A New Paradigm of Economics Policy

The St. Stephen's College Economics Society invited me to inaugurate the National Economics Festival 2023 on 11th February 2023 with a lecture on "A New Paradigm of Economics Policy".?

I was honoured to get this invitation--it was my official admission to the St. Stephen's economics fraternity after sixty years of my graduating from the College with a Masters in Physics, not Economics. (I was refused a transfer from Physics Honours to Economics when I joined the College in 1959. The Principal said I would serve the country better as a scientist rather than an economist!).?

Mainstream economics is straining under the pains of a paradigm shift. Processes of public policy-making must be reformed too. The Society asked me to share my "out-of-box" thoughts and experiences with them. The discussion?with the very bright students and faculty was very thoughtful. It was a?pleasure to?be back in class with them.?

I?am attaching my lecture. I hope you will enjoy it too.??

Comments welcome!

A New Paradigm of Economic Policy

?I feel greatly honored by the St. Stephen’s College Economics Society. Thank you for the opportunity to discuss with you the need of a new paradigm of economic policy. After sixty years, I feel I have been finally admitted into the College’s economics fraternity.

?St. Stephen’s economics’ graduates have made great impacts on India’s public policies. N.K. Singh, Chairman of the fifteenth Finance Commission, and Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission for two terms, were my contemporaries in College sixty years ago.

?Though I did not study Economics in college: I studied Physics. In fact, I was denied a transfer to Economics Honors from the Physics Honors course into which I had been admitted. I had requested a transfer as soon as I joined College, when I realized that studying Physics was going to be much harder work than Economics. Physics’ students had to spend every afternoon in the cold science labs of Delhi University, while economics’ students could hang around in the college café, sipping hot coffee, or lie back on the front lawns to enjoy the warm sunshine in winter.

?I was given a dressing down by Principal Raja Ram for even considering the move. Physics Honors in St. Stephen’s College was the most difficult course to be admitted to in India at that time. I had been admitted because of my national ranking in the school exams. India needed more scientists, Dr. Raja Ram said, and more hard-working young people to serve the country. He even summoned my father to put some sense into my head. Chastened, I stuck with Physics, and even went on from B.Sc. Honors to an M.Sc. in physics.

?I never became a scientist though. I joined the Tata Administrative Services. India needed to build industries to become self-reliant, which the British had prevented us from doing. Britain became the world’s greatest industrial power—producing cloth and steel and exporting it around the world. British industries took cotton from our farmers and produced cloth in Britain, which they exported back to us. To make India ‘atmanirbharat’ in industry, Jamsetiji Tata built a steel mill in Jamshedpur to convert our abundant iron ore into steel. He overcame great opposition from the British government.

?By joining Tata’s, I would serve the country the Tata directors told me. I gave up my ambition to join the IAS or IFS to serve the country. Instead, I plunged into the hard work of building and running factories in India, producing steel, and trucks and buses. Made in India, by Indians, for India and the world.?

?Some fundamentals of economics and planning

Though I did not study economics in College I had many friends who were. They recounted some famous one-liners they were taught in Economics 101.

?Prof. Ghosh, who taught economic policy, would begin his class on India’s five-year plans by profoundly telling the students: “A five-year plan is a plan for five years”. He would even make them repeat it.

?The class to explain what “money” is, which is an important subject in economics, would begin with the professor—I forget whether it was Prof. Balbir Singh or Prof. Ghosh again—holding up a ten rupee note and reading from it. “I promise to pay the bearer the sum of ten rupees”, with the signature of the Governor and seal of the Reserve Bank of India.

?It is reassuring to know that if I have a ten rupee note, I can get ten one-rupee notes. But this does not explain the real value of money. What can I get with a one rupee note? When I was in school, I was happy with one rupee a week as pocket money. What will I get for a rupee now?

?Though I was denied the opportunity to learn the theories of economics and economic planning, I did learn the realities of economics and management by working in industry and business for fifty years.

?When I was invited by the Prime Minister, Dr. Manmohan Singh, to serve as a Member of India’s Planning Commission in 2009, I told him that I was not an economist. He said that was why he wanted me to join the Planning Commission. Fresh thinking about economic planning was required to make India’s growth more inclusive, he said.

?There is a growing movement within the economics fraternity globally to rethink the fundamentals of economics science. I have become involved with it.

?I am delighted to share my thoughts at my alma mater today on three subjects:

?The process of public policy

The role of money in the economy, and in the governance of society

And, the value of life-long learning

?First, Public Policy.

Dr. Manmohan Singh gave me a special assignment when he appointed me a Member of the Planning Commission. Which was to suggest how the Commission could be reformed to facilitate more inclusive and environmentally sustainable growth.

