Kaushik Basu & why academic Econ is shite

Economists never enjoyed any high prestige. Inventors and industrialists were folk heroes. It was only when, because of total War or the Great Depression, or the post-War Bretton Woods straitjacket,  Governments had to intervene on a very large scale that a few Professors were enlisted to polish the turd that was Government Economic policy. In India, the public had lost confidence in economists by about 1958. However, under UPA- because Manmohan was an economist- there was a brief period when there was some interest in the latest Ivy League Professor brought in for cosmetic purposes as Chief Economic Advisor.  

In a paper titled 'the state of Economics, the state of the world' Kaushik Basu, who was CEA between 2009 and 2012- wrote-  

Since the World Bank’s engagement is primarily with development economics, it may be worthwhile to point out that development economics, like economic theory, has had its moments of epiphany.

Both were playing catch-up with what had already happened to the economy centuries ago.  

Arthur Lewis had been troubled by two problems. First, there was the age‐old question of why industrial products, such as steel, were so much more expensive than agricultural products.

The answer was obvious. Agricultural produce grows on the land. To get iron ore and coal to produce steel, you have to dig deep under the earth. Steel has become much much cheaper relative to agricultural produce over the last 2500 years.  

Second, why were some countries persistently poor, while others were so rich? 

All countries were persistently poor till some developed new technologies and underwent demographic transition.  

  In an autobiographical essay, Lewis (1980) writes about his eureka moment in 1952: “Walking down the road in Bangkok, it came to me suddenly that both problems have the same solution.

Sadly, it wasn't the correct solution- which I gave above.  

Throw away the neoclassical assumption that the quantity of labor is fixed.

This means that the poor peasant can hire Elon Musk to create robots to do his work for him. He can also hire various Super-Models to entertain him in his new-found hours of leisure.  

An unlimited supply of labor will keep wages down,

No. It would make labor a 'free good'. I could have as many butlers and chambermaids as I desired. They would not need feeding.  

What Lewis had not noticed was that it was 'Advanced countries' where the labour supply could rise without any loss of productivity in any other sector. This is because women wanted to get the fuck out of the house and get jobs and rise up. 

producing cheap coffee in the first case and high profits in the second.

Steel is often an unprofitable industry. There is an 'accelerator' effect. In an upswing there may be large profits. In a downswing there may be large losses.  

The result is a dual national or world economy…”

Lewis was black. The duality he saw had a lot to do with Racism and the superior military technology of the 'Master' races.  

This was the genesis of his classic paper on dual economies in the Manchester School in 1954, which would play a major role in his being awarded the Nobel Prize in 1979, and in triggering research in development economics.

By then there had been a lot of actual development. Japan had risen up. Thailand and the other 'Tiger economies' were also doing so by embracing 'export led growth' and getting rural girls into giant factory dormitories. Lewis was useless. It wasn't true that you could frictionlessly move rural folk into manufacturing industry or high value adding services in the same country, or region. There was emigration from agricultural areas, but this went hand in hand with implicit real wage/service provision discrimination such that urban folk gained 'economic rent'. In other words, there was a hidden cost to development- but if migrants found ways to 'internalize' negative externalities- i.e. if they found their own solutions to their collective action problems- they too could gain. 

 Intuition and Causality I turn now, more specifically, to the subject of development policy.

That subject is 'Tardean mimetics'- imitate what your superiors are doing. Tell economists to fuck off. Accountants and Entrepreneurs are all you need.  

For the project of converting research to good policy, we need, in my opinion, three ingredients: data (and evidence), theory (and deductive reasoning), and intuition (and common sense).

No. For good policy you just need good policy. Research does not matter. Theory does not matter. Imitate what has worked for your superiors. Tell academics to fuck off.  

One of the great achievements of economics, in recent decades, has been in the area of empirical analysis.

But Davenant and King had empirically demonstrated the law of demand in the seventeenth fucking century! Adam Smith was playing catch up except he never actually caught up.  

There is reason to celebrate the rise of data and our ability to analyze data using different methods, from intelligent bar charts, through simple regression analysis and structural models, to randomized control trials.

No there isn't. Successful countries didn't bother with that shit. Still, you can earn a little money teaching it to kids who were too stupid to get into Medical Skool.  

This recent success raises hope of economics becoming a truly useful science (see Banerjee and Duflo 2011; Duflo and Kremer 2005).

But Banerjee and Duflo are useless. Measuring poverty is like measuring your dick. It has no magical effect. The poor remain poor and your dick remains tiny.  

