On April 16th, 2009, The Businessline carried my letter to TCA Srinivasa Raghavan's opinion on 'Why Economics is not Physics'. The letter was however shortened. I am reproducing my original reply below.
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There is a major difference between Mathematical Techniques and Mathematics. I hope you will appreciate the idea that Mathematics is not about calculations alone. As a matter of fact, calculations are a means to comprehend the underlying logic and rationale mathematics embodies. So techniques are not science, they are just a medium through which science can express itself and what every individual comprehends out of it is completely dependent on the capabilities of an Individual’s mind.
Mathematics is also only indicative. The accuracy depends on the number of dimensions taken into consideration. Let me touch Pythagoras Theorem you have used as an example. The theorem holds good only in 2 dimensions. It is not tough to understand that there is no triangle in three dimensions. Of course you can have nonzero x-y-z values for all the three vertices, but a triangle is still a plane and a stand alone plane is only two dimensional. Unless we fix the number of dimensions the accuracy can always be disputed. But this cannot be considered as failure of Mathematics/Pythagoras theorem. Even in science our rules are based on dimensions. Say gravitation and there are principles of physics that hold true in an environment governed by gravitation. I would like to bring another example. A recent analysis suggests that the largest structures in the universe are about 200 million light-years in size. But scientists at the Enrico Fermi center in Rome argue that largest structures discovered so far are limited only by the size of the galaxy surveys that found them. Still larger structures might stretch beyond the scope of the surveys. How ridiculous it would be to say that there cannot be a survey beyond our scope? It just highlights our own limitation and incapability.
Similarly in Economics, the social system is too complex to pin down the dimensions and offer accurate measurements. This should not mean that Economics is not physics; it is just that our own understanding has not advanced enough to find these social dimensions where we can successfully apply rules and obtain results. In no way this means that society is dimensionless. It only means that right now, Economics (social science) is in its very nascent stage of development (the same way science or mathematics was) and is in need of its own Galileo or Newton or Einstein to be born. Hence, while there are only 10 countries that meet the Taylor’s rule and 185 sovereign nations that don’t, is it not time to say that the world is not Geocentric in Economics terms? A mistake in a rule is supposed to unearth undiscovered possibilities not discard the rule itself. Am I making sense?
Thursday, May 28, 2009
Sunday, May 17, 2009
The Brightside of American Protectionism
It seems that Barack Obama’s recent no-tax-benefit declaration has caught Asia in a hot debate. We have experts arguing for and against the idea and some have gone to the extent of saying that America will be on the losing side as a result of its own protectionist policy. The Economist magazine’s recent research report on the threat of possible mass uprisings leading to failed states as a result of deepening of the world economic crisis also cites protectionism as one of the major reasons. But is protectionism really that bad? American Protectionism, particularly in the current crisis has a brighter side to it.
The World’s Mouth
America is the world’s mouth. It has this interesting capacity to gobble up everything the world can produce. A typical American buys 53 times as many products as someone from China, according to Sierra Club; one American's consumption of resources is equal to that of 35 Indians[1]. This rampant nature of American consumerism has been the result of a very high income level the Americans enjoyed over a long period of time and also because of their belief in borrowing (read debts). It is exactly this capacity of America to consume led to an economic boom in several developing countries including India, because there was this perennial buyer for all the products the world could possible produce: oil, grains, software and just about anything. But the latest credit crunch reversed all that not only because debt levels increased but also because the income levels of Americans stagnated. In simple words, the ratio between debt levels and income levels became too big for the country to afford.
Protectionist Policy
So what is Obama trying to do? America suffers from depleted wealth today and Obama’s protectionist policies are only trying to restore wealth back to the nation where it should have belonged in the first place. The tax restructuring and incentives will only bring back more money to America that is rightfully America’s and also lead to an increase in the income levels of the Americans. It is well known that the primary objective of a protectionist approach is to generate employment within the nation and thereby increase income levels, a qualified swadeshi approach. But this closed door approach will not last long because the American spirit is entrepreneurial and profit seeking. Once order is restored, the country will open doors for growth which will again trigger the let-us-gobble-everything spirit of the Americans.
As a matter of fact, Americans have already started buying, cautiously though[2]. There are credit cards still being distributed in America, reduced however. As long as the American attitude to buy is alive, protectionism will only strengthen their economy so they could buy more and those who can sell can rejoice. So American Protectionism is good because it is temporary. Though it is easy to conclude that this worst downturn after the great depression will change spending habits, America’s protectionism will exactly nullify that because the attempt is to increase income levels and keep the economy moving.
Americans by their very nature are not used to the style of saving of the Oriental East. Of course, the baby boomers in US are saving more than their parents ever did, but they are not going to become thrifty. As confidence is restored in the system, they will start spending again and consumer spending has always been on the rise in America since 1959[3]. American spending has always been good for the world economies, especially the developing countries in Asia and a perennial buyer will again emerge from the ashes. It just needs a little time and patience.
The real threat
The real threat is in Obama’s attempt to inculcate an attitude for saving in Americans. His approach to do away with the boom-bust cycle the world has been going through for a long time is really a huge threat, because to establish a spike less graph of prosperity, America needs to reduce consumption. America needs to mimic the East. The very definition of wealth and prosperity should start bordering on spirituality. But isn’t a reduction in consumption good for the world? But the real question is, “Can Americans achieve that? Is the victory of Barack Obama and the ‘Yes We Can’ slogan the beginning of that change?” We will have to wait and see and while we are waiting it is time to invoke the pan-Asian spirit.
