Advice on economy: ‘Consult others’ economic policies to devise your own’

LAHORE:

In the wake of the recent wave of globalisation of finance and trade, developing countries like Pakistan cannot afford to devise their economic policies without studying policies pursued by other countries, British politician and economist Lord Mehgnad Desai said on Tuesday.

He was speaking about his new book, Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One, at the Lahore University of Management Sciences.

Desai said the global economy was more open now compared to the past.

On his approach to economic theory, Desai said theory was contingent upon the particular historical circumstances of the economy under study. He said demographic changes were an important factor in determining the utility of a theory. For instance, he said economic theory developed by British economist Lord Maynard Keynes was relevant to the post-world war II era because most states had gone into isolation and were reluctant to trade with one another. However, he said Keynesian ideas of macro-economic management could not work in the current era.

He said Keynesian theory was premised on the idea that [public] debt was not necessarily bad for the economy. Besides foreign loans, he said pension funds had been a key source of financing public debt. He said such an understanding could work in the post-world war II era because most western countries then had large populations of young people entering the labour market. This had facilitated a manufacturing sector boom and helped economic growth, he added.

However, continued reliance on pension funds as a source of debt was not possible for western countries any longer because their population of the elderly now outnumbered the young.

About the economic crisis of 2008, Desai said the crisis had led many economists to integrate disciplinary approaches from behavioral sciences in their work rather than singular focus on macro-economic theory.

Following the crisis, he said western countries had undertaken crucial reforms in their banking sectors. “Banks have greater capital liability now. If a similar crisis occurs again, it will cause the shareholders to lose their money rather than the taxpayers,” he said.

He said the economic collapse of 2008 had been caused by the character of economic growth in western countries, in particular the United States. He said economic growth in these countries was in name only and was fuelled by speculative investments. It was not backed up by actual changes in the economy, he added.

“Failure to see the crises coming was a failure of the academic discipline of macroeconomics,” he said.

Desai said insights from behavioral sciences, information technology and economics should be combined to understand trends in economic growth.

He said from 1971 to 2008, the global economy saw a bust, followed by a boom and finally a collapse in 2008. He said the collapse of economies (a period of low economic activity) was linked to innovation cycles. He said it had been observed that the end of an innovation cycle could trigger economic collapse. “The causes of the end of an innovation cycle cannot be predicted,” he said. Discussing the surge in development of cell phone applications, he said it could be seen as an example of a boom triggered by innovations in the information technology sector.

He said he believed information technology sector had been unable to transfer its high productivity to other sectors of the economy. He said this made him sceptical of the ability of the IT sector to sustain growth for long. Nonetheless, he added it was difficult to predict with accuracy if an innovation bubble would burst and lead to another economic crisis.

Published in The Express Tribune, August 5^th, 2015.