There is, however, a propensity among some economists to dismiss all theory as esoteric. Among other dangers, this has the risk of making our discipline inefficient. Suppose we insisted that Pythagoras could only use empirical methods. Would he ever get to his theorem? The answer is he might. If he collected a large number of right‐angled triangles and measured the squares on their sides, he may have hit upon the conjecture of the two smaller squares adding up to the one on the hypotenuse.

Basu is merely saying that pure math is useful because it can be applied. The question was whether pure development theory could be applied? The answer was, no. It was stupid shit. 

But this would be extremely inefficient.

The mathematical theory of Trade and Development turned out to be a waste of resources. Control theory in production econ might be okay- but leave that to the engineers.  

Moreover, there would be a lot of debating and dissent. Some would charge him of using a biased sample of right‐angled triangles, all from the Mediterranean region. “Would it work in the Arctic, in the southern hemisphere?” they would query. 

It does not work for a reason Einstein explained. We don't live in an Euclidean universe.  

   We must acknowledge that there are many truths that can be discovered more efficiently and more compellingly using pure reason.

Empirical correlations are observed. Only tautologies can be 'discovered'. Otherwise you have 'natural deduction systems'. But they are only as good as their underlying structural causal model. If that is good, you can change the world directly.  

Further, there is a great deal of sloppiness in the way we reason about the use of evidence. For instance, hard‐headed practitioners will often tell you the following: “If we do not have any evidence whether or not some policy X works, we must not implement X.” (I was told exactly this fairly recently, in response to a suggestion I made.)  

Nobody tells the entrepreneur or the inventor that. But we do tell bureaucrats or politicians that they should not be allowed to do stupid shit with our tax dollars.  

Let me call this rule in quotes an axiom.

Just call it a rule. In law, if you- as an Agent- have been hired to give evidence based policy recommendations, that is what you have to do. If you are a Principal- e.g. an entrepreneur- you are not subject to this rule. Sadly, this also means a crazy guy like Nkrumah can tell Arthur Lewis to go fuck himself because the former was the Head of State. The latter was merely an advisor.  

To see that this is an unreasonable axiom, observe that if we do not have any evidence whether or not X works, we do not have any evidence whether or not not‐X works.

Rubbish! We have no evidence that insisting that CAT scans only be performed by actual cats will improve outcomes. This does not mean that we have no evidence that CAT scans performed by trained humans are worth having.  

But since we have to do X or not‐X, that original axiom has to be flawed.  

If we are already doing not-X because it is useful then there is evidence it works.  

For good policy we need facts and evidence, but we also need deduction and reasoning.

No. A good policy may be implemented by a guy who has good intuition but who can't reason worth shit.  

We can go a step further and make a case for using mathematics.

We can also make a case that CAT scans should be performed by actual cats. This is because cats are cute.  

While the use of mathematics can be overdone and that has happened in economics, the immense achievements of Cournot (1838) and Walras (1877), and of modern economics, would not have happened without it.

But modern econ hasn't achieved shit. Entrepreneurs and politicians who decided to imitate what works best have propelled us to a much higher level of prosperity.  

This is because mathematics is a disciplining device, even though it is demanding and clearly not something meant for all. As Krugman (2016, p.23), not being able to make up his mind if a particular argument of Mervyn King (2016) was right, observes, “[W]ords alone can create an illusion of logical coherence that dissipates when you try to do the math.”    

The opposite is even more true. Arrow-Debreu looks logical. Then you realize Language would not exist in an Arrow-Debreu world. The thing is nonsense.  

  The power of doing a model right, even if it is abstract and uses assumptions that may not be real, can be seen from general equilibrium. Take Gerard Debreu’s classic The Theory of Value. This is a book of great beauty, as spare as poetry.

But, it refers to a world where there would be no Language and thus no poetry.  

In some ways, it is comparable to the work of Euclid, for it brings together in a systematic way an amazing range of ideas.

It is stupid. A topological existence proof is meaningless if there is impredicativity or intensions have unknown extensions. Thus Arrow-Debreu could not prove anything at all. It is no good saying 'a price vector' with such and such quality exists if its extension is unknowable. This is because the thing isn't actually a vector nor are there any actual underlying sets. I might say 'the true cat is the being such that none better able to perform CAT scans is conceivable.' But no such true cats can be found. There is no extension fitting the intension. 

Euclid may not have been as original as Pythagoras or Archimedes, but in bringing intellectual order to a scattered discipline, he had few peers, and he served an enormous role in the progress of knowledge.

