Economists have always been at
the receiving end of the society

The Dismal Record of Economists

They have been blamed not only for giving confusing advice, but also for failing to predict accurately the catastrophes that befall on economies. They have been, at best, good at analysing what has happened in the past. But, when it comes to future, it has been alleged that they have miserably failed to predict, with reasonable accuracy, the future events. Here, it is the predictive power of the economists which has been open to question. With the failure of economists to predict the onset of the world wide economic crisis of 2008, more ammunition has now been added to the arsenal of critics attacking economists. They are often reminded of the story of John Maynard Keynes, the renowned economist of the 20th century, being refused entry to heaven upon his death for failure to predict accurately the exchange rate, interest rate and the inflation rate that would prevail just in a day’s time!

The addiction to schools of thought
Some attribute this failure of economists to their being slavishly bogged down in opposing schools of thought.
The danger of being addicted to a particular school of thought is that it blinds one’s eyes to the obvious, closes the mind to novelty, binds one’s intellect to fixed ideas and prevents one from making good judgments. Above all, it reduces one’s resilience and flexibility thereby diminishing his capacity to find solutions for the complex social problems that emerge in different forms almost on a day to day basis.
Schools of thought are normally formed around one leading figure or a few of such figures that come up with a new way of looking at worldly problems. The history of economic thought abounds such leading figures who have spawned innumerable followers, sometimes with rational reasoning and sometimes illogically, to take their message forward.

Kautilya: The independent thinker
During Kautilya’s time too, there have been a large number of such schools of thought which were very powerful in terms of both the follower base and the intellectual rigor of the analysis they made. Kautilya chose to be different and independent. He not only disagreed with the previous authorities, but also presented his view on many issues boldly. For instance, when the previous authorities argued that Moksha or the spiritual salvation was the greatest ambition of life, Kautilya said that Artha or the economic well being is the predominant ambition because without it, none of the other ambitions, namely, Kama or the worldly desires, Dharma or ethical and moral living and Moksha or the spiritual salvation, could be realised. In the Chankya Neethi, he emphasised the importance of following what is in scriptures with wisdom. He equated the uncritical following of what is said in scriptures without using one’s wisdom to ‘giving a mirror to a blind man’.
What Kautilya emphasised, in his bold statement that scriptures should be read with wisdom, was that one should approach economic problems with an open mind without being prejudiced or biased by conventional wisdom ingrained in one’s mind. One should, therefore, be ready to question even the most accepted view of the society before agreeing with the same. Two hundred years before Kautilya, the Buddha preached the same to Kalama princes that the acceptance should be based on what one experiences as correct and not on what one has heard or read.

Scientific theories necessarily have to be refuted
The history of economic thought in modern times is full of such different schools of thought. Most of these schools, after coming to prominence for a short while, have died away with the onset of a new school or a new idea. That is the very nature of science because in science what one discovers is not ‘the truth’, but ‘a truth’ which should have the capability of being refuted, if one goes by the methodology suggested by Philosopher Karl Popper. Hence, a practical economist, unless he is on full alert to what is happening in the realm of economics almost on a day to day basis, is unable to offer solutions for economic problems based on the school of thought he has so ardently followed.

Let’s take a practical example
The Keynesian Prescription
If one follows the Keynesian school, the magic wand of creating wealth and bringing about prosperity is the deficit financing undertaken by the government to stimulate economic activities. The argument of the Keynesians is that when the government spends more than what it earns, a new income is recycled into the hands of the people who will now use that new income to create a new demand for goods and services. Producers, having noted the enlarged demand, will make use of the hitherto untapped resources and increase output, but in the process cause the income in the hands of the people to get transferred to their hands. That income does not remain idle in their hands, but get spent on more inputs thereby recycling it to the hands of the people for a second time. It, therefore, gives rise to a series of new demands for goods and services from the side of consumers and a corresponding series of demands for inputs from the side of producers.
It will be like one’s getting into a spiral staircase for the first time with some outside help (government’s initial spending money through deficit financing) and then, moving up the staircase automatically on its own (the subsequent series of demands for goods and services and the corresponding series of demands for inputs).
This is a very attractive proposition which cannot be ignored by politicians, policy makers, bureaucrats and the general public. If a small investment done initially brings about a bigger and bigger prosperity later year after year (multiplier effect as Keynes said), then, how could that proposition be ignored?

