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I was reading an article in the International Monetary Fund website by economist Angus Deaton. When a Professor at Princeton and Nobel laureate says that economics is in “disarray” today and that he has been rethinking the basis of economics, there are some valid questions that deserve better answers.
1) One of his arguments is that competitive markets are rarely free.
Power is often a defining element of who changes the rules and how wages and price gets decided. The powerful often change the free-market rules and get away scot-free. This suggests that markets are not at equilibrium and often there is an artificial equilibrium forced on both buyers and sellers.
The biggest problem is that companies have become too big and often more powerful as countries. The governments of countries have to work for the welfare of citizens in some way. For big companies, they have no such constraints. They employ a tiny segment of the highly educated population and have nobody to answer to, if their actions wreak havoc on society. The management is rewarded big money to increase stock valuation. Hence, the only people who have any influence over the company are stock owners.
2) There is no conversation about ethics. Economists are quick to equate well-being and wealth. They often ignore evidence that people are also looking for equity, welfare and tranquility.
Companies talk a lot about culture, because they intrinsically understand that employees want to belong to a family. Compensation alone cannot make an employee motivated. India was a country which rarely talked about greed and excess wealth. Well before socialism reared its head in post independent India, India has always valued equity and social harmony. Across countries in Asia, Africa and South America, the extreme focus on individual wealth and economic power has been a tough pill to swallow. In all these continents, people understand that one does not need millions of dollars to live a satisfying life. If one has enough to eat and live that is enough. However, it is the exact opposite experience for people living in the big cities of Europe and the USA. They have to run the hamster wheel faster and faster, just to keep them from drowning.
3) The focus should move away from efficiency. Just because one player is most efficient at producing goods, does not mean that other factors should be ignored. Most of current US problems have arisen from the mistaken idea that China, being the most efficient manufacturer, should be the origin of every single supply chain.
Another example is India where it is not always the most efficient or cheapest performer who wins the market. It may sometimes be both together, The CEO of Uber, Dara, was complaining recently that Indians want the impossible. They do not want to pay anything but expect the best service. The Indian market is not better or worse, it is the polar opposite of the western capitalistic model. If one can win in India, one can win any part of the world.
4) Extreme focus on simplistic numerical models. When I worked under Professors helping them with their research, I have observed that p hacking is rampant. The current model of research, especially in humanities, is turning into a joke. When famous researchers including Presidents of Stanford and Harvard resign for plagiarism, p hacking and a host of other research issues, it shows that the problem is very widespread. Everyone is doing it, but nobody wants to talk about it. Basically, everyone knows what they want to find and run experiments till they find that correlation.
In the social sciences, it is almost impossible to differentiate correlation from causation. The numbers are often low and there is also a lot of noise in the signals. A student has to get a tenure track position, and assistant professors need tenure. In the craze to publish, few care for ethics. In this way, economists and social scientists end up becoming a pawn of their political and economic masters. Journals choose research which shows fantastic results, rather than choose the plain vanilla ones that do replication or do not find any correlation. These journals indirectly end up encouraging and incentivizing bad behavior.
5) Arrogance of economists from places like the Chicago school and their inability to understand the limitations of their model. They also stubbornly refuse any insights from other disciplines. There are excellent theories like Herzberg’s theory of motivation and Maslow’s theories in Psychology and Behavioral economics. They all point that employees look for many things beyond monetary compensation. However, the arrogance of macroeconomists has ensured that nobody dares question their beliefs, which is exported as unquestionable truth by institutions like the World Bank and IMF.
Macroeconomists should reflect on their group think and inability to attract diversity. Why are 98% of Nobel winners male? The Nobel Prize has also disproportionately gone to macroeconomists who advocate neo-Keynesian, neoliberal and Chicago school thoughts. Why are institutions acting as proponents of specific ideologies? The Nobel selection committee, who are infamous for their lack of transparency, get to decide who the winners are and by default help choose how global institutions are run. The fact that neither economic restructuring nor sanctions work anymore are a reflection of the intellectual bankruptcy of these institutions.
Something worth thinking over is that compensation analysis and benchmarking inside any company is decided by the market data collected through economic models. If the economic models are flawed, how accurate are the compensation data? To anybody who works in Human Resources, this finding is no surprise. The most misused and misunderstood data in a company is the average compensation data. Everybody knows that the average numbers mean nothing but cannot stop coming up with fancy and elaborate models to create compensation models for the company. At the end of the day, employee compensation is based on pure negotiating power and tactics, not on market externalities. I wish compensation analysts and executives would read Angus Deaton’s article carefully.
I trained for a while under the foremost labor economist in the world, so I do have some strong opinions about economics.
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