?The Indian economy was growing fast since the year 2000. In fact, it was the fastest growing large economy in the world, behind only China. Though growth was high, joblessness was increasing. Incomes of people at the bottom were languishing while India was producing more billionaires. Pollution was rising. The soil was degrading. And water was becoming scarce.

?At the same time, citizens were complaining more loudly that the government did not understand their needs. It was merely making “plans which were for five years”, as Dr. Ghosh said. The plans were ineffective, and the Planning Commission must be reformed the Prime Minister said.

?The problem that policy makers all over the world must solve is: “How on Earth can we live together harmoniously, and also allow animals, plants, and rivers to live on, and thus sustain our lives and the lives of our grandchildren?” ?

?To answer this existential question, the science of economics must evolve. While economists worry about the growth of GDP, climate change is affecting everybody. Problems of unemployment and inadequate incomes are affecting people everywhere, even in rich countries.

?Fundamentals of economics

Two fundamental changes are required in the foundations of economics science.

?Firstly, the economy must be recoupled with society. The present paradigm of economics is that society must be reformed, and the informal converted into the formal, to enable the economy to grow. Instead, the science of economics must be reformed, and change its form, to improve the well-being of society.

?Secondly, economists, and all scientists, must be good systems thinkers, not merely specialists in silos. The health of the human body cannot be improved by keeping only the heart healthy. The liver, the brain, and all parts of the body must be healthy too. A specialist prescribing strong medicines to improve the condition of the heart can harm the liver and kidneys. Patients must then rush off to other specialists to treat their livers and kidneys. Their overall health worsens, and they must spend a lot of money for their treatments.

?Similarly, economists must work in harmony with environmental scientists, public health experts, and other specialists. Like the proverbial blind men around the elephant, experts must listen to each other. So that all of them understand the shape of the elephant before any of them pokes it in the wrong place and makes it angry.

?Not listening

What I learned in the Planning Commission is that the economists and experts in the Planning Commission were not listening to each other. And none of them was really listening to common citizens. Experts believe they know what is best for the people. They make plans, from their ivory towers, top-down. Experts look down upon common people. People are just numbers in economists’ models. The plans are not connected with ground realities. Thus, plans and policies do not improve the well-being of the people. In fact, they often cause harm. No wonder, people around the world are losing trust in their governments.

?Experts in silos talk down to the people. They don’t listen to experts in other silos around them. And none of them listens to the people below.

?Systems thinkers must be good listeners. The essence of good public policy making is systems thinking. And listening is essential to understand the whole system. And for winning the trust of the people too.

?Students in schools and colleges are not taught how to listen. Instead, they are taught how to convince others, by marshalling data and constructing arguments to win debates. In fact, students of economics in St. Stephen’s were the best debaters in the university, and probably still are.

?Prizes are given in schools and colleges to the best speakers and best debaters. There are no prizes for the best listeners. There should be.

?Money and measurement

From the need for a paradigm shift in the process of public policy—specifically, the need for more systems thinking and deep listening, I turn to the necessity of a paradigm shift in Economics science.

?Natural scientists describe the flows of materials and energy in the natural world in their models and mathematical equations. They have no need to adopt money as a measure of the values of the natural materials and energies represented in their equations.

?Anthropologists and historians describe structures of relationships in societies and changes in them. They do not use money as a measure of the value of the relationships and the benefits of changes in them.

?Economists also model the natural world. However, in their models, the natural world is a provider of resources for the economy. Economists use money as the measure of the values of natural resources in their models. Economists also ascribe money values to exchanges between human beings in society to make their transactions fit into their mathematical models of an economy.

?In an economist’s model money is required to measure and map the natural and social world. And, in the economy, money can buy anything.

?The value of money

The adoption of money as a measure of value enables nature and human beings to be turned into commodities which are tradeable with money prices attached to them. Land becomes a commodity which can be bought and banked as a financial asset. Living trees become commodities, their value determined by the amount of timber they will yield. Human labor becomes a commodity with a price to it in a labor market. Knowledge too is converted into property with a money value attached to it so that it can be traded amongst those who have money to buy it.

?Every science needs some standards of measurement to enable whatever it is studying to be represented in mathematical equations.

?Physicists must have universal standards of lengths and weights for measuring material phenomena. They have adopted the meter for length, and a kilogram for weight. The meter is represented by the distance between two marks on an iron bar kept in Paris. The standard kilogram is defined as the mass of a particular cylinder made of platinum-iridium kept at the International Bureau of Weights and Measures.

?What is the universal standard of the money measure?

