‘Noise’ in our interpretations

Historians keep on writing histories although the facts on which they base their work don’t change


Shahid Javed Burki June 07, 2021
The writer is a former caretaker finance minister and served as vice-president at the World Bank

Historians keep on writing histories although the facts on which they base their work don’t change. More information may come to light as scholars look more carefully at the available archival material. They may also gain access to new archives. For economic historians — a discipline that I have practised now for decades and is the subject of several books I have written — basic facts don’t change. The rate of past GDP growth and that of the sectors that constituted the economy remained unchanged. The rate of increase in population in the past also does not change neither does its composition into male and female segments. The proportion of the population located in urban areas may change if new definitions of what makes up urban areas get to be adopted. This has happened in Pakistan.

However, different ways of looking at numbers bring in biases. In a new book, Noise: A Flaw in Human Judgement, a group of scholars of considerable repute factor in how biases enter human judgment. Daniel Kahneman is the principal author. An earlier book by Kahneman, Thinking Fast and Slow, won him the Nobel Prize in Economics although his discipline is clinical psychology. In it he argued that contrary to what classical economists had said all along, it is seldom the case that rationality is behind all economic decisions. The “economic man and economic woman” mostly decide on the basis of what they have experienced and acted upon in the past. His research done in Israel in collaboration with his colleague, Amos Tversky, who, had he lived, would have shared with him the Nobel Prize, came up with an estimate on how often important experiences, judgments and decisions are based on rational investigation and thinking. That, they said, happens only 10% of the time. The rest of the time human beings act on the basis of past-learning and biases. They used the example of driving a car to illustrate the point they were making. When confronted with a situation that requires a sharp change of course, the driver of the vehicle does not go into deep thought about the most rational action he or she should take. The move of the vehicle out of danger is a reflection of instinct and experience.

Kahneman working with two other scholars — Olivier Sibony, a management specialist, and Cass Sunstein, a behavioural economist — have now come up with new thinking on how the environment in which decisions are taken as well as biases of the people making the decisions cloud their judgments. They show how unwanted and unintended “variations in judgments (evaluations) and decisions (choices) creates noisy systems which affect thinking” in practically all professions even in those that believe that what they do is based on solid science. The authors suggest there are ways to deal with these biases. Multiple people should be asked to make independent judgments and then they should be brought together to resolve differences.

How would I apply the thinking of Kahneman and his colleagues to the way Pakistani economic historians read their country’s history? There is agreement among historians that over the last 75 years, Pakistan’s economy has been through several ups and downs. There were at least three periods of high economic growth rates when the country’s national income (GDP) increased at a rate twice as high as the rate of increase in population. The World Bank’s research suggests that the rate of growth of an economy should be at least twice as high as the rate of increase in population to make a serious dent in the incidence of poverty. Although poverty data is not available to judge whether that was indeed the case in Pakistan, I would suggest that did in fact happen.

The first period was in the early to mid-1960s, from the time General Ayub Khan inaugurated Pakistan’s first episode of military rule, to 1965, when the country went to war with India. The second was in the early part of the 1980s, when General Zia was in command of the country to the time of his death in 1988. The third was in the early 2000s when General Pervez Musharraf governed as Pakistan’s fourth military dictator. The fact that the periods of high growth rates coincided with periods of military rule would suggest that the men in uniform are good at managing the economy compared to those in civilian clothes. This is where we have to introduce “noise” into our analysis and look deeper into history and not simply at the association of high growth rates with the periods of military rule. I have difficulty in accepting that military and authoritarian rule is good for rapid development and change in societies.

The rate of growth is only one of the several factors that affect the health and prospects of the economy. Here I will refer to another classic work that puts emphasis on measures other than just the rate of growth. In Why Nations Fail, a book by the MIT economist Daron Acemoglu and Harvard University political scientist James A Robinson, there is a suggestion that economic policy must be inclusive in order to benefit all segments of society. But inclusiveness only works if the political system has the same attributes. I will quote at some length from one of the main conclusions reached by these two scholars. “Inclusive economic institutions that reinforce property rights, create a level playing field, and encourage investments in new technologies are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity.” This analysis describes well the situation in Pakistan during the three periods of rapid economic growth I have identified above. While the economy grew rapidly in these periods, there was significant increase in income and wealth inequality during these periods of authoritarian management. However, when the military was out of directly managing the economy, the civilian successors did not give up on that extractive behaviour.

One more quotation from the Acemoglu-Robinson book would help us draw important lessons for Pakistan. It is especially relevant for the phase through which Pakistan is passing at this time in its history. It has now a political party in power that is not extractive and is led by a person who does not believe in personal enrichment rather than improving general welfare. “Inclusive economic institutions are supported by, and support, inclusive political institutions, that is those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralisation so as to establish law and order, the foundations of secure property rights, and an inclusive market economy.”

To return to the point at which I started this discussion. In order to understand the point Pakistan has reached after almost 75 years of independence we should listen to the noise that is around and work on reducing its pitch and reach.

 

 

Published in The Express Tribune, June 7th, 2021.

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