The Hindu Business Line : Economics, a depressing tale of miscalculation

Societies we create are `unique in comparison to anything in the past'. "We have no historical experience that prepares us to deal with it," says Nobel Laureate Douglass C. North, in Understanding the Process of Economic Change. On the same theme is Change Management, by V. Nilakant and S. Ramnarayan, where the emphasis is on new ways of thinking, says D. Murali.

Were you to compress `the ten thousand years from development of agriculture to the present' in a 24-hour clock, "the pace of change appears to be very slow for the first 12 hours," said Douglass C. North in his Nobel Prize Lecture, on December 9, 1993. "The last 250 years — just 35 minutes on our new 24 hour clock — are the era of modern economic growth accompanied by a population explosion," he added.

Economic change, according to North, is "a ubiquitous, ongoing, incremental process that is a consequence of the choices individual actors and entrepreneurs of organisations are making every day." Has it not been analysed and explained many times over? Not completely, he'd say, because explaining the pace and direction of economic change throughout history is a major puzzle.

To help resolve the mystery, here is his new book, Understanding the Process of Economic Change, from Academic Foundation (www.academicfoundation.com). The book studies "the ceaseless efforts of humans to gain greater control over their lives", not merely as an academic thesis of the past but as a way to unlock "the door to greater human well-being and to a reduction in misery and abject poverty."

North rues that economic history is a depressing tale — "of miscalculation leading to famine, starvation, defeat in warfare, death, economic stagnation and decline, and indeed the disappearance of entire civilisations." A continuing tale, it is.

For example, in a report dated March 10, www.newkerala.com speaks of the year's tally of about 400 suicides among Maharashtra farmers "as a result of failed crops, import competition and crippling interest payments".

North explains that our world is non-ergodic, characterised by `continuous and novel change'; and the societies we create are `unique in comparison to anything in the past'. What is novel in the environment we make today is that "we have no historical experience that prepares us to deal with it".

Indomitably, humans have continually reached out into the unknown, and achieved successes, though failures too have been many.

North then delves into `consciousness and human intentionality', to take the discussion to a refreshingly different level.

Three sources of economic change, viz., demography, stock of knowledge, and institutions, have been fundamentally altered, he says.

"The speed of economic change is a function of the rate of learning but the direction of that change is a function of the expected pay-offs to acquiring different kinds of knowledge," is an insight from his Nobel lecture (http://nobelprize.org). The way we play the game is determined by the `scaffolds' we erect, in the form of formal rules defining the incentive structure, strength of informal norms, and the effectiveness of enforcing rules. Don't underestimate the power of institutions because these reflect "the accumulated beliefs of the society over time".

You can change formal institutions through law, but "informal institutions evolve in ways that are still far from completely understood and therefore are not typically amenable to deliberate human manipulation". In times of disorder and crises, societies with stable institutions recover rapidly, points out the author.

However, he decries the overemphasis that international organisations place on institutions. Because the world we live in is dynamic. "Policy derived from static theory in a dynamic setting is going to produce unanticipated (and unpleasant) outcomes," cautions North.

Thankfully, therefore, institutions such as property rights and judicial systems "do not have to be faithfully copied in developing countries."

The key is `the incentive structure that is created'. For example, the Chinese started with `the household responsibility system' to achieve `rapid economic development without any of the standard recipes of the West'.

Hence, there is no set formula for economic development; and don't expect an economic model to capture `the intricacies of economic growth'. Which is why it may be necessary to look behind the impressive numbers that hit the headlines as economic growth percentages.

The final chapter titled, `Where are we going?' prays that those who make political decisions have vision, and bets on human adaptability to take on novelty. Yet, it is sobering to remember that `adaptive efficiency' may have its limits, as proved by the decay and disappearance of societies.

Contemplative read.

Create enduring institutions

On `change' again, is, Change Management, by V. Nilakant and S. Ramnarayan, from Response Books (www.indiasage.com).

"We need new ways of thinking, working, engaging and interacting to build organisations," writes the Finance Minister in his Foreword. "Growth, development and change require shifts in our mindsets and mental models. More importantly, sustained progress demands that we commit ourselves to making tough choices and implementing them," he urges.

Chapter 1 of the book extols the wisdom of Kurt Lewin, who "first articulated the science of change in human systems".

Strangely, it's only Mosh Lewin who finds mention in North's book, while North doesn't appear in the index of Change Management.

Be that as it may, one can't disagree with Nilakant and Ramnarayan when they say that a common mistake most managers make is in assuming that just because they are ready for change, everyone else in the organisation should be ready too. Typically, "You can expect about 20 per cent of the people to be enthusiastic about change.

"Another 20 per cent will be strongly opposed to the change, and the rest will be sitting on the fence."

In the Foreword, the Finance Minister informs, "The authors of this book were involved in change management programmes conducted for ministers in the Indian government and civil service officers, with whom I was closely associated under the leadership of Shri Rajiv Gandhi in the 1980s. Their ideas on change management were initially developed when they worked with the Tata group of companies" The book abounds with examples, both from abroad and closer home.

For instance, you'd read about how Mahendar Reddy, who took charge as the Commissioner of the Cyberabad Police in 2003, mobilised support in his effort to make the force responsive and people-friendly. "He realised that 85 per cent of his staff were constables who did not have a place to sit in the police station... The sub-inspectors, who were at the first level of supervision, regularly worked 12 to 16 hours a day." Change management is not just about creating business models, making profit or increasing market share. "Fundamentally, it is about creating enduring institutions," conclude the authors.

More than `enduring', which only brings to mind fears of entrenchment, I guess, it is important for institutions to be evolving.

Economics@TheHindu.co.in

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