It is not real economics

Abstract from Business Line Editorial  

A great deal has been thought, spoken and written about the calculation error made by Carmen Reinhart and Kenneth Rogoff. The two Harvard University economists, after analysing time series data from scores of countries, “showed”, as it were, that if national debt exceeded 90 per cent of GDP, economic growth slowed down. Ergo, they suggested, countries should strive to not cross this limit. Given their stature in the world of empirical economics, for four years this became the Holy Grail, at least for fiscal conservatives. Then, a few weeks ago, it turned out that the two Harvard economists had got their numbers wrong. But does that also mean they got their economics wrong? Instead of debating this question, the world of economists, both genuine and charlatans, has been having a go at the duo, forgetting that when huge amounts of data are crunched by research assistants in Excel sheets, this sort of error can creep in. And that this was an academic paper — if governments sought solace in it, it was not the economists’ fault. Reinhart and Rogoff have said sorry, but that, surely, is not that. The 90 per cent limit suggested by Reinhart and Rogoff, raises a question that has dogged mankind for the last 3,000 years, namely, of causality. Post hoc ergo propter hoc (after this therefore because of this) is the commonest error everyone makes and it seems Reinhart and Rogoff have not been immune to it. More is the pity.

The episode should serve to initiate a debate on at least three things that seem to be wrong with economics: One, the virtual disappearance of basic theory from the toolkit available to economists; two, its overwhelming substitution by mindless empiricism merely because data sets are available; and, three, the absence of context in both. The time has come to strike a balance between the three. Just how this can be done should engage the minds of economists. A starting point might be to shed current fashions even if it means annoying departmental seniors and to move out of the templates of thought established over the last 30 years.

Indian economists need to do this even more than others because the current crop, trained mostly in the US, has forgotten that one size doesn’t fit all and that economics operates in a domestic socio-political and global economic context that can neither be derided nor dismissed. Integrating this context in theory and data should set a fairly crowded academic agenda. This point was brought in a forceful but characteristically gentle fashion by Reserve Bank Governor D Subbarao, at the recent IMF conference on re-thinking macroeconomics. He touched on issues that only practitioners would know about. But each of the numerous points made by him, if researched diligently, should lead to insights that could inform and shape public policy in the Indian context.