The Hindu Business Line : ‘Economics cannot promise wealth, but can avoid disasters’

Economics tells us that when we are investing, we should diversify and stop thinking we are smarter than everyone else. If you follow those rules you will at least avoid disasters.

MR TYLER COWEN, AUTHOR OF ’DISCOVER YOUR INNER ECONOMIST

Like the majority, you may find economics hard to understand. Yet, virtually nothing in our lives is untouched by it. Not even culture.

As a teacher of the very subject, Mr Tyler Cowen, who by the way has primary research interest in the economics of culture, is not what you would call a geek. In fact, he loves restaurants so much that he can’t stop talking ab out it and finds blogs so fascinating that he started The Marginal Revolution.

It was not surprising, therefore, when the Holbert C. Harris Professor of Economics at George Mason University, US, and Director of the Mercatus Center came out with his book curiously titled Discover Your Inner Economist.

The book aims at reducing the yawning chasm between the public and the economists, with practical counsel for situations such as falling in love, surviving your next meeting and motivating your dentist!

Most people have never seen that economics can make their lives better, Mr Cowen laments as he responded candidly to a set of questions fielded by Business Line over e-mail, while on a long bus trip in Mexico. A self-confessed aficionado of Indian food, he says the inquisitive mind is very strong in India right now and warns stock market zombies to stop thinking they are smarter than everyone else.

Excerpts from the interview:

There has always been a kind of disconnect between economists and people. Who is to blame?

Both people and economists are to blame for the disconnect. On one side, people don’t read enough books, or they don’t read serious enough books.

Economic illiteracy is common in all countries of the world. People see the economic relationships right before their eyes, but usually they don’t understand the deeper connections.

Economists, on the other hand, speak too often to each other and not to the general public. In academic life the rewards are for specialisation, which I consider to be a shame.

A lot of economists seemingly carry a difficult baggage of jargon…

The winds of change are very much upon us. There is Freakonomics (written by Steven Dubner and Steven Levitt), there is The Undercover Economist (Tim Harford of Financial Times), and there is my book. Most of all, there are the blogs. Economists are becoming popular, and rewards are rising for economists who write for the general public.

Do people really need to know that money can’t buy them everything?

Some people get addicted to money, and they work harder and harder, but towards what end? This is especially a problem in the US, where the workaholic ethic is very common. Pride in one’s work makes one happy. But beyond a certain point, just having more money doesn’t much contribute to happiness.

Economics helps us understand. But in a world that is fraught with hidden agendas, information asymmetry and not-so-perfect markets, can economics really be of some help?

Imperfect markets, information asymmetry, etc., make it all the more important that we consult economics.

Otherwise obtaining good results would be very, very easy. In reality doing well is difficult, precisely for some of the reasons you mention.

In stock markets we probably have the craziest of theories circulating. Some use the Boston Snow levels; others ogle at the hemlines, while another bunch looks for all information in the daily share price movements. Does economics explain these peculiar habits or fascinations?

In my view, economics explains maybe half of what goes on in the stock market. We are not at the point where economics can explain fads and trends of the sort you mention.

Maybe we’ll never get there. Most of all, economics tells us that when we are investing, we should a) diversify, and b) stop thinking we are smarter than everyone else. If you follow those rules you will at least avoid disasters. I can’t promise those rules will make you rich.

If we give everything the spin of “incentives” or some modification, as suggested by you in your book, we would have to be so calculative to get the best results?

To get better results for incentives, we don’t have to be so calculating. Instead I try to point out some simple rules.

For instance, when the person you are dealing with resents the possibility of your control, deal with that person very carefully and very gingerly. Ask whether intrinsic motivations are likely to be strong. Ask yourself “what kind of person am I dealing with?” Most of all, ask yourself, “how will this person perceive what I am doing?” Those simple questions won’t give you the right answer every time, but they will lead to appreciably better results.

You have said that high rewards often make individuals choke. Today’s corporate world is all about that fat pay cheque and, in particular, bonuses. Are they really no good?

Most high-level CEOs don’t choke; if they did they wouldn’t get to that position in the first place. But most people do choke or get nervous. We shouldn’t try to impose high-stakes rewards on everyone; most of all we should avoid doing this to our children.

If there was a big problem that came to your mind with regard to modern people vis-À-vis economics, what would that be?

Most people have never seen that economics can make their lives better. My book is attempting to revise that view by showing we can be happier and more successful by thinking like an economist.

At times, it seems that politics and economics work concertedly to obfuscate matters for the common man. How can the inner economist be awakened?

How can the inner economist be awakened? I can’t give you any answer but this one: Read my book! Read the economics blogs. Approach reality with a curious mind.

D. MURALI

INDRA NATH

http://InterviewsInsights.blogspot.com