Companies have production and sales targets, set by the management. These targets can be justified, even when they are unreasonable.

At a national level the Soviet Union used to have production targets. No one quite knew where they came from. But they could always be justified on the basis of some invented input-output grid. It was physical, you see.

Sports people have targets, too, for say physical fitness. These are set by medically qualified people with a deep knowledge of human physiognomy, muscle strength, lung capacity and all that.

Tax departments have targets as well. These are based on the old Jean Baptiste Colbert principle of plucking the feathers off a goose till it doesn’t start hissing. That is, you tax as much as you can.

There are hundreds of other examples of target setting that are based on some verifiable principle. But on what basis does economics set targets?

No answers

Having spent a lifetime in economics and amongst economists (without belonging to their tribe) I have asked them this question repeatedly. No convincing answer has emerged. Truth is, they don’t know.

Or, when asked if their targets are actually counter-productive, most have changed the subject. Why bother answering a journalist? Some have become very irritated. Only very few have had the courage to admit that it’s vanity that leads to the targets that economics sets.

This obsession with targets has some other interesting aspects. The most important of them is that they are internally inconsistent. The moment one is achieved, many others become impossible to achieve.

You set employment targets and efficiency is the first to be affected. You target inflation, and growth gets affected. You target exchange rates and exports and imports get affected. This doesn’t happen with micro targets like production targets.

Micro versus macro targets

Also, while micro targets are achievable, the macro ones like inflation aren’t. Or, as the Taylor principle pointed out — in a variation of the Heisenberg principle of physics — that in an open economy you can either target an exchange rate level or an interest rate level. You can’t do both. This is actually true of many other variables.

A third aspect is the overall intellectual approach involved in targeting. You can’t transfer an approach that’s suitable at the micro level to macroeconomics.

The USSR had micro targeting because of its five year plans but no macro targeting because it wasn’t a market economy. It has never heard of inflation, fiscal deficits, etc.

The US has macro targets like inflation and deficits but no micro ones because it is a market economy. The markets adjust output levels.

China, of course, doesn’t have many targets. It flies by the seat of its pants. The only thing it ever targets is its exchange rate to keep it undervalued to make its exports competitive.

But India, God bless our lack of originality, has every imaginable target possible. Inflation. Fiscal deficit. Government debt. Output. Exports. Inflation. Interest rate. Exchange rate. Poverty level. And many others. It’s quite an endless list.

I have a theory about this: we love targets because they are a comforting synonym for laziness and a substitute for effort. Setting a target — except on rare occasions — is seen as work done. That’s why we hardly ever achieve these targets.

Where did this practice, of economics setting targets, come from? Believe me, it didn’t exist before 1980. Trawl the literature and you will not find more than one or two such targets.

There was, for example, the 1949 suggestion by Milton Friedman about the ideal rate of growth of money supply. Some growth economists also devised some targets for capital accumulation. But that was all.

Target setting

Since the early 1980s, however, economics has become very active in target setting. Inflation? Two per cent. Fiscal deficit? Three per cent. Current account deficit? 2.5 per cent. Unemployment? Five per cent. And so on.

Why have these become what the Christians call the Holy Grail, or something that is persistently pursued? Why are countries judged by their success in achieving these targets, never mind if the targets make sense? Indeed, is it the business of economics to set these targets without any basis?

The answer lies in the inability of governments to tax enough and, therefore, their need to borrow madly. This simply wasn’t a problem before the 1980s.

So what should be done? Governments must go back to the spending philosophy of the pre-Keynesian era. And economists must stop pretending they know what they are talking about.

Otherwise they will set their silly targets and governments will ignore them. This is a lose-lose proposition.

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