Saturday, 24 January 2015

Economics is more difficult than "Rocket Science!"

Here everybody is an economist!

Everyone carries their shopping list of what needs to be done. I often get long lectures from opinionated people who obviously use the same ideas at dinner parties and official meetings (why are they called to official meetings and allowed to hold forth?).In a loud voice and with full conviction they argue it is not rocket science!All we need is Get the basics right! As if these are arguments. But no matter the audience (especially arrogant officialdom) buys their line.

My question what are the basics?is often drowned out! We all know what the basics are without actually talking about it. This is how economics is done in Pakistan.

After much effort, I find out what the basics are in the minds of these philosophers. I learn that their basis are mere wishes for in increase in revenues, exports and growth.

Makes it easy! Does it not!

We wish all the good things and call it economics.

For sixty years Plan after Plan as wished for these good things, increase production, increase growth, increase exports. It is just so sad that the economy will not listen to these economists and deliver all good things like production, growth and exports. And not to forget that all this must happen with low inflation.

Of course we must keep asking for more revenues and every discussion must note well-worn examples of the rich not paying taxes. Ok so let us have a new tax and collection must improve. There you go. Now see It is not rocket science!What is it about rocket science that these guys like? Every three minutes, someone mutters it is not rocket science!and all nod in agreement. Discussion killed! Time for next anecdote!

This is how we do our thinking here!

Is it worth telling these guys that economics is more complicated than rocket science? Rockets are inert and do as they are told. Charting their course is easy. They listen to signals follow.

Self willed humans on the other hand, do as they like. They resist and react to each other and to government policy. If policy is made without taking into account how self-willed individuals in their millions do, the results will be very different from those that were anticipated.

So next time someone tells you economics is easier than rocket science and their pocket list of wishes is all we need, remind them that rocket science is easy, economics is much much more difficult.

Let me offer another list of "the basics" for good economic outcomes!

One important way of looking at the economy is that it is an aggregation of all transactions in the economy. Transactions are basically exchange of goods and services or contracts to exchange goods and services at points in time.

It is important to understand that value is created at the point of exchange. Production happens for purposes of exchange. Successful economies like the US have configured their economies to maximize the number of transactions in the economy.

Most of us who have transacted in Pakistan know how difficult it is to transact in most markets. Buying land outside DHA can be a nightmare; contracts can easily be dishonored; shareholding in a company is no guarantee of a dividend it a share in returns; consumer goods come w/o warranty or assurance of quality and so on. Basically we have an economy where transactions are difficult and often insecure.

Looking at it from a transaction viewpoint, I can come up with another list if "getting the basics right" this list would begin with I'm proving law and order and go on to securing property rights strengthening contracting, redesigning and reframing markets for efficiency and removing incentives for rentseeking and putting in place incentives for entrepreneurship

This was what government was supposed to do. This is the basics of governance! Sure it requires hard work and much thinking to make this happen. And yes it is even more complicated than rocket science.

If our friends would be more inquiring, they would find out that the development experience of the last sixty years has shown the primacy of these basics over their usual list of wishes. Without better governance, all those good things --growth of economy exports and revenues-that our "rocket scientists turned economists" want in all probability not happen. A little reflection will show that Plan after Plan wishing for increased growth exports and production with higher revenues have come to naught because of poor governance!

Perhaps, saying it is not rocket science!stops these people from thinking. All of us need to come out of our comfort zone and encourage discussion and debate on real reform which is better governments for better markets.