What is wrong with Economics

Raghuram Rajan has an interesting piece on what went wrong with the economics profession in the
years that led up to the global crisis. His big issues: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.

I think these, in turn, are directly related to the incentives of academic publishing. It's a recurring theme in agency theory: When the principal rewards the agent for performance in a certain direction, an excessive focus upon that comes about, and performance in other directions gets contaminated. When universities created an incentive structure linked purely to peer-reviewed journal pubs, economists focused on performing for each other, instead of performing for the world.

So in our diagnosis of the crisis, just as we criticise the HR policies of banks, we should also criticise the HR policies of universities.

While I'm quite aware of the narrowing of the mind that comes about from the Western-style process of focusing on pubs and tenure, it is not easy to find an alternative HR framework. George Stigler had a fascinating little article on this (which I was unable to find: do you know it?).

In India, in particular, the economics profession suffers from the twin maladies of low pressure and the historical baggage of development/socialist economics. On average, if an Indian economics department was given strong incentives to publish more, it would be an improvement. Performing for economists is better than not performing. At the same time, on the scale of mankind, it does seem that economists need to do more in terms of performing for the world.

Why does the publishing+tenure process work well in science and engineering? I have an opinion of one element that is in play there. In science and engineering, bringing in resources through research contracts is essential for doing research because research requires expensive equipment, staff, etc. There is, then, a joint production of academic publications alongside performing for the world (which allocates research funding). Hence, when the principal asked for academic publications, this did not generate a closing of the mind. In contrast, most research in economics in the top departments worldwide does not require bringing in external funding. So that source of pressure for performing for the world is absent.

Author: Jeetendra

• What is the role of WPI in monetary policy?, 22 July 2015.

• Mythbusting: Balance of payments edition, 6 July 2011.
• The extent to which reform of the capital account is or should be irreversible, 7 February 2011.

• Free your mind, 16 May 2009.

• The oil subsidy is causing an indigestion, 8 September 2008.
  

Interesting readings

Important new facts about the Bombay attacks, by Sebastian Rotella, on Propublica. It seems that we have a name and a face for the key handler of the murderers.

Vikram Doctor about how Bollywood is (not) growing up.

Why Bombay should envy London.

Maihar music lineage: first set of shows in Bombay, Calcutta, Bangalore, Delhi.

Samar Halamkar in the Hindustan Times on making expenditure programs of GOI work.

It appears that the Mubarak regime in Egypt is now at its end game. The most interesting question now is: Will Egypt turn into a normal country, or will there be a collapse into a fascist regime as happened with Iran? In order to understand this, it is useful to read about Iran's story (Abbas Milani in the National Interest) and Carrie Rosefsky Wickham in Foreign Affairs on the Muslim Brotherhood.

Do the events in Egypt change our prior about Iran, Saudi Arabia and China? Read Eric Abrahamsen in Foreign Policy and Willy Lam on AsiaSentinel on China. Egypt's lessons for Asia by Gavin M. Greenwood on AsiaSentinel.

Evan Fraser and Andrew Rimas in Foreign Affairs on food riots.

Howcome you never see a headline like Psychic wins lottery?. Are lotteries just a tax on dumb people? I read this great story about a statistician who figured out how to win the lottery.

Paul Krugman in the New York Times Magazine on Europe's currency crisis.

The art of good writing by Adam Haslett, in the Financial Times.

Importance of the appointments process

A memorable passage from When Irish eyes are crying, the story of Ireland's economic disaster by Michael Lewis, in Vanity Fair:

...the dominant narrative inside the head of the average Irish citizen -- and his receptiveness to the story Kelly was telling -- changed at roughly 10 o'clock in the evening on October 2, 2008. On that night, Ireland's financial regulator, a lifelong Central Bank bureaucrat in his 60s named Patrick Neary, came live on national television to be interviewed. The interviewer sounded as if he had just finished reading the collected works of Morgan Kelly. Neary, for his part, looked as if he had been dragged from a hole into which he badly wanted to return. He wore an insecure little mustache, stammered rote answers to questions he had not been asked, and ignored the ones he had been asked.

A banking system is an act of faith: it survives only for as long as people believe it will. Two weeks earlier the collapse of Lehman Brothers had cast doubt on banks everywhere. Ireland?s banks had not been managed to withstand doubt; they had been managed to exploit blind faith. Now the Irish people finally caught a glimpse of the guy meant to be safeguarding them: the crazy uncle had been sprung from the family cellar. Here he was, on their televisions, insisting that the Irish banks were ``resilient'' and ``more than adequately capitalized'' ... when everyone in Ireland could see, in the vacant skyscrapers and empty housing developments around them, evidence of bank loans that were not merely bad but insane. ``What happened was that everyone in Ireland had the idea that somewhere in Ireland there was a little wise old man who was in charge of the money, and this was the first time they'd ever seen this little man,'' says McCarthy. ``And then they saw him and said, Who the fuck was that??? Is that the fucking guy who is in charge of the money??? That's when everyone panicked.''

