The ‘talking oneself into a recession’ nonsense

This is another nonsense peddled by those who have no knowledge of either economics or history: that talk of recession will bring about a recession. Those who do not want a recession are in a majority, likely. They are the camp followers of the central bankers who sold the trope, ‘Great Moderation for eternity’. Why cannot they talk the world economy into one endless expansion, facilitated by negative rates, MMT and nominal GDP targeting?

The ‘expert’ problem

The biggest problem with experts is not that they can be wrong but that they think they have answers for all the problems or that others think they have. Human history proves otherwise.

Read this blog post of mine from last year in which I quote from Sir Martin Rees’ ‘Final hour’ on how little scientists were able to predict the developments that were going to happen in the second half of the twentieth century, in 1937!

At best, experts and governments can ‘nudge’, if they know how and where to ‘nudge’. More often, the best outside help is not to make problems worse. That takes humility on the part of experts to accept. Admittedly, it is trickier for politicians not to act because they have been elected to act.  So, they act in wrong ways. It is because expert advice, for the most part, falls short because experts fail to factor in the law of unintended consequences and second, experts simply forget that ‘ceteris paribus’ is only a starting assumption and not a reflection of reality. 

Politicians have to find a way to be seen to be acting without causing harm and without worsening the situation. Experts need to become more rigorous and more humble as well.

This may seem like standard ‘expert bashing’ which has become fashionable and even trite. But, an expert, George Akerlof, had written himself about the ‘limitations’ of expert wisdom, inasmuch as expert wisdom is perceived as wisdom that can emanate only from hard science.

In a paper that is about 20-page long, footnote no. 8 caught my attention. So much for wisdom and rationality among economists who routinely consider themselves as experts:

Two papers—one by Brock and Durlauf (1999), the other by myself and Pascal Michaillat (Akerlof and Michaillat (2018))—show that beliefs in a scientific field will converge if its practitioners have a desire for conformity. In Brock and Durlauf, scientists continually adjust their beliefs to reduce the distance between their thinking and the beliefs of others. In Akerlof and Michaillat, evaluators of candidates for tenure are biased in favor of those with similar beliefs and also against those with different beliefs. In both cases, the beliefs converge. Furthermore, that convergence will not necessarily be to the Truth (or to best practice). On the contrary, because of Reason 1 (the role of Hardness in the scientific pecking order) and Reason 2 (its facilitation of agreement), following from the comparative statics of equilibrium in Akerlof and Michaillat, those uniform beliefs are likely to have Hardness bias in turn.

These theoretical findings of belief convergence under rather general conditions accord with Kuhn’s (2012) view that scientists base their work on commonly-held paradigms. Those paradigms do not just pertain to subject matter; they include, as well, beliefs about appropriate methodology for the respective field. [Link]

Was NDA II an economic failure?

What follows below was written on 15th May 2019, eight days before the official declaration of election results in India, to the 17th Lok Sabha and four days before the exit polls. I wrote it for my own clarity. But, it might also turn out to be a response to this long piece by Maitreesh Ghatak and two co-authors. It is a different matter altogether that one must write a separate rebuttal for some of the ‘strange’ figures that the note features. I shall do so separately. This was written and published in March 2019. It did not swing the elections in favour of the Congress or the UPA or whatever else.

One must note, here, that he and two other co-authors tried to pass off, before the May 2014 elections, the UPA II economic record as a good one. That did not swing the elections in favour of UPA and the Congress.

Not only did the Congress Party lose the elections on both occasions, he lost quite a bit of his personal credibility too, in my view.

As you read the file below, pl. remember that it was written on 15th May 2019. You are welcome to quote from it. But, will be grateful for attribution.

VAN_Was the NDA II government an economic failure_15052019

Non-linearity and Asymmetry

In our Q&A, Lacy and Bill discussed how linear economic models are just not working and nonlinear  analysis is so critical. A lot of practical people are turned off by this, thinking it shouldn’t be so complex. But, these same people would never tell a physicist to avoid nonlinear concepts. [Link]

This is unsurprising to yours truly. I had written copiously on non-linearities and asymmetries in economics because human responses are anything but symmetric. Loss aversion is a classic example of asymmetry. The values we attach to what we already possess and what we crave for are asymmetric.

Relationships between economic variables are non-linear because economic agents (i.e., ordinary people) are asymmetric. It is as simple as that.

The two theorems of Lacy Hunt

First, federal debt acceleration leads to lower, not higher interest rates. This is because the economic stimulus effectiveness ends quickly, but the debt overhang causes weaker business conditions that reduce loan demand.

Similarly, monetary easing eventually leads to lower, not higher interest rates. Debt productivity falls, making the velocity of money decline so monetary policy becomes asymmetric and inefficient. [Link]

He has charts to show that. Notice that they are all ‘hard currency’ countries. Therein lies the clue to the relevance and applicability of his theorems:

Federal Debt and interest rates


Ideas thrive on competition

I enjoyed writing this piece for Mint last Tuesday:

Why capitalism must allow competition for its own good

Capitalist America did a great disservice to itself when it ‘defeated’ the communist Soviet Union

Raghuram Rajan recently had an opinion piece titled, Why Capitalism Needs Populism. He is on to something with that title.

It becomes clearer when you see these lines from Samuel Huntington’s book, ‘The Clash Of Civilizations And The Remaking Of World Order‘: “It is human to hate. For self-definition and motivation people need enemies: Competitors in business, rivals in achievement, opponents in politics.” And, “there can be no true friends without true enemies. Unless we hate what we are not, we cannot love what we are.”