American protectionism can only be a threat if all the other countries follow suit. If every country follows a closed door approach and promotes isolated existence, then it will not augur well for the future. A failure of international cooperation means a failure of International Organizations. Poor African nations that are entirely dependent on UN aid may be wiped off the face of earth and we will have more countries falling prey to autocracy because international diplomacy will lose its meaning. With 35% of the world’s population already under authoritarian regimes[4] the chances of the world sliding down into a regressive path is higher.
Countries may choose to build barriers for American export, but they should remain open to American investment and allow a part of profits to be taken back to America. American investments may reduce as a result of the no-tax-benefit, but definitely not to the extent of entirely disappearing. India and China should lead a pan-Asian cooperation and promote free trade within the region. Unfortunately, given the unrest in south Asia, this is highly unlikely. So the real threats to the conventional definition of ‘economic growth’ are a complete reversal of American consumerism and lack of international cooperation, by itself not American Protectionism.
Citations:
[1]http://edition.cnn.com/2007/BUSINESS/12/23/eco.shopping/index.html
[2]Off their trolleys – http://www.economist.com/
[3]The Rise in U.S. Household Indebtedness: Causes and Consequences - Karen E. Dynan and Donald L. Kohn – http://www.federalreserve.gov/
[4]The Economist Intelligence Unit’s Index of Democracy 2008
The World’s Mouth
America is the world’s mouth. It has this interesting capacity to gobble up everything the world can produce. A typical American buys 53 times as many products as someone from China, according to Sierra Club; one American's consumption of resources is equal to that of 35 Indians[1]. This rampant nature of American consumerism has been the result of a very high income level the Americans enjoyed over a long period of time and also because of their belief in borrowing (read debts). It is exactly this capacity of America to consume led to an economic boom in several developing countries including India, because there was this perennial buyer for all the products the world could possible produce: oil, grains, software and just about anything. But the latest credit crunch reversed all that not only because debt levels increased but also because the income levels of Americans stagnated. In simple words, the ratio between debt levels and income levels became too big for the country to afford.
Protectionist Policy
So what is Obama trying to do? America suffers from depleted wealth today and Obama’s protectionist policies are only trying to restore wealth back to the nation where it should have belonged in the first place. The tax restructuring and incentives will only bring back more money to America that is rightfully America’s and also lead to an increase in the income levels of the Americans. It is well known that the primary objective of a protectionist approach is to generate employment within the nation and thereby increase income levels, a qualified swadeshi approach. But this closed door approach will not last long because the American spirit is entrepreneurial and profit seeking. Once order is restored, the country will open doors for growth which will again trigger the let-us-gobble-everything spirit of the Americans.
As a matter of fact, Americans have already started buying, cautiously though[2]. There are credit cards still being distributed in America, reduced however. As long as the American attitude to buy is alive, protectionism will only strengthen their economy so they could buy more and those who can sell can rejoice. So American Protectionism is good because it is temporary. Though it is easy to conclude that this worst downturn after the great depression will change spending habits, America’s protectionism will exactly nullify that because the attempt is to increase income levels and keep the economy moving.
Americans by their very nature are not used to the style of saving of the Oriental East. Of course, the baby boomers in US are saving more than their parents ever did, but they are not going to become thrifty. As confidence is restored in the system, they will start spending again and consumer spending has always been on the rise in America since 1959[3]. American spending has always been good for the world economies, especially the developing countries in Asia and a perennial buyer will again emerge from the ashes. It just needs a little time and patience.
The real threat
The real threat is in Obama’s attempt to inculcate an attitude for saving in Americans. His approach to do away with the boom-bust cycle the world has been going through for a long time is really a huge threat, because to establish a spike less graph of prosperity, America needs to reduce consumption. America needs to mimic the East. The very definition of wealth and prosperity should start bordering on spirituality. But isn’t a reduction in consumption good for the world? But the real question is, “Can Americans achieve that? Is the victory of Barack Obama and the ‘Yes We Can’ slogan the beginning of that change?” We will have to wait and see and while we are waiting it is time to invoke the pan-Asian spirit.
American protectionism can only be a threat if all the other countries follow suit. If every country follows a closed door approach and promotes isolated existence, then it will not augur well for the future. A failure of international cooperation means a failure of International Organizations. Poor African nations that are entirely dependent on UN aid may be wiped off the face of earth and we will have more countries falling prey to autocracy because international diplomacy will lose its meaning. With 35% of the world’s population already under authoritarian regimes[4] the chances of the world sliding down into a regressive path is higher.
Countries may choose to build barriers for American export, but they should remain open to American investment and allow a part of profits to be taken back to America. American investments may reduce as a result of the no-tax-benefit, but definitely not to the extent of entirely disappearing. India and China should lead a pan-Asian cooperation and promote free trade within the region. Unfortunately, given the unrest in south Asia, this is highly unlikely. So the real threats to the conventional definition of ‘economic growth’ are a complete reversal of American consumerism and lack of international cooperation, by itself not American Protectionism.
Citations:
[1]http://edition.cnn.com/2007/BUSINESS/12/23/eco.shopping/index.html
[2]Off their trolleys – http://www.economist.com/
[3]The Rise in U.S. Household Indebtedness: Causes and Consequences - Karen E. Dynan and Donald L. Kohn – http://www.federalreserve.gov/
[4]The Economist Intelligence Unit’s Index of Democracy 2008
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