?Let us look at the ten rupee note again. It says that the central bank of India guarantees that a person who has a ten-rupee note will get ten one-rupee notes or coins in exchange. What then is the worth of a rupee? How much real stuff—food, clothing, and shelter—can a rupee buy? A rupee note has no value in itself. Digitized money has even less reality.

?There isn’t any universal and unchanging standard to measure the worth of money, like the meter rod and cylinder for lengths and weights. The gold standard for backing money has been given up. Instead, the US dollar has become the universal currency for measuring the worth of other currencies including the rupee. Who fixes the value of the US dollar? It is the US federal bank.

?Monetary value, not real value

Money, though abstract and variable, has been adopted as the measure of the value of whatever is exchanged in transactions in an economy. The worth of countries, companies, and even human beings is measured in money terms.

?India is striving to increase its GDP so that it can move up international rankings of countries.

?The worth of companies is measured by their financial valuations in stock markets. The real value to society of what the companies produce does not matter: it could be tobacco products or arms and ammunition that kill humans, or medicines to improve their health.

?Even human beings are ranked by how much money they have: millions or billions of dollars. Those who have the most are admired most. The worth of a human life to society is measured by how much money that individual may earn in her life. Thus, the compensation payable by Union Carbide for the loss of Indian lives in the Bhopal gas tragedy was determined by US courts to be an order of magnitude less than levels of monetary compensations that are paid by American companies for American lives lost in industrial accidents in the US. Is an Indian human being much lesser than an American human being?

?Economists make sense of the world in the language of money. Whereas citizens value many things which money cannot, and should not buy, such as their dignity and their freedom.

?Governance of business and societies

Nobel Laureate economist Milton Friedman, who influenced the policies of Margaret Thatcher and Ronald Reagan and set economics into a neo-liberal course, declared that the purpose of a business is to produce financial value for shareholders and the “business of business must be only business”. The condition of society and the environment are externalities to business, and they are not the business of the corporation’s board.

?Reagan declared further that government is not the solution to a society’s problems, and in fact government is the problem he said. Therefore, government should get out of the way to make it easier for businesses to make profits.

?“Minimum government, maximum governance” has become a mantra. However, with both government and business withdrawing from the care of society and the environment, environmental degradation and social inequities have become even worse with neo-liberal economics and financial globalization in the last thirty years. ?

?Climate scientists warn that we cannot carry on the way we are. Global governance must be reset. And the science of economics needs a new paradigm.

Changing the paradigm

Physics underwent a paradigm shift in the last century. Quantum physics replaced Newtonian mechanics as the model of physical reality. A high point in my education was to listen to a lecture by Noble Laureate Nils Bohr, a father of of quantum physics, in Delhi University sixty years ago.

?In Newtonian physics everything is predictable. The world is a machine, and engineers know which levers to pull to make the machine more efficient. Quantum mechanics and Einstein’s theories of relativity proved that human minds can never describe reality with certainty. Light can be either a particle or a wave. One can be certain about the position of an object or its movement, never both. How one sees the positions of others depends on where one is and the relative motions of observer and observed. Heisenberg’s principle of uncertainty, it was discovered, is a universal principle.

?Economists consider the economy and society a machine, with inputs and outputs within it. Economic policymakers look for levers within the machine to pull to make the machine more efficient and to increase its outputs.

?This model is fundamentally flawed. Human society is not a mechanical construct. Human beings have emotions and aspirations. They can produce technological innovations, and they can create new ways of working together. Mathematical models of the economy cannot anticipate these innovations. Therefore, economists can never predict the future accurately. ??

?Money shapes economic policy

For understanding the forces that are shaping the future, which are outside economists’ models, they must learn to listen to human aspirations and concerns. Economists wedded to their mathematical models are unable do this.

?Money is heard loudly in economic policy; common people are not.

?Milton Friedman’s contemporary, Albert Hirschman, pointed out that Milton Friedman had expressed his difficulty in accepting the notion that people should desire to express their views to make themselves heard. Friedman would much rather they resorted to ‘efficient market mechanisms’ than ‘cumbrous political channels’ and use their money rather than their mouths to make their opinions known.

?Money is precise, Friedman said. If people don’t like something, they need not buy it. No need to discuss what they like and what they do not. Thus, voices of those with the most money determine the rules of the market, within nations and in global trade too.

?What about people who have very little money, or no money at all. They carry no weight in markets. How will they be heard, Hirschman asked?

?A paradigm shift is required in economics science. The language of economics must change. Economists must step out of their echo chambers. They must learn the language of humans who speak with feelings and emotions; not always rationally, nor precisely. Economists must learn to listen to the cumbersome political channels through which people speak about their perceptions of injustice in society. They must listen, with respect, to citizens’ suggestions about better solutions for their world.

