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Why the standard economist may be the emperor in new clothes

D. MURALI

Why too much credence to a version of economics that is often ridiculously at odds with our simple powers of observation, asks Nobel Laureate George A. Akerlof in Explorations in Pragmatic Economics. In Empire of Knowledge, Vinay Lal talks about the culture and plurality of the global economy, and critically examines the role of the West. Right reads to keep this weekend busy, says D. MURALI.

Enemy's enemy can well be your friend. Especially true, that is, when we are talking about economists and their craft. "If everyone assumes that the emperor must wear clothes, then they will fail to see it if he does not," writes Nobel Laureate George A. Akerlof in Explorations in Pragmatic Economics, from Oxford University Press (www.outp.com).

Seeing things with childlike simplicity, Akerlof rues that we have given too much credence to "a version of economics that is sometimes insightful, but also all too often ridiculously at odds with our simple powers of observation." He concedes that the papers in the book `deviate from the standard for economics in many circles today' — the economics that is characterised by `perfect competition, profit maximising by firms, and maximisation by consumers with only economic concerns.'

The book opens with the famed essay on the market for `lemons' that is more than three decades old. There, Akerlof explains, using the example of used car sales, how sellers have an incentive to market poor quality merchandise or `lemons' in situations where buyers use some market statistic to judge the quality of prospective purchases. Interestingly, the author applies the logic to topics as varied as insurance and employment, honesty and credit. For instance, as in the case of cars, "the average medical condition of insurance applicants deteriorates as the price level rises," points out Akerlof when exploring for an answer to why people over 65 find it difficult to buy medical insurance.

Costs of dishonesty

"Dishonest dealings tend to drive honest dealings out of the market," he observes in a section that studies the costs of dishonesty. "There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business." The cost of dishonesty, according to Akerlof, is not only the amount by which the purchaser is cheated; "the cost also must include the loss incurred from driving legitimate business out of existence." The second piece in the collection is `the economics of caste and of the rat race and other woeful tales.' Akerlof defines caste equilibrium as "a state of the economy in which caste customs are obeyed, yet no single individual, by behaving differently, can make himself better off." One of the examples he gives is of government-business groups, including military-industry, regulator-regulatee, and business-politics, `held together by a caste-outcaste structure'. Akerlof points out how, by nature, "the important operations of these groups are usually secret or too technical for unambiguous assessment."

Another example of castes is `professional groups'. How so? "The public often delegates authority to professional organisations to police their own members — the most prominent of these being bar and medical associations. In turn, the members are expected to maintain professional conduct." Akerlof reasons that, since cooperation with others in the profession is a necessary part of the job, the `outcasting mechanism' as used by government-business cliques "enforces a professional unanimity that gives the profession more than its fair share of economic power." Not a message that self-regulatory autonomous bodies such as the Institute of Chartered Accountants of India would like to hear.

`Scholars in psychology, sociology, political science, anthropology, and history' usually study identity as a key concept. Boldly, Akerlof "introduces identity — a person's sense of self — into economic analysis," through a paper jointly written with Rachel E. Kranton. "Identity considerations can explain the high shares of housework of wives who undertake a large share of outside work hours," notes the paper. Studying gender in the workplace, the authors say that a woman working in a `man's' job suffers a loss of utility, affecting the labour supply.

Shotgun marriage

The next paper is on `out-of-wedlock childbearing', written with Janet L. Yellen and Michael L. Katz. Even as the stiff upper lip economists would look the other way, you can read about `shotgun marriage', that is, partners marrying in the event of pregnancy. And also about how economics copulates with reproduction, as in this snatch: "There will always be an equilibrium in which women with negative pregnancy costs will also demand a promise of marriage before engaging in sexual activity... For the man it is not worthwhile to seek another relationship because he would forfeit current utility and, ultimately, do no better."

In a different chapter, titled `the economics of illusion', Akerlof observes, "It is usually assumed that individuals vote in their best interest. But this best interest may be neither obvious nor pleasant to contemplate. Unless the innate desire to believe the truth is strong or those who know the truth are persuasive, the desire and ability for self-delusion can lead to poor social decisions." He explains how, in matters of public policy debate, simple undeniable facts alone do not determine what to believe. In such situations where margin of doubt prevails, "individuals have freedom to choose what to believe." Also, "in such an environment, there is freedom for people to choose beliefs which make them feel good about themselves."

Don't miss reading the chapters on `procrastination and obedience', `looting', `jobs as dam sites', and the rest, to make the pragmatic shift. Because, "As Bayesians we should simultaneously use informal sources, detailed non-statistcial studies, and statistical observations," as Akerlof urges, rather than pejoratively dismiss `close observations' as anecdote.

Violence of `development'

If you would like to continue on that note of dissent, try browsing through Vinay Lal's Empire of Knowledge, from Vistaar (www.indiasage.com), a book on `culture and plurality in the global economy.' Dissent is condemned to oblivion, cautions Lal, unless it is couched in `the rational, civilised, constitutional, and adult-like language recognised by Western parliamentarians and social commentators.'

Chapter 1 reckons with the millennium and notes how modern culture has made a cult of time. "If modernity's encounter with time is any gauge, we have become creatures largely of sense rather than sensibility," rues Lal. "The politics of time is yet to open itself to us, but the time when we shall be let in to its secrets is not so far removed," he hopes.

A chapter titled `governance in the twenty-first century' sees the UN (United Nations) as embodying Neanderthal politics, at the heart of which lies "the exceedingly old view, which no generation has ever been able to relinquish, that might determines right." The General Assembly has been all but reduced to `a ceremonial speech-making body,' laments Lal.

"The idea of development remains the clearest example of the violence perpetrated by modern knowledge systems upon the integrity of human communities," he opines in a different chapter. For instance, the expression `colonial development' was not about the development or welfare of the colonies, but mining of them for their wealth, and extraction of taxes, explains Lal. In spatial geopolitics, the developing world has no autonomy, he'd declare bitterly. "As the lodestar shines in the West, the Orient must orient itself towards the Occident."

When discussing ecology, economy and equality, Lal insists that you can't write a history of poverty without writing about the super-rich. "There is an old saying that the poor will always be with us; but its complementary itself, namely that the rich will always be with us, is less a portion of the popular wisdom that we have inherited."Ominously, the book concludes with a chapter titled, `War without end: New categories of knowledge and terror.' In an epilogue penned on July 10, 2005, after the London blasts, Lal writes solemnly: "We have entered into a phase of brutal and unending violence. Terrorists and advocates of the war on terror are bound together on a horrifying pact. Violence has a ravenous maw. It countenances no opposition." Of continuing relevance, one may say.

Right reads to be busy with this weekend.

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