Vision 2020 and beyond

Venky Vembu | Updated on January 03, 2020 Published on January 02, 2020

Crash course: The difficulty in predicting the path of a snooker ball may be likened to the perils of economic forecasting   -  ISTOCK.COM

A decade may well be a long time for economics to play itself out, but India can ill-afford another ‘lost decade’ of the sort that just ended

Deep in the innards of the Science Museum in London is a ‘wonder machine’ that simulates the workings of an economy. Assembled in the 1940s at the London School of Economics by New Zealand economist Bill Phillips using an unlikely collection of tubes, levers and pulleys — many of them retrieved from WWII warplanes — the MONIAC (Monetary National Income Analogue Computer) is, by the standards of today’s processors, a clunky apparatus that is comically simplistic in the way it claimed to mirror a system so complex as the economy.

To be fair, the Financephalograph (as it was also called) was initially intended only as a teaching aid for students to understand, for instance, how the flow of money in the economy — graphically represented by the flow of coloured water from the ‘Treasury’ tank through the economic machinery — impacted other elements of the ecosystem. Or the impact that a lowering of interest rate has on savings (and investments) or on inflation. Despite its simplicity, so popular did the MONIAC machine prove with economists around the world that at least a dozen more were fabricated and gifted to universities or sold to corporates. The satire magazine Punch said, only half in jest, that a model of the MONIAC machine ought to be installed at every town hall to give every ignorant member of the public a rudimentary understanding of economics.

As finance minister Nirmala Sitharaman frenetically cranks the levers of the Indian economy in order to arrest the sharp slowdown of recent months, she will have reason to wonder why the successful outcomes of laboratory simulations of economic policy actions — of the sorts that the MONIAC machine yielded — aren’t replicated with quite the same felicity in the real world. For months now, the minister has been throwing everything in her policy armoury at the slowdown, but the economy has stubbornly remained unyielding to her ministrations. The famed ‘animal spirits’ have thus far failed to be stoked; the economic engine, which she would have liked to see roaring on all 12 cylinders, is at best coughing and sputtering. Every successive forecast of an imminent rebound in the economy has been spectacularly belied.

It’s fair to say, of course, that economic forecasting, of the sorts that experts feel compelled to do at the turn of the decade, is fraught with many perils even at the best of times. In the late ’70s, for instance, Denis Healy, then chancellor of Britain’s Exchequer, was so vexed with the unfailingly wrong counsel and projections offered by economists that he trenchantly threatened to do to forecasters “what the Boston Strangler did for door-to-door salesmen” — to wit, make them distrusted for eternity.

However, one strand of Sitharaman’s angst is actually easy to explain. As economist and political theorist FA Hayek noted in his 1974 Nobel Prize acceptance speech, economists fail in their policy guidance largely because they are susceptible to a ‘scientistic’ attitude. What he meant was that economists have a “propensity to imitate... closely the procedures of the brilliantly successful physical sciences”. Unlike in, say, physics, where the variables can be summarised or averaged, economics represents a case of “irreducible complexity”.

Indicatively, the problem of economic forecasting is rendered supremely difficult because even an infinitesimal change in a handful of variables can get amplified and can render accurate predictions impossible. As physicist Dr Michael Berry at Bristol University established in another context (one that involves billiards balls), forecasting the path of a snooker ball, after it is hit, gets progressively more difficult.

The first impact is fairly easy to calculate; the second hit is slightly less easy to predict, but it can still be done with a reasonable degree of certitude. But that’s nothing compared to the complexity in predicting the sixth or seventh impact: For that, you would have to take into account the gravitational force of people who are moving about near the billiards table. Progressing thus, to predict the 56th impact, you would need to factor in the effect of every single particle in the universe. Which is why, Berry argued, even the world’s best billiards player cannot plan a shot that would have even three or four consecutive collisions and have reasonable expectations that he will be able to successfully carry it out.

Even given the complexity of systems, the errors of policy makers and forecasters — not only in India, but even in more developed economies — have been so egregious in recent years that the intellectual heft of experts has repeatedly been called into question. The decade gone by, after all, saw an upsurge of populist sentiments even in evolved democracies, which made a mockery of established mainstream political and economic punditry on everything from Brexit to Donald Trump’s election. Nearer home, we have been witness up-close to the public bonfire of the reputations of domain experts, and a celebration of the de-intellectualisation of society.

The temptation to knock down economic experts who may have momentarily faltered has proved hard to resist even in circles whose members themselves lay claim to being part of the ‘information elite’. Early in 2019, geopolitical commentator Fareed Zakaria cherry-picked data points to establish that celebrated economists were not exactly infallible, and even made bold to proclaim “the end of economics”. That was, in fact, a bit of a ‘straw man’ argument. First, contrary to the case that Zakaria laid out, only ideologically blinkered economists had been blind to the crises that were building up in the system. Independent experts had repeatedly sounded the alarm, but had been drowned out by distractionary drumbeats and political partisanship.

Now what: Finance minister Nirmala Sitharaman’s attempts to arrest the slowdown have barely made a dent   -  PTI/ATUL YADAV


So what might the decade ahead hold for the Indian economy? It’s worth stating at the outset that it requires an overdose of courage — and of foolhardiness — for anyone to make predictions with any degree of certitude. That’s because the complexity of the economic system has, if anything, been rendered even more acute by an unfavourable geo-economic climate. Political maps are being redrawn, economic partnerships are being reimagined, and, although an occasional burst of ‘creative destruction’ may momentarily yield beneficial effects, the situation today does not merit such optimism.

For one thing, today’s global leaders don’t inspire any confidence in their capabilities. They are hurtling down the highway of populism without a roadmap, and even if they do know what they’re doing, there is no certainty that they will be able to shape the consequences of their actions. No one can, therefore, foresee where the next point of impact for the snooker ball might be.

At home, too, the societal churn that has been unleashed by political developments in recent months bodes ill for the economy. Many of the macroeconomic metrics today are at a multi-decadal low, and the prospects of an early turnaround have receded further away. Policy makers continue to play whack-a-mole with frailties in the financial system, and, despite occasional blips of comforting data points, it is far from clear that the system has begun to heal itself.

Even so, the state of the economy today lends itself to two metaphors. The first is the washing machine, and the second is a supertanker.

Economists liken the current state of the financial sector to a washing machine that is in a mid-wash cycle. The dirty laundry has perforce to go through the complete cycle if it is to come out clean. Interrupting the cycle, however time-consuming the process may seem, will ruin future laundry-loads as well.

Despite the manifest attempts by a few corporates to game the Insolvency and Bankruptcy Code, the process of cleaning up lenders’ balance-sheets is gradually gaining traction. And although the design of the goods and services tax regime is far from robust, which accounts for the fact that there are still revenue slippages, the overall architecture — with the constant chivvying of tax authorities — is incrementally contributing to a more formal economy.

In that sense, the Indian economy is like a supertanker that is doing a mid-sea turnaround: It may lack the agility of a lighter freighter, need more of a turning radius, and its stately pace of locomotion may trigger impatience in some, but once it completes its pivot, the expectation is that it will be better positioned to go full steam ahead.

But two considerations will determine if the journey ahead will remain smooth for the supertanker: Just how choppy the seas are, and whether the ship of state is being steered in the right direction. The developments of recent months have not exactly offered becalming reassurance that those conditions are being met.

A decade may well be a long time for economics to play itself out, but India can ill-afford another ‘lost decade’ of the sort that just ended.


Venky Vembu is Associate Editor, BusinessLine

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Published on January 02, 2020
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