At my university, a generous alumnus, Stephen Bruce, has funded an initiative on ?Rethinking Capitalism.? As the fallout of the financial crash of 2008 drags on, now with the banking crisis in Spain, the topic seems inordinately relevant. Even in India, the crisis has given critics of economic reform ammunition against that direction of policy, aside from the direct impacts on India of the weakening global economy.
In April, the Bruce Initiative took its efforts from the redwoods of Santa Cruz to the closest academic precincts of the centre of capitalism, with a conference at New York University, a stone?s throw from Wall Street. And the opening remarks were delivered by NYU?s Goddard Professor of Media, Culture and Communication, who happens to be a very famous expatriate Indian, Arjun Appadurai. Professor Appadurai began as follows, ?Why does there appear to be no one to blame for the ongoing destruction of the economy, society and environment? The government, banks, experts, and regulators have all claimed innocence, while taxpayers have had to speculate on their futures. It is time to point the finger: it is the discipline of economics that has brought about this state of affairs. From business to the media to academia, economists now run the world.? I have heard this sentiment in different forms from several colleagues across the other social sciences and the humanities, along with complaints that economists should now show more humility, since we got things so wrong.
Are economists to blame for where we are now? My first thoughts on reading Appadurai?s remarks were that he was tarring the whole profession with the misguided optimism of a part of it?Alan Greenspan musing on the taming of the business cycle, for example?and that he was confusing economists with business people and politicians, who indeed did much to bring about the current mess. Towards the end of his brief talk, however, Appadurai states, ?We can move toward a new form of social inquiry that looks at the relationship between quantity, quality and personhood. This is a different theory of social action that moves away from rational choice.? So clearly he has a problem with the core methodology of economics.
Indeed, economists move easily into business schools, into government, and into many positions of power, and their approach to theories of human behaviour and social action can be influential in shaping policy. Alan Greenspan perhaps does have a ?transcendental faith in markets? that is not fully justifiable based on empirical experience. But Greenspan and others are often driven by ideas and ideology that have nothing to do with economics, its intellectual origins, or its mainstream. From followers of Ayn Rand to libertarians to evangelical Christians who want a ?faith-based economy,? there are factors that shape people?s decision-making much more than anything gleaned from what economists espouse or teach. So it is not clear that economists rule the world of ideas, let alone run the world.
On the other hand, more attention to economists? focus on rational choice might have helped to foresee and avoid the crisis, since a major cause was precisely the pursuit of rational self-interest by assorted actors: government, banks, regulators and so on. The problem was not with economists? models of behaviour, but with the institutions within which the behaviour was playing out. Economists have long understood that rational individual choice can lead to terrible social outcomes, and that markets are not always perfect. They have long understood the problems of inequality and the limitations of market mechanisms in this regard?these are taught in every introductory economics course, and get repeated all the way through the production of doctorates in the field. In the case of the crisis, indeed, one can argue that part of the problem was that markets were not allowed to work?Wall Street preferred to trade financial derivatives in non-transparent, discretionary, and unequalising ways, rather than through modern, well-governed market institutions.
Economists are an eclectic bunch. They work on nutrition, inequality and all the challenges of economic development. They explore evolutionary pressures, social norms, systematic irrationalities and institutional minutiae. They are voracious gatherers and analysers of data, and where the economy does not yield data for clear predictions, they create experiments in the field and in the lab, to understand what makes people tick, individually and collectively. Economics has already begun to develop theories of social action that are not confined by assumptions of narrow self-interest or perfect rationality. Economics is driven by pragmatic empirical methods, but with underlying clarity about the difference between prediction and prescription.
Some economists misread events leading up to the crisis. Others saw it coming. If the destruction that Appadurai worries about was caused by unchecked greed, one cannot blame the economics profession for pointing out that people (mostly) act in their self-interest, and tracing the consequences. What is worrisome, though, is that attempts to rethink capitalism or blame economics will contribute to abandoning the good that they can yet bring to countries like India. Indians will emerge from poverty through the lessons of economics, not by blaming the discipline.
The author is professor of economics, University of California, Santa Cruz