The monetarists’ counter view
But, an opposing school that calls itself ‘Monetarists’ does not agree with this world view.
They argue that a temporary income received by people does not cause them to feel richer and therefore, the new demand is not viewed as a permanent improvement of the market conditions by producers. Hence, money pumped by the government does not lead to faster wealth creation as predicted by Keynesians. Instead, it raises the demand for goods and services as measured by its money value and with no improvement in the supply of those real goods and services, all what happens is the attainment of some economic growth coupled with a faster increase in the price level. Hence, in the long run, an economy will find that its inflation rate has broadly corresponded to the increase in money supply which is basically determined by the level of deficit financing undertaken by the government.

Sri Lanka’s experience: High inflation and low growth
Evidence from Sri Lanka during its post independence history seems to suggest that the country has moved along the path predicted by Monetarists.
Sri Lanka has had deficit budgets in the entirety of its post independence history except in 1954 and 1955. These deficit budgets were basically funded by creating new money by the government. It has attained some economic growth during this period, just less than 5 percent annually on average, when its counterparts in the East Asian region managed to record economic growths of 9 to 10 percent year after year. Its inflation record has been woefully dismal. Before 1977 when there were economy wide controls, inflation had been suppressed and was reflected in the form of queues, waiting lists and rationing systems. After 1977, when the economy had more or less been liberalised, inflation was open and stood at about 11 percent on average per annum.

The evil side of inflation
This high inflation caused Sri Lanka to depreciate its exchange rate continuously to maintain its export competitiveness and overcome balance of payment difficulties, raise wages and thereby allow the domestic cost of production to rise continuously and go for bigger and bigger deficit budgets when the government revenue did not rise along with the increases in the money income of people.

Monetarism too is inappropriate in a recession
However, the monetarist prescription seems to be inappropriate when a country is hit by an economic recession. In an economic recession, it is necessary to uplift the economy through additional spending and the monetarist prescription is basically for curtailing spending. Hence, in a recession, an economy will shrink beyond redemption if monetarist policies are followed to the letter. Consequently, the emphasis of policy has to be shifted from monetarism to Keynesianism, when the most pressing problem faced by an economy is economic recession and unemployment.
Predictors fail because the world is non – linear
The mistake made by many who predict future events is the assumption that the world in linear. According to this assumption, if a phenomenon is at a given position today, it will move along a linear path to a new position tomorrow. If it is so, it is easy to predict its path accurately. But unfortunately, world events are non – linear and what is predicted today can be derailed by a totally unexpected event that might take place tomorrow. The difficulty of economists is to correctly identify this unexpected event that has a bearing on the path predicted by them.

Dogmatism in thinking
But, many still believe that it is the Keynesian type of stimulus that is relevant to Sri Lanka. The best evidence is supplied by the election manifestos presented by the two main contenders to Presidency in the just concluded Presidential Election. If the winner implements his manifesto to the letter, the country could witness once again whether Monetarists have been correct in identifying the growth path of the country in the next decade, that is, an era of some growth coupled by high inflation!

Good Mechanic: No addiction to a given tool
Sri Lanka’s future, therefore, lies in shedding dogmatism and applying pragmatism when making economic policies. A pragmatist is like a mechanic with a tool kit filled with different types of tools. When he finds that one particular spanner cannot unscrew a given nut, he simply puts it away and tries another one. If that spanner too is not suitable, then he moves to another spanner until he finds the one which just fits the given nut. It means that the mechanic approaches his problem with an open mind and is not slavishly addicted to a chosen spanner.
Sri Lanka’s economic policy makers in the new regime should be pragmatists like the mechanic who is ready to try whatever the tool that helps him to solve his problem. For that, they must be ready to give up the Keynesian overalls which they have been wearing all this time.
(W.A. Wijewardena can be reached on waw1949@gmail.com)