Economics For Life

“I'd like to share a revelation that I've had during my time here. It came to me when I tried to classify your species and I realized that you're not actually mammals. Every mammal on this planet instinctively develops a natural equilibrium with the surrounding environment but you humans do not. You move to an area and you multiply and multiply until every natural resource is consumed and the only way you can survive is to spread to another area. There is another organism on this planet that follows the same pattern. Do you know what it is? A virus. Human beings are a disease, a cancer of this planet. You're a plague and we are the cure.” - Agent Smith, The Matrix.

It has been nearly two years since the Lehman Brothers collapse, an incident which put an end to all confusions and announced a full blown recession. After an initial bail out which all agreed was the right strategy to prevent a catastrophe, we are now at a juncture where we need to decide our medium and long term strategies. Not surprisingly though, we see economists (including the venerated ones such as Joseph E. Stiglitz (nobel prize winner) and Raghuram Rajan differing in opinion. Some like Paul Krugman and Stiglitz are in favour of a more socialistic approach advocating that the government should keep intervening and keep pushing capital into the market where as the others, the free market economists, feel that the minor signs of improvement are good enough to suggest a recovery and it is the right time for the U.S. government to pull itself out and let market forces do their job. What I was wondering is that in spite of all the tools at hand; in spite of all the genius mathematicians and economists, all the supercomputers and the modelling and analytical techniques; in spite of it being 234 years since the first work of modern economics, The Wealth of Nations, was written by the Scottish economist Adam Smith; we are unsure.

I was talking to friend of mine named Hemant Jodha, who had worked with HSBC for almost a year. He used to work on models to predict the market and forecast the macroscopic economic scenario. He explained to me that any model involves assumptions which seem “reasonably accurate” at certain points of time. It is important to note that the exceptional cases (tail risk) are almost always ignored while making those assumptions. So even after you have done all the regression and made projections, there is an itchy feeling because you know that the predictions are only too subjective. That is the reason why, hardly anyone was able to predict this meltdown till it was knocking at the door and any cautions were conveniently overlooked.

On a broad level, we have two major economic approaches- socialist approach and capitalist (or free market) approach. Fifty years ago, socialism was considered a remarkable theory and had champions like Nehru backing it. It was based on idealism. After the collapse of the Berlin Wall, the utopian model was discarded. We had proved to ourselves that we humans are basically selfish and cannot work efficiently until we have a fear of getting dismissed or we see significant additional economic rewards for our actions. Idealism does not work. Capitalism, which is based on the assumption, that individuals and organizations work with profit as the primary goal in mind has failed us today. Greed can be good, but too much of it has left the economic giants in a self-assessing mode. I would like to bring up another economic model suggested by the famous social scientist none other than Mahatma Gandhi. He had suggested that India should adopt a bottom up strategy with each village in India acting as a self sufficient unit. He was against the use of much technology, for he believed that technology brought nothing but alienation to people and made them greedy. He wanted to build an economic system based on simplicity and love; an economic system where nobody would be left hungry but nobody would be rich either. He obviously thought with his heart and the theory sounds a bit too unpractical, but never the less it is a beautiful idea for our minds to fiddle with.

Can we ever come up with a perfect economic model? The answer to that one is no. But we can say that we would be hovering around capitalism, with government taking requisite measures to check outrageous strategies. But where to draw the line? Also what is the assurance that people will not find new ways to circumvent the check points put in by the government?

There is another angle which I would like to bring in here. Say we go for a full blown capitalism and growth, the way India and China are trying to do. Do we have enough resources to sustain a luxurious living for such huge populations? Can our reckless living styles be supported by the limited sources of earth? We all see what the developed nations have done to our world resources. USA has just 4% of world population and uses nearly 30% of world resources. How can we hope to become developed, which practically means come to same levels of per capita consumption. We cannot even think of coming close. The earth is burning out too fast. There are predictions that oil will be over in 4 to 5 decades; that major rivers of India will be exhausted in 3-4 decades. As I hear economic theories to sustain development, I hardly hear any theories which will help us go beyond the known world resources. We are pinning our hopes on a magical breakthrough, which will fulfil our requirements of energy and other resources. We need to pause and think where we are heading. I am sure the per capita resource consumption, per capita green house gases produced etc would be less during these periods of recession. Sometimes I feel that recession is nothing but nature’s way of asking us to slowdown, or a way of buying itself more time to balance things, or a way of just taking a breather.

Capitalism is a way suggested by the brain. People work hard, earn well and enjoy. That is how the brain suggests we behave. But will it be sustainable? There is enough for everybody’s need, but not enough for everyone’s greed. As much as I hate to admit that we won’t or perhaps can’t change, I feel that a feasible sustainable economic solution will require us to show significant behavioural modifications. The solution lies somewhere in between the economic theories suggested above, where not just the brain but the heart plays a significant role as well- a solution which uses technology, provides freedom but simultaneously also propagates simplicity, sensibility and sensitivity.