ISSN: 1391 - 0531
Sunday, March 11, 2007
Vol. 41 - No 41
Financial Times  

Economics – A layman’s lament

By Dr U. Pethiyagoda

A cynic, whose name I cannot immediately recall, held that “Economics is steadily becoming the art of making commonsense difficult to understand”. However, one of the definitions of economics in the Oxford Dictionary is “the practical science of the production and distribution of wealth.” Herein lies a fundamental difference going well beyond mere semantics. Are we dealing with an art (usually juxtaposed with craft!) or a science? One of the cardinal features of science is that results are predictable. This presupposes an ability to control all variables except that which one seeks to study.

A problem that complicates economics is that there is always an element of human behaviour involved. This could often be characterized by irrational or idiosyncratic responses to a given set of circumstances – usually very complex.

This poses two difficult problems. One is that since identical conditions cannot be repeated in the sphere of economics, predictability is not attainable. Since the experimental objects (human beings) behave erratically (Murphy’s Law), quantification is generally hopeless. Of course, one would say, there is the “average man”.

This is again of limited value because this is a mythical creature that at best represents the men of a widely disparate set of responses.

So let us face the fact that Economics is indeed classifiable as an art like painting, music or politics. Responses and reactions are simply not quantifiable. This is why all of these activities are so engaging. Unfortunately, there is some presumption of “respectability” attached to Science.

Thus, although many economists are personally very likeable and reasonable chaps, they are irked of their specialty being denied the “status” of a science. Now as long as this remains as a harmless diversion and subject of debate, there is no great harm done.

The troubling problem is that in trying to achieve” respectability” an attempt is apparently made to quantity the unquantifiable.
This necessitates the coining of high sounding terms with some pretence of exactitude but in reality, not much better than vaguely informed guesses. Maybe, I am wrong but a layman may be forgiven a modicum of ignorance.

Developing countries and their “policy makers” (incidentally the writer is of the view that “policy” is such a vacuous and all encompassing term that its use should preferably be banned by law!) rely fervently and religiously on “Economic Specialists”.

Incidentally, the much admired Dr Mahathir Mohamed of Malaysia is reported to have once plaintively pleaded “will someone please give me a one-handed economist? Whenever I present a problem my experts tell me “…. On the one hand, you may …….but on the other ……..!” What use is this to me?”

Economists can be dangerously misleading, especially in a cash-strapped developing country economy-particularly where the state is an important player in economic activity.

The danger becomes most felt when “Economic Analyses” are attempted for proposed state investment projects. An important guideline in deciding on investments is a figure called the “Rate of Return”. In the field of agriculture for instance, this figure can be altered simply by assuming yields, unit prices and costs and returns within plausible limits. In fact, some cynical friends boast “Tell me the Rate of Return you want and I will provide it.” This is huge bonanza for those wishing to promote a project for “other considerations”, if you see what I mean!

Likewise, I am perplexed by the frequency with which such terms as “growth”, “inflation”, “GNP,”GDP”, “per capita income” and so on are freely bandied around with no indication on how such figures are derived and an undeserved implication that they are precise.

For example, such estimates are sometimes even given to the second place of decimals! We were taught in secondary school that the use of decimals is justified only to one place short of what the available data will permit us to calculate. One is led to doubt whether such an eminently sensible rule is regularly observed. A full newspaper page devoted to an exposition of these crucially important indices in a development context would be newsprint well expended and huge achievement in public enlightenment and education!

It is to be suspected that many who trot out these terms glibly have not the slightest idea of how they are derived or how they could be legitimately used. I for one am ignorant and maybe therefore, unconvinced of their utility! For example, could some expert explain what impact say the increase of public servants’ salaries, increased defense expenditure, tamasha expenses, imports of luxury items, thefts of public property, repair of terrorist damages to public resources and other unproductive publicly financed extravagances have on “growth”, GDP and therefore per capita incomes? One hopes that there is some inbuilt safeguard to exclude such “unproductive” outlays in the calculations.

Why also is it that the bureaucracy glibly talks of “foreign assistance” or “foreign aid” without troubling to segregate or separate “grants” from “loans”? The implications of this distinction are clearly too vast to be buried in obfuscation! If users of this obscure terminology do so merely to impress their superior knowledge on us lesser mortals, they are merely being mischievous. If they do so to obscure or mislead, they are simply being dishonest.

In this context, we should remind ourselves that foreign loans have to be paid back in foreign (hard) currency.

It is not difficult to see that in a scenario of dwindling prices for our commodity exports and a steadily devaluing currency, the problem increases with time. In this context, the much touted “grace period” for loan repayments is more accurately a “curse period”! Consider the “attractive” interest terms often boasted about.

If one’s currency meanwhile devalues 110% devaluation superimposed on a generous “half per cent interest” seems to look more like “ten and a half percent”! Or is there some deficiency in logic here?

Many who freely use lofty economic terms patently do so without the foggiest idea of how these figures are derived, how good is the raw data, what is their precision, and how are they meant to be used.

It may be salutary to seek public enlightenment from frequent users. Otherwise, it may be akin to enjoying a delectable dish without the benefit of knowing the nature and quality of the ingredients!

No sensible person could fairly be expected to regard as gospel, figures about whose derivation he has no clear idea, the level of accuracy determines utility. Few would buy the idea that “any figure is better than none” or that frequency or universality of use necessarily bestows legitimacy. No amount of sophisticated manipulation transforms bad data into good! Goebbels established the doctrine that any lie repeated often enough, eventually gets accepted as truth. To allow any fiction to guide action is dangerous.

When a multitude of problems confront our nation- poverty, crime, urban crowding, communicable diseases, narcotic use, unemployment, collapse of infrastructure, social inequalities and many more- it is tempting to look for a “common cause”.

The nearest to my find is over-population. Any chicken farmer or livestock husbandry man is guided by the concept of “carrying capacity”. How is it that shackles come to be raised when similar considerations are applied to human populations? It is a pity that even reasoned arguments are not met by hard facts but most often by emotional outbursts or suspicions of sinister motives.

It is a significant disappointment that the issue of population seldom enters the national development debate. Consider our situation. A population of about 20 million is said to be increasing by 1.3% annually.

This suggests a current increase of 260,000 babies per year. On a daily basis, this amounts to a little over 700 extras to feed, school, employ, transport, house and otherwise provide for. It has also to be remembered that this number will continue to increase as will also the people’s expectations.

Frighteningly also, when today’s needs are met, we are faced with the need to cater in like manner for tomorrows’ births! Little wonder that we feel congested, traffic unbearable, schools crowded, youth unemployed.

Thefts and violence on the increase and other signs of bursting at the seams! The 1920’s and 30’s are nostalgically recalled as times of stability, security, decency and leisured life styles.

Were we then close to an ideal “carrying capacity?” Our demographers and economists could fruitfully get together to assess the implications of population growth, the expansion needed to sustain such growth and the “policies” (that ridiculous word gain!) necessary to be considered..

I am convinced that I am not the only one in a state of puzzlement and concerned at the frequency with which some of the parameters mentioned are used.

Their central importance makes it imperative that everyone (and certainly those addicted to their use!) should know what is being talked about.

I repeat that even a whole newspaper page devoted to various experts’ views on these numbers and their interpretation will be a highly useful exercise. Who will take up the challenge?

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