Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Current Paradigm of Economics In India Is Inadequate

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Indian economy challenges

Central Idea

  • The current paradigm of economics in India is inadequate in providing solutions to the three major economic challenges the country is facing. The economists need to break out of their self-referential silo and examine the science of complex self-adaptive systems.

The Poly-crisis faced by India

  • The Indian government is grappling with three economic challenges at the same time:
  1. Management of inflation,
  2. Trade agreements, and
  3. Employment
  • Economists do not have a systemic solution for this poly-crisis. Consensus among them has broken down even about solutions to its separate parts.

Lessons from China and Vietnam

  • Foreign investment in China: China and India opened their economies to global trade around the same time, some 35 years ago. Since then, China attracted foreign investment that was many times more than in India, and the incomes of its citizens increased five times faster.
  • Vietnam emerging as more attractive destination: To attract investors, India must compete with other countries. Vietnam is often cited as a country that is proving to be more attractive than India to western and Japanese investors. However, when looking into Vietnam, they rediscover what was learned from China.
  • High levels of human development: When both countries opened to foreign investors China before Vietnam, they had already attained high levels of human development, with universal education and good public health systems.

The Problem with the Current Paradigm

  • There are some fundamental flaws in the current paradigm of economics.
  • Economists often cite Tinbergen’s theory, which states that the number of policy instruments must equal the number of policy goals. This is a mechanical and linear view of how a complex system works.
  • In complex organic systems, root causes contribute to many outcomes. The behaviour of the system cannot be explained by linear causes and effects. The causes interact with each other, and effects also become causes.

Facts for prelims: What is Tinbergen’s theory?

  • Tinbergen’s theory states that the number of policy instruments (P) must be equal to the number of policy goals (G), in order to achieve the desired outcome.
  • In other words: P = G
  • This means that for each policy goal, there should be at least one policy instrument to achieve it.
  • For example, if the policy goal is to reduce inflation, then there should be a policy instrument such as interest rate changes to achieve that goal. Similarly, if the policy goal is to promote employment, then there should be a policy instrument such as job creation programs to achieve that goal. Tinbergen’s theory emphasizes the importance of having a clear and consistent policy framework to achieve desired outcomes

Crises and the Inadequacy of the System

  • Policies that fit one country may not fit the needs of others: Macro-economists search for global solutions, but trade and monetary policies that fit one country may not fit the needs of others. Their needs have emerged from their own histories.
  • Emphasis on data trends: Economists arrive at solutions by comparing data trends of different countries, and in their models, people are numbers. Economists do not listen to real people, whereas politicians try to at least.
  • For instance: The inadequacy of the current paradigm was revealed by several crises in this millennium, the 2008 global financial crisis, inequitable management of the global COVID-19 pandemic, and the looming global climate crisis.

Conclusion

  • A new economics is required to solve the poly-crisis faced by India. A movement to change the paradigm of economics’ science to bring perspectives from the sciences of complex self-adaptive systems has begun even in the West. India’s economists must step forward and lead the change towards a new economics paradigm based on the sciences of complex self-adaptive systems. India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits at the same time, and the current paradigm of economics cannot provide solutions.

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