?A summary

I will now summarize the main ideas I have discussed so far.

?Humanity has an existential problem this century. Many systemic problems must be solved simultaneously. These are enumerated in the UN’s 17 Sustainable Development Goals which all countries have signed up for. They range from environmental issues to societal issues, and economic issues. The 17th goal says a new way for all stakeholders to work together is essential to solve the inter-connected problems of all goals.

?Albert Einstein said that pushing harder to solve problems with the same type of thinking that has caused them is madness.

?Environmental degradation and increasing inequities within countries, and amongst countries, have been aggravated by the dominant paradigm of materialistic economic growth. This paradigm must change.

?Systems Thinking

The European Enlightenment since the 17th century has advanced scientific knowledge. Knowledge is advancing in many fields with experts who know more and more about less and less. While science is advancing it is also fragmenting.

?Now the specialists must learn together and think together for solving the interconnected problems in the SDGs. All streams of knowledge must inform each other. Systems thinking must be learned by students in all disciplines.

?Deep Listening

To understand how the whole system works, experts must listen to people not like themselves. They must listen to experts in other disciplines. Those on top, in their ivory towers of knowledge, and on pedestals of power above the people, must listen to the people below. Only then will humanity find, and be able to implement, the systemic changes that are necessary to save the world.

?The economy must be recoupled with society. Human society is not a machine that economist sitting outside it can design, as engineers of physical machines do. Economists are situated within the system they wish to change. Their minds are formed by the system around them. They must have more humility and listen to others. Only then will they learn what the system is really, which their mathematical representations of it cannot explain.?

?I did not learn economics in college. I am learning it now, sixty years later. And I am relishing it.

?I cannot say what the new paradigm of economics will be. It will evolve and you young students of economics must be instrumental in its evolution.

?Epistemic questions and ethical questions

I have posed some questions about the present paradigm of economics.

?Epistemic questions about the methods of economics: matters of measurement, mathematics, and money. Money is the tool for measurement in economics and it has become central in the governance of modern economies.

?I have posed some ethical questions about the role money is playing in the global economy, and about the distortion of human values in economic valuations.

?The purpose of policy

My ambition when I was in college was to serve the country, to make it a good country for all Indians. Gandhiji’s talisman to policy makers continues to inspire me. Gandhiji asked all policy makers and planners to think about how their policies and plans will improve the well-being of the poorest person they see.

?I hope you, students of economics in St. Stephens’ College, who must be amongst the very brightest of young Indians to have been admitted here, will be curious about the world around you. I hope you have the ambition to make the world better for everyone.

?Do remember Gandhiji’s talisman. An economy which is only good for rich and powerful people is not a good economy, no matter how large it is.

?Life-long learning

The new paradigm of an economy will not emerge in an instant. It will evolve through deep dialogues amongst people who care and who are searching for it. I hope St. Stephens College will be a nucleus for these dialogues.

?Students, and teachers of economics too, should venture outside the classroom to understand the real economy.

?Read well beyond the texts you are taught.

?Read the history of economics going back thousands of years to Indian, Chinese, and Greek philosophers. Follow the exciting discussions amongst modern economists—Marianna Mazucatto, Dani Rodrik, and others. Study the work of J.C.Kumurappa, the economist who supported Mahatma Gandhi, for insights into the designs of socio-economic enterprises that are environmentally friendly and socially just.?

?Step outside the present ideologies in economics. Study how modern trade systems evolved along with European colonization. Read the defenses of capitalism and free trade, as well as the critiques of neo-liberal capitalism.

?Read the debates amongst modern scientists and philosophers about the structures of modern science and its limits. The philosopher Henri Bergson, and the mathematician Kurt Goedel’s debates with Einstein about Einstein’s concepts of time, and about the incompleteness of mathematics as a tool for understanding reality.??

Read beyond hard core economics. Study the history of social, political, and economic institutions. And explore the emerging science of evolutionary systems, which is very relevant to shape a new paradigm for economics.

Living is learning. When learning stops, the mind decays, and life becomes limp. Be curious always. The title of Gandhiji’s autobiography is “The Story of My Experiments with Truth”.

?Continue to ask questions and to seek answers. Be life-long learners. As Gandhiji was. It will keep your minds young even while your bodies age, as they will.

?Thank you again for inviting me to share my thoughts with you about a new paradigm for economic policy. ?Let’s learn together.

Text of Lecture by Arun Maira at National Economics Festival organized by St. Stephen’s College Economics Society on 11th February 2023