Better execution of complex IT systems in government

The TAGUP report has been released. For the background, see the creation of the group and this blog post. The ideas of the report could give a quantum leap in the execution quality of five projects of tremendous importance -- the Goods and Services Tax (GST), the Tax Information Network (TIN), the Expenditure Information Network (EIN), the National Treasury Management Agency (NTMA) and the New Pension System (NPS). In all these areas, political consensus has been achieved but the execution has floundered. More generally, these recommendations add up to an important fresh look at how to modify the ground rules of public administration in India, so as to better cope with the sorts of challenges that are now being faced.

Update (5 May 2011): Movement on implementation of TAGUP. 

C. B. Bhave's 3 years at SEBI

I first met C. B. Bhave when I walked into his office in September 1993. I was a freshly minted Ph.D. at the time. Speaking with him made a huge difference to my thinking about finance and markets.

He had clearly figured out the key building blocks of a revolution in the Indian capital market: electronic trading, clearing corporation, demutualisation, derivatives trading, depository, etc. Most Indian bureaucrats would have visited the trading floor of the LSE and the NYSE and replicated it. He had the strength of mind to look beyond `global best practices'. And from 1994 to 2001, the revolution went from ideas to action. It is hard to find an area of the Indian economy where the reforms were more successful.

The governance problem in finance spans two rather distinct problems: regulation (the making of rules) and supervision (the enforcement of rules). The best rules in the world are pointless if they are not backed by teeth. SEBI has shaped up as one of the best success stories in India's economic and commercial law, in the way rule of law has come to prominence. SEBI's orders are on their website. They are appealed at SAT. SAT processes cases rapidly. SAT is tough and competent. It's a great arrangement.

I remember, in the dark days where accusations about the `IPO Scam' were being bandied about, Bhave said to me that he remained confident that over the years, SEBI would sort itself out, thanks to the checks and balances that come with the rule of law. It is a message that we need to apply to all other financial regulators in India.

Bhave's SEBI made significant progress on strengthening the enforcement process leading up to good quality orders. On one hand, this required improvement of staff and processes. This is, of course, work in progress. A lot of work remains to be done before SEBI consistently writes high quality stuff. But the best orders of Bhave's SEBI are much superior to anything that came before. In addition, a strong enforcement process at SEBI required political toughness in not buckling under pressure.

It is, hence, not a surprise that his time at SEBI has been an exceptional one. Here are a few retrospectives on his time at SEBI:

• Editorial in the Financial Express, 21 February 2011.
• Old challenges, new Sebi chief: an editorial in Mint, 17 February 2011.
• When a top regulator asked C. B. Bhave to stop margining FIIs... by Sachin Mampatta in DNA, 18 February 2011.
• How Bhave transformed SEBI, by N. Sundaresha Subramanian, Anirudh Laskar & Pramit Bhattacharya, in Mint on 17 February 2011.
• Impartiality will be his legacy, by Ashish Rukhaiyar, in the Business Standard, 15 February 2011.
• An interview with C. B. Bhave with Gautam Chikermane, in the Hindustan Times, 13 February 2011.
• A show on CNBC Awaaz, featuring Sanjay Pugalia, S. P. Tulsian and me, mostly in Hindi: One, Two, Three.
• C. B. Bhave sets the bar high for SEBI's new Chairman UK Sinha in the Economic Times, 7 February 2011.
  
• Bhave's great service to the Indian securities market by Mobis Philipose in Mint, 31 January 2011.
  
• Bhave, a silent warrior for retail investors by Rajesh Abraham in Financial Chronicle, 31 January 2011.
  
• Great job, Mr. Bhave by Shobhana Subramanian in Financial Express, 15 December 2010.
  
• C. B. Bhave: In the eye of the storm by Tamal Bandyopadhyay in Mint, 8 August 2010.

India: a nascent social democracy?

As India embarks on the early stages of middle income, there is interest in a more expansive outlay of expenditure for the government. This motivates the question: Can India now embark on constructing an array of welfare programs, which would ultimately add up to an approximation to a welfare state or a social democracy?

Vijay Kelkar and I wrote a paper Indian social democracy: The resource perspective on this question, for the 10th `Indira Gandhi Conference' which took place in New Delhi recently.