On economists

There is this technocratic idea that Economics is a scientific discipline like Physics. Not true. Subject to the “conservation law” that the world cannot consume what it has not produced yet, economic relationships arise from our personal, social, cultural and moral choices. A productive community can express a moral preference for an egalitarian ethos. At Zoho, we express a moral preference for all of us having the same food and setting for everyone i.e, no special executive dining rooms. No economic law dictates a “correct” course here.

As I once joked, I made a choice to invest in designing an LTE modem vs buying a private jet! Again no economic law can dictate this choice. Yet, these choices greatly influence economic outcomes and the overall well being of a community.

Political economy - and economics is explicitly political outside of the “conservation law”, which sets a mathematical boundary - is about how a company or community makes these choices of where to commit resources. LTE modem or private jet? Bullet trains or rural broadband? I respect politicians more than economists for this reason: politicians grapple with the political economy choices, however (very!) imperfectly, while economists pretend to give objective answers from their mathematical models. Most of those models are garbage in, garbage out.

India’s curse is that among Asian nations, India has had the most economists advising us. East Asian nations like Japan or Taiwan or South Korea have historically produced few economists. I see a direct connection between their prosperity and their producing few economists! We must get rid of the technocratic obsession with credentialed economists and go by experience and observation on the ground. We must always keep the political economy of choices in mind, governed by our cultural and social ethos. Good politics is good economics.

On Krugman

(Source: https://threader.app/thread/1470219919711113216)

Krugman is contesting the idea that inflation hits low-income households hard. Low income households CONSUME a far greater proportion of their income than high income households. When CONSUMER prices go up, all consumers feel poorer but low income households feel the worst. Anyone with a grasp of reality knows this. Every politician of every party knows how rising consumer prices lose them elections.

Yet we have a genius Nobel economist questioning this basic premise. Krugman is my poster child for academic economics having gone horribly wrong. The rot runs far deeper in academia. Fields as diverse as Electrical Engineering and Psychology have become increasingly detached from reality. We must not accord the academic priesthood the automatic presumption of expertise but evaluate their claims carefully. 🙏

Trade policy

Krugman has written a NYT piece attacking Trump’s trade policy against China, which attempted to (but failed to) reduce persistent, decades-long US trade deficits and Krugman never mentions the word “debt”! I will analyze why the policy failed.

First, the obvious consequences of those persistent trade deficits, particularly in manufactured goods are:

  • a) Explosion in US debt with the US becoming a largest net debtor from being a net creditor nation
  • b) The erosion of the US manufacturing base which destroyed know-how
  • c) The loss of manufacturing base resulted in loss of good wage jobs for non-college-going workers
  • d) Rising US foreign debt obligations were recycled back (invested) in US stock and real estate markets blowing monster bubbles in both, which mostly benefited the wealthy
  • d) Loss of high paying manufacturing jobs combined with financial and real estate bubbles resulted in massive increase in inequality
  • e) The US imported goods and created “token-distribution” services jobs (aka bullshit jobs) to claim those goods, an erosion of real skills

Trump’s tariff policy failed to yield quick results because the erosion of industrial capability and skills in the US, which arose from decades of flawed policy, cannot be reversed so quickly with tariffs. It would take a decade for the US to regain its industrial base.

All of the above have been fairly obvious to many economic observers for a while, yet @paulkrugman’s grasp of basic economics and how industry works is so weak he cannot see it. He represents the bankruptcy of academic macro.

This matters to us in India because US-trained economists like @APanagariya and Raghuram Rajan have been pushing essentially the same line as Krugman: liberalize import of manufactured goods, don’t worry about persistent trade deficits and so on. That policy course is bad for India. India needs to develop strong manufacturing know-how and skill base. That is the only way to ensure well-paying jobs for our workers, particularly the vast majority without college degrees. It takes time to develop that industrial base and we need clear policy support.

Finally two books that challenge the Krugman line and must read for us in India:

Bernanke and Macro economic models

Bernanke when he was Fed Chair (2011): “Monetization would require a permanent increase in the money supply to pay the government’s bills through money creation. What we’re doing here is a temporary measure which will be reversed …” (This has only hugely increased by 2022.) Why do we take these academic economists seriously?

This is not a minor slip on Bernanke’s part. His only job as the Fed Chair was to manage the money supply. He got his forecast on the money supply (i.e Fed balance sheet) disastrously wrong. It is time to junk the models and frameworks these professors use and start over. Macro economic models mostly consider only “flow” (GDP, employment, wages) and ignore “stock” (debt build up). That’s like declaring that smoking did not kill me this quarter so it is okay. After all, “in the long run we are all dead” as the economists quoting Keynes say.

Rajan

Source: TW

Rajan echoes the conventional-economist thinking that focuses on efficiency gains from trade and totally ignores resilience and the benefits of a diversified jobs mix in a region. As an example, a bright kid in Tenkasi wanting to build planes today has to migrate out of India. Rajan would argue “Let’s make labor mobile across countries so the Tenkasi kid can migrate to where planes are built” and that ignores unmodeled costs of uprooting people, such as elderly people left behind.

Their models also have no place for culture, community and so on. Economists would basically assume away those unmodeled costs as trivial or non-existent. That is the ultimate triumph of logical positivism. My contention is that when all those unmodeled costs are taken into account, those efficiency gains evaporate, particularly long term.

Conveniently, the economic models they study have no long term (“in the long run we are all dead”). Well, the long run has arrived, and it is mainstream economics that is dying. We need a wholesale reexamination of the philosophical foundations of mainstream economics.

Wireless systems and toy models

Source: TW

I spent over 4 years in my PhD deep inside mathematical models of wireless systems. It slowly dawned on me that the professors were addicted to the models themselves and never entertained any doubts about whether the models had much to do with reality. Over time, the entire purpose of the models evolved so as to allow us to publish cute theorems & win grants, awards & coveted tenure! I saw this trend everywhere I looked in academia with very few professors immune to the pull of models increasingly detached from reality.

It was therefore not a surprise for me that this trend had taken deep root in economics. In wireless systems, industry practitioners typically ignore the toy model pushers. Alas, in economics it is these toy model pushers who have come to dominate economic decision making. In that sense, people like Krugman or Bernanke are much the same as shamans of old with their aura of academic authority, peddling fake economic cures based on their irrelevant toy models that confer a veneer of mathematical prestige on what is basically nonsense.

My own personal liberation came when I decided to leave that academic prestige path and go build real engineering systems for a living. I have long refused to list my PhD among my qualifications because I don’t value that work and consider it all but useless. At least I got one thing out of spending those 5 years in a PhD. I learned to discriminate between bullshit toy models and endlessly fascinating reality.

Economics is too important to be left to these toy model pushers. That is why I so passionately engage them. 🙏

Valid range

Source: TW

There are no economic “laws” beyond “accounts must balance one way or another” - the accounting identities. The rest are merely locally or occasionally valid observations elevated to high status due to their Physics Envy. Modern academic economics is mostly a pseudo-science. Fundamental economic questions that go beyond the “accounts must balance” type are questions of values and those are entirely outside the domain of mainstream economics and are more the domain of culture, anthropology, philosophy and sociology, all of which inform politics. To achieve economic progress, we should ignore academic economists as soon as they step out of the “accounts must balance” territory.

All this may sound harsh but entire counties have been misguided by this pseudo science coming from high prestige names.