Samuel Huntington cites the second quote above from Michael Dibdin’s novel, ‘Dead Lagoon‘.

By that token, one can say that capitalist America did a great disservice to itself when it “defeated” the communist Soviet Union in 1990. The latter was needed to cushion, smoothen or even hide the rough edges of capitalism; to lend it a human face; to suffuse it with humane tendencies via welfare policies, via policies that seek to provide (if not succeed) a level playing field in terms of opportunities.

Without the “check and balance” that communism provided, the excesses of capitalism manifested themselves first in 2001 and then in a much bigger way in 2008. As a result, within a little over a quarter century of capitalism having triumphed over communism, America has a politician who has called for a 70% top marginal tax rate. So much for the end of history.

With victory over enemies and rivals, one loses a force that actually keeps one “battle fit”, intellectually or otherwise. So, we all need the “other” to remain fit ourselves. No point in becoming totalitarian. That is the short but definite first step towards decay, sloth and eventual extinction.

So, capitalism needs populism to redefine and reinvent itself for the better. But, that is only a necessary condition and not a sufficient condition. One may still read the wrong lessons from competition and make the wrong course corrections. I think that is what is happening to the so-called “liberals”.

They now face competition from those who espouse “populism-nationalism” as they pejoratively describe those who do not think like them. Going by Rajan’s thesis, the so-called “liberals” should welcome this competition as a tool or an opportunity to “up their game” intellectually. But quite the opposite is happening with the Democratic Party in the US and with several so-called “liberal intellectuals”.

One example of a counterproductive and delusional reaction is their characterization of the ongoing trade and intellectual disputes between the US and China. They characterise it as “Trump’s trade war”. One moment, they blame him for compromising with China, and the next moment, they blame him for triggering a trade war. All along, it has been about China not living by its own commitments when it signed up to join the World Trade Organization in 2001.

The second example is, as Robert Barro points out in another Project Syndicate piece (My Best Growth Forecast Ever), liberals wishing ill on the economy in America because it is doing well under a president they hate.

What happens if competition fails to hone and sharpen or if competition is removed? Crises emerge in short order. Having seen off competition from communism (or so they thought), capitalists have been behaving (enriching themselves) in a manner that has resulted in a crisis that threatens their very existence. The crisis of 2008 was a warning sign ignored.

Indeed, that is what has been happening to so-called Western liberal and democratic societies lately. They are blaming demagogues and politicians for the rise of protectionist sentiments with respect to trade and immigration. Perhaps, ageing societies are prone to such sentiments naturally and all the more so when an economic crisis has shrunk their savings pie and placed their social security, pensions and healthcare in jeopardy. Ageing individuals no longer welcome new ideas and strangers in their midst. Why should ageing societies be exceptions? If seen that way, the answer certainly does not lie in forcing further immigration upon them.

For societies and ideas, a failure to harness competition could mean a revolutionary overthrow and the emergence of a new order. This new order may not be for the good. Further, there could be a prolonged period of chaos and disorder before that new order emerges.

In recent times, 1914-45 and 1967-82 are examples of such “disorderly” and “chaotic” interregnums, although the latter far less so than the former. That is why the chaos, disorder and violence of 1914-45 produced two decades of order and prosperity all around.

The chaos and disorder of 1967-82 produced a new order that appeared to usher in an era of prosperity—globalization and all that. But, it has landed the world in a crisis of capitalism, for capitalism got rid of the “check and balance” of competition along the way.

Therefore, what awaits us is another prolonged (or, short, if we are lucky) period of uncertainty and turbulence, followed by a new social order that will not look like 1945-65, nor like 1982-2000, but a lot worse. Brace yourself.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University). These are the author’s personal views

In general, you can save this URL to access my weekly MINT columns. They appear on Tuesdays.

Love of facts: 19th vs. 20th centuries

I just read another interesting and thought-provoking Andrew Batson blog post on the posthumously published collection of essays by Oliver Sacks titled, ‘The River of Consciousness’. It details the attention to facts (relative to theorising) and the documentation of facts regardless of whether they fitted a pre-existing theory or a body of knowledge. This comment about the field of psychiatry brought forth a smile in me as it reminded me of the state of much theorising in economics today (yes, even today, in my view):

Sacks found that those nineteenth-century writers, while often lacking a theoretical framework to interpret their observations, were meticulous recorders of what they observed. Twentieth-century psychiatry had a more developed theoretical system, but had little time for phenomena that did not easily fit into that system, and so ignored them. There is perhaps a parallel for this in anthropology, where the extremely detailed accounts of early fieldworkers can still be usefully mined for insights for decades afterward–something it is difficult to imagine happening with many contemporary works with a much more elaborate theoretical apparatus. A mindset that places value on facts is itself something of value.

I left the following comment on the post:

A great post, as usual:

I was mildly surprised by the last sentence: “With economics also having taken an empirical turn over the past couple of decades, perhaps there will be a swing back to appreciating some of those nineteenth-century virtues.”

My understanding is that the field, study or the body of knowledge in economics – especially with respect to (but not limited to) monetary policy and its impact on the real economy, asset markets, etc., – is more characterised by the description of the field of psychiatry earlier in the post:

“Twentieth-century psychiatry had a more developed theoretical system, but had little time for phenomena that did not easily fit into that system, and so ignored them.”

(Cross-posted at