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Wednesday, Apr 29, 2009
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Business Daily from THE HINDU group of publications Wednesday, Apr 29, 2009 ePaper | Mobile/PDA Version | Audio | Blogs |
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Opinion
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Economics Industry & Economy - Economy Columns - T.C.A. Srinivasa-Raghavan I complicate, therefore I am Growth theory has been an awful waste of time and effort because it has not been able to establish causality beyond reasonable doubt. 
T.C.A. Srinivasa-Raghavan For the last 60 years, politicians have been obsessing over the rate at which national output grows. The phenomenon of it growing forever, sometimes quickly, sometimes slowly, has come to be known as economic growth. It is easy to see why politicians are so enamoured of it. More output means more jobs and therefore more income for the voters, with workers getting higher wages and owners of capital getting bigger profits. In the end, it promises re-election, albeit mostly in the breach. But it is not only politicians who have been fixated on growth. Economists, bless their simple souls, too have focused on it. “What,” they have been wondering, with brows furrowed in deadly concentration since the end of the Second World War, “causes growth?” And the answers have been something like this: Investment. Yes, but… Technology. Yes, but… Knowledge. Yes, but… Innovation. Yes, but… Social institutions. Yes, but.. Political institutions. Yes, but.. Judicial institutions. Yes, but… Economic institutions. Yes, but… Governance. Yes, but… Human capital. Yes, but… Endogeneity. Yes, but… Big Push. Yes, but… Open economies. Yes, but… Geography. Yes, but… And so on. Like in Newton’s Third Law, for every explanation there has been an equal and opposite explanation. In fact, more than one. But it is not just the simultaneous presence of multiple and equally valid explanations that is a problem. It is also the refusal by economists to acknowledge that, beyond a point, even as intellectual inquiry goes, this is a pointless pursuit because it is never going to yield any definitive answers. This essential pointlessness has been magnified by the use of advanced mathematics. This has lent the topic an aura of high intellect and unattainability for the ordinary mortal. In the final analysis, however, we have not been any the wiser. Harsh as this may sound, growth theory, as it is known, has added absolutely nothing to our body of knowledge. Turnpike theoremIt has even been harmful as when the coming into fashion of a particular theory has led to sharp lurches in policy that took a long time to correct. Indeed, often, just when it has been corrected another fashion has come along, usually at the behest of the World Bank, and the system has lurched off in another direction. There is, for instance, the famous Turnpike Theorem, which led to a huge number of “research”, papers being published, and reputations being established. A turnpike, by the way is old English for a highway which connects two places by the shortest distance. Now, if you are an economic planner and want to accelerate long-run growth, you think of your economy as being on a side road. You have to decide whether to get on to the highway or not, in order to get to wherever it is you are going. Not a terribly hard problem to solve but this is what Paul Samuelson and Robert Solow, both Nobel winners, had to say about it back in 1958. The maths involved was daunting, to say the least, as if it was the trajectory of a rocket to the moon that was being planned. “There is a fastest route between any two points; and if the origin and destination are close together, and far from the turnpike the best route may not touch the turnpike. But if the origin and destination are far enough apart, it will always pay to get on to the turnpike and cover distance at the best rate of travel, even if this means adding a little mileage at either end. The best intermediate capital configuration is one which will grow most rapidly, even if it is not the desired one, it is temporarily optimal.” Over-compensationPolitically, this meant giving distribution and distributive justice much lower priority than growth which, as India discovered in 1967, was not very clever if you were a democracy. The reaction to the electoral disasters that followed came in the 1970s when India decided to over-compensate in terms of distribution. This was the equivalent of not taking the turnpike and sticking to the side roads. China, in contrast, without democracy, has done well out of the Turnpike Theorem. Amazingly, it had been tried by the USSR first and then Mao Zedong as well, but it failed to work for them. However, it worked for Deng Xiaoping because the US, in order to bring down the USSR, decided to co-operate with China and not refuse to buy things from it. The Turnpike theory thus had very little to do with China’s success. Space has run out, so we shall have to return to the topic later. Suffice it to say that growth theory has been an awful waste of time and effort because it has suffered from the key deficiency of economics: it has not been able to establish causality beyond reasonable doubt. In the next article in this series we will discuss decline, the mirror-image of long term growth. More Stories on : Economics | Economy | Politics | T.C.A. Srinivasa-Raghavan
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