bank One, economics is not simply "a magic black box that doles out reams of forecasts of statistics that move the financial markets"; it is more than "merely moving and counting currency".

This is an author who had grown up in a region `so ravaged by economic hard times that it produced the Michigan Militia, lost the manuscript of the book in the 9-11 disaster, and who says "economics always adds insight into what others might see as chaos".

Chapter 17 of the book, titled "Old rules for the New Economy", is a summary of five rules to show that technology may change, but human nature rarely does. So, "the purely New Economy view of the world was inherently flawed".

The first rule is that wage gains will eventually exceed productivity gains, even when productivity growth is high. Now, these are two different things: Wages are a `monetary' concept, while productivity growth is a `physical' concept. The former is not bound, while the latter is.

To explain further, Swonk cites a kindergarten tale: The race between the tortoise and the hare. "Wages are the tortoise and productivity growth is the hare. The race starts and the hare (productivity growth) is out of the gate fast, while the tortoise (wages) slowly prods along.

The hare, however, is inconsistent in its performance. It sees that it's ahead and takes a rest or goes off course. The tortoise, however, is consistent and keeps moving toward its target." Thus, robust productivity gains would continue, but wages would eventually win the race.

Rule 2 is that price-wage inflation is inherently inertial. That is, periods of high inflation tend to be followed by periods of high inflation, and vice versa. Does this explain the persistence of low inflation after the global financial market crisis?

This rule, according to the author, implies that once inflation begins to accelerate, it will continue to rise for some time to come. "At some point, those gains will become self-feeding, and inflation will be a much larger problem than it seems today."

The third rule states that accelerating price inflation is the principal cause of most recessions.

To understand this, one would need to appreciate that expansion is made of two phases: "the first phase is characterised by decelerating inflation; the second, by accelerating inflation".

The obsession with inflation is justified, because "it is the primary indicator of imbalances in the economy and a trigger point for monetary policy".

Rule 4 is that inflation pressures tend to hit small firms first. This accounts for the `uneven distribution of inflation across the economy'. Thus, when everybody gets hit, some get hit harder.

As with disease symptoms and bund-breaches, "inflation tends to show up in small-firm and service-sector prices before it shows up in goods prices".

For example, "it shows up in the price of maids and nannies before it shows up in the price of cars".

The last rule is that financial market and production efficiencies have eroded, but not repealed, the Fed's ability to affect growth.

So firms and consumers have more ways to counter high interest rates, without depending on the central banker.

This could explain why the Fed boss, Dr Alan Greenspan, adopted aggressive postures to pre-empt recession, like dramatists who have to overact to emphasise. But "timing the turning points in a cycle is a sucker's game," concedes Swonk.

(Economics@TheHindu.co.in)

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