Looking Back at Macro-economics 101 book review: The economic crisis revisited

IT IS nearly seven years since the global financial crisis started. These years have been agonising for most economists, especially for policymakers, and more so after the Queen of England asked bureaucratic economists as to how they failed to predict the crisis. Economists have been carrying the cross all these years, feeling guilty, but not revealing that, many a times, they were not even at the helm of affairs in key economic ministries or heading central banks and international financial institutions. Economics is a difficult subject and with the increasing complexity of the modern world and its finances, only a trained economist can diagnose the malady and prescribe a remedy. The global financial architecture doubtlessly needs a rethink.

While the economic profession has undertaken to review its theories, and acknowledge the flaws, many other factors that led to the great recession also need a revisit. The world may not be the same as pre-2008 and nobody expects a return to normalcy in the next few years. Rather, there is a tectonic shift emerging in both the economic and political centres of the world. The world has become flatter, and both the advanced and emerging countries have realised their inter-dependence on each other, mainly due to the impact of cross-border spillovers. Globalisation does help to expand the reach of markets, but capital flows are to be monitored and hence the revision in the stance of the multilateral agencies on capital controls. While Indians, read Bimal Jalan and YV Reddy, had understood the significance of financial markets, including the devastating power of complex derivative products, in the aftermath of the Asian crisis and included it as one of the objectives of central banking, the world only realised it a decade later. In a flat world, sharing of knowledge is important rather than pontification of one stance.

In such a situation, the book, Looking Back at Macroeconomics 101, presents a ringside view of the economy from a non-economist, making for interesting reading for both the general public and economists, especially those working in public policy and international financial architecture.

The book is a collection of 80 articles written in different newspapers since 2006. The articles in the book reflect the long stint in public service of the author in key assignments in the country. The preface and the postscript are compulsory reading for any student of economics because the discussion contained therein, distilling the author’s experience over the years in policymaking, is on the frontier of economics.

The various chapters cover some anomalies with respect to theory and received wisdom in the profession. Illustratively, on a net basis, capital started flowing out from emerging markets to advanced economies, contrary to economic orthodoxy. Similarly, the structure of international trade started changing, with global production chains increasing trade in intermediates, making conventional trade metrics irrelevant. Most importantly, high deficits and debt in fiscally-disciplined mature economies did not lead to higher interest rates, as would be traditionally expected. The negative impact of over-financialisation of the economy became apparent and so did the pitfalls of moving away from the gold standard, with the rise and fall of fiat money.

A brief history of globalisation is interesting reading, as it discusses the emergence of ‘universal civilisation’ after four distinct phases of globalisation. The section on inequality discusses the phases of growth and trade-off between free trade and imperialism. Similarly, the discussion on population brings forth the irrelevance of Malthus because productivity growth exceeded population growth. The discussion on ‘dark matter’ highlights the proposition of Harvard economists Ricardo Hausmann and Federico Sturzenegger to financial issues in the US economy.

There are a number of chapters that would interest young economic scholars like Taylor Rule in India; ever-changing definitions of basic concepts like unemployment; sub-prime lending, monetary and fiscal policy, and its impact on India; inflation and its history; globalisation and its future; and the global financial crisis and its rebalancing. Policymakers would especially be interested in issues like the role of G20 countries and other multilateral agencies; capital flows; global spillovers; and shadow banking and systemically important financial institutions. With small articles written in an easy language, complex issues have been explained in simple terms with historical perspectives, making the book a must-read for both students and policymakers.

By Charan Singh

The writer is RBI chair professor of economics, Indian Institute of Management, Bangalore