Parallel perspectives

Economics gone astray as economists clutch at straws

Economists are facing a market place bestiary almost like matadors grappling with the marauding fury of incensed bulls. The range of economists in the ring is easily the highest we have seen in decades- strange bed-fellows counter-pointing traditions covering both the classical and the ultra modern. Economic theory is struggling to hold its breath.

At the top of the list of economists in circulation, we have Vince Cable, the British Liberal Party economist, a favourite among many outside his own country. While the G20 leaders were screaming that perilous economic downturn was upon them, Cable got high praises for trying to come to grips with a situation gone berserk all over the world.

He is no heart-throb exuding Obama like charisma. But the diminutive MP from the constituency of Twickenham rightly predicted the imminent and damning financial crisis as he kept on pointing to the extended banking sector and the spiraling public debt in England. He is now the accredited expert on the subject.

Drawing lessons from the world crisis is tricky. Mistakes recur frequently while the answers need painful calibration of facts. No consensus exists and neither are two crises the same.

Why markets fluctuate with recurrent characteristics and duration is mind-boggling. Bust and boom is with us no matter what.

One expert, Will Lisner, with insight into the markets, believes that despite millions spent by the National Bureau of Economic Research (NBER) on business cycle research, "no satisfactory theory of the expansion and contraction of business activity known as the business cycle has yet been empirically validated."

So did Neo-classical economist Thomas Sargean, stating "I do not have a theory, nor do I know somebody else's theory that constitutes a satisfactory explanation of the Great Depression".

Everyone, including our own Governor of the Central Bank, Nivard Cabraal, is working on New Models of menu costs, efficiency wages, hysteresis, tackling depleted foreign reserve flows and insider-outsider labour. Such approaches first suggested by John Maynard Keynes may offer explanations of market place rigidities, but hardly explained the inevitability and regularity of cycles.

British economist, Keynes, of course was the reputed guru whose prescription became fashionable after the great depression of the 30s. Those of us who did economics remember how we were grilled on Keynesian General Theory, deemed sacrosanct, by professors as if our lives depended on it.

However, some believe that what we are doing now is grasping at straws or being "compulsively optimistic" to inject confidence into the market place where none exists now. We hear economists in the background saying out loud in anguished tones 'economics itself has gone astray.'

Main issue is how economists infer and deduct as they treat and analyze economic data. They struggle to show what is considered true from what can be conclusively proved to be true. Often the theory and proof of its efficacy need vast amount of empirical studies for validation of decisions. A new thesis by Nobel Laureate George Akerlof of Berkeley California and Robert Shiller of Yale Connecticut, titled "Animal Spirits," argues that untamed animalistic behaviour by the consumers seems to be the culprit for inexplicable economic meltdown now afflicting the world.

This is an unusual lament which might make the founder of capitalistic economic theory turn in his grave.

We know that Adam Smith in his "Wealth of Nations" declared that the invisible hand of the consumer was capable of divining economic equilibrium in society to a notwithstanding consumer buying binges or investor greed.

Now, Akerlof and Shiller call such claims somewhat stretched, citing irrational human behaviour in matters of economics.

They show that spontaneous action (or inaction) by the consumer, could not be specifically gauged and often miscalculated by the economists.

So the thesis of Akerlof and Shiller seemed destined to get a handle on the inexplicable economic doldrums now experienced by the world.

As the world recovers from the severity of the current crisis, Akerlof and Shiller may provide solace to economic policy-makers guiding investment activity in many parts of the world hoping to avoid a repeat of the current mess.

These two leading lights of economic theory are taking a realistic view of things coming unglued as too much economic theory covered a multiplicity of sins.

Human beings supposedly behaving as unerring calculators would not provide a valid basis for economic decision-making. We saw the dotcom bubble burst in the 90s, so did the housing market this year in the US.

In contrast to all this, the resilience of Sri Lanka's economy bears testimony to a less pessimistic nature of economic theory. Bereft of all those expensive high-tech tools and econometric calculus, Sri Lankan policy-makers have arrested the slow down in economic growth.

Central Bank Governor Nivard Cabraal may still pull off an ace in the hole predicting over a five percent growth rate in Sri Lanka this year. (The detractors, I bet, would argue otherwise).

Meanwhile, bleak economic environs round the world match to a syllable the flukiness of the current economic theory. Fickleness of economic decision-making stares us in the face.