An economist-exorcist’s lessons

In his monumental work, The General Theory of Employment, Interest and Money, economist John Maynard Keynes pointed to the tremendous influence of the ideas of economists and political philosophers — “both when they are right and when they are wrong.” Even practical men, Keynes noted, “who believe themselves to be quite exempt from any intellectual influences, are usually slaves to some defunct economist.” And madmen in authority, he wrote (with seemingly amazing prescience!), “who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back.”

Failed economic ideas float around far longer than they deserve to, and exert disproportionate influence in policy-making. That is because — as another economist, John Quiggin, has noted — ideas are very hard to kill, even when they are proven to be wrong and dangerous. Like zombies — those “unliving, yet undead” beings that are the staple of apocalyptic movies — these failed ideas keep crawling out of their graves to haunt humanity.

For instance, free-market fundamentalists continue to swear by the ‘trickle-down theory’ — the idea that policies that benefit the well-off will ultimately have a “trickle-down” effect and help even the dirty, unwashed masses. And they will faithfully abide by this theory even if it has been comprehensively disproved. Likewise, the Efficient Market Hypothesis — which rests on the idea that the “market knows best” and that all government intervention by way of regulation is disruptive — and the evangelical passion about ‘privatisation’ continue to colonise policymakers’ minds, as recent exertions in India and elsewhere demonstrate.

The world needed a warrior who is firm of mind and clear of ideas to go to intellectual war against these and other zombie ideas. Nobel Prize-winning economist and New York Times columnist Paul Krugman is that warrior for our times.

Going to war

In this compilation of his earlier-published columns, blog posts and academic papers, Krugman goes valiantly into battle against these “zombie” economic ideas.

In some ways, Krugman is a reluctant ‘exorcist’ and warrior. “Punditry,” he claims, “was never part of the plan.” Given his training in trade economics, he had visualised for himself a career in research and teaching. But the policy wonk felt compelled to don the crusader’s cape because “in 21-st century America, everything is political.” Even accepting what the evidence says about an economic question will be seen as a partisan act, he notes.

In such a climate, what is a “would-be scholar” to do? One option would have been to ignore the political heat, put your nose to the academic grindstone and keep doing your research. “But we also need public intellectuals: people who will understand and respect the research, but are willing to jump into the political fray.”

The theatre of war in which Krugman battles zombie economic ideas is largely the domain of US politics and economics — although he occasionally does venture abroad, to developments in the Eurozone, and to international trade tensions. Even so, the lessons of his Masterclass in economics apply with equal merit to an Indian context — with some notable exceptions.

For instance, Krugman notes that the most persistent zombie idea is the insistence that taxing the wealthy is hugely destructive to the economy as a whole, so cutting taxes on high incomes will produce miraculous economic growth. That idea has taken firm root since US President Ronald Reagan articulated it in the 1980s. In the US, that conservative philosophy has additionally acquired a heartless dimension because the Republican Party has simultaneously been looking to take away Social Security benefits and Medicare entitlements from the poorest people by claiming that they are fiscally unsustainable. That translates into a cruel transfer of wealth from the poor to the rich, and Krugman points to its perversion.

More important, Krugman establishes that the doctrine (that low taxies on the wealthy are the secret of prosperity) is lacking in any merit. That theory, he notes, was tested in 1993, when Bill Clinton raised taxes, and the conservatives predicted disaster; instead, Clinton presided over a huge economic expansion. It was tested again under George W Bush, who cut taxes again, and although his supporters promised a boom, what the US actually got was lacklustre growth followed by a financial collapse (in 2008). And it was tested yet again, in 2013, when Barack Obama allowed some of the Bush tax cuts to expire, while raising some other taxes to pay for his signature healthcare proposal; the economy just kept chugging along.

Fiscal attitude

One other philosophical argument that Krugman makes — and on which he has been proved right — holds lessons for India as it grapples with the malefic economic effects of the coronavirus. The Modi government’s excessively cautious fiscal response to revive the economy is very likely rooted in the belief that it is more important to not strain state finances in an emergency for fear of risking a sovereign ratings’ downgrade. Conservative policy experts have also argued that fiscal excess today could cause inflation to shoot up. But as Krugman notes, in another context, when there are conditions of severe economic downturn, when there is a enormous demand shortfall, the conservative argument about inflation does not hold.

And aiming for fiscal rectitude in times when the economy is so severely dented will render the depression deeper. Doing too little, he points out, is a much bigger risk than doing too much. And doing what seems like responsible things — holding government spending down in the face of big deficits, and refraining from printing what looks like an awful lot of money — end up making the depression worse.

The landscape that Krugman’s all-seeing warrior eye takes in stretches from economics to politics to climate science. With intellectual rigour and an in-your-face, take-no-prisoner combativeness, he bluntly calls out “charlatans” who peddle dishonest (and disproved) theories in bad faith, purely out of partisan considerations.

It has famously been said that the only thing necessary for the triumph of evil is for good men to do nothing. Just as a geeky photo-journalist slips on a spider costume to become a superhero, this policy wonk morphed into an exorcist to chase away zombie economic ideas. And the world is a better place for it.