No. He played a role in the progress of mathematics. But mathematics is not knowledge of anything other than itself just like poetry or Socioproctology. Why? If such knowledge existed then some truth can be 'known to be known' a priori. But, if so, there there must also be a 'true cat' which alone knows how to best perform CAT scans.  

Likewise with Debreu’s slim book.   The path‐breaking general‐equilibrium model of Walras, Arrow, and Debreu

was useless. By the early Seventies, it became clear it was 'anything goes' because of hedging and income effects even absent Knightian uncertainty. Anyway, coevolved systems are 'far from equilibrium'.  

provided a template that sparked some of the most original works in microeconomic theory, by Akerlof and Stiglitz, prominently, which has to do with modeling the functioning of markets under imperfect information.

But markets changed as technology changed such that there was an arms race between screening and signaling devices. Akerlof also had an utterly useless theory of the Indian caste system. Stiglitz went utterly bonkers. He praised Chavez. 

This has greatly enhanced our understanding of micro‐markets, why markets fail, why prices are often endogenously rigid, resulting in credit markets with excess demand and labor markets with excess supply.

These guys didn't understand shit. That's why they didn't become billionaires playing the markets.  

This research also has hopes of improving our macroeconomic analysis since, as we know, Keynesian macroeconomic analysis, like Arthur Lewis’s dual economy model, makes extensive use of price rigidities, and neither Keynes nor Lewis had an explanation for these rigidities.

Nonsense! Keynes knew about cartels and trade unions. Lewis knew that if workers don't get enough to eat, they stop being workers.  

Thanks to the work of Stiglitz and a few others, we now have a formal understanding of open unemployment and credit markets that do not clear despite the absence of exogenous restrictions on interest rate movements.

Everybody else knew about this back in the days of ancient Sumer. Arbitrage occurred even before the first coins were minted by ancient City-States.  

Alongside these positive theories, we saw the rise of normative economics.

Scolding the economy rather than scolding the environment. Why not scold cats till they become true cats and perform more perfect CAT scans?

Perched between analytical philosophy, mathematical logic, and the social sciences, this was a remarkable achievement.

It was utterly useless. True, a few cretins like Basu could get PhDs in this shit so as to teach other cretins. But, what else are you to do with cretins? The point about mathematical econ was it meant to keep busy the sort of nutter who might otherwise turn into a rabid Maoist. 

There were major contributions from Samuelson, Bergson (1938), and others, but the truly astonishing breakthrough was Ken Arrow’s (1951) slim book: Social Choice and Individual Values.

It too was based on the intensional fallacy.

Arrow’s Impossibility Theorem became the bedrock of an enormous research agenda.

Wholly useless.  

The leading figure here was Amartya Sen, whose work, straddling philosophy and economics, demonstrated that it is possible to bring the finest traditions of theory and          mathematical logic to bear on age‐old questions of ethics and normative principles (Sen 1970; see also Suzumura 1983).

What was the upshot? More hot air.  

This work brought into the mainstream of rigorous analysis concepts such as rights, which were widely talked about but seldom subjected to careful scrutiny (Sen 1996).

Fuck off! Hohfeld told us everything we needed to know about rights and obligations. If there is no incentive compatible remedy, the right will not be effective or else will be rationed.  

This body of work has been important for the World Bank, since its mission goals have foundations in it (World Bank 2015b), and also in related country‐specific research (Subramanian and Jayaraj 2016).    

Useless shite. Edwin Lim had helped China rise. He couldn't do the same for India because the Rights-based activists gained more by preventing the World Blank finance infrastructure investment than the decent Punjabi economists like Manmohan and Montek.  

       It is worth digressing for a moment to note that data and statistics belong to a larger domain of inquiry, which has to do with description.

It would only be worth making this digression if you were talking to imbeciles.  

Doing descriptive social science is often treated as a pejorative,

No it isn't. My degree is in 'Analytical and Descriptive' Econ. It doesn't try to shit higher than its arsehole.  

which is unfortunate, since, as Amartya Sen (1980) points out in a powerful essay, good description is not easy and a huge amount of the progress of science depends on description.

Good description is easy enough for any useful purpose.  

Description, be it in words or data, entails choice.

It entails correspondence with the facts. This means there is less 'choice' than when speaking imaginatively. 

Description is not regurgitating everything we see around us. We have to pick what is vital and make that available to others. How we describe and what we describe shapes our understanding of the world.

Nonsense! I may describe everybody I meet as a shithead but I am careful to consult a Doctor of high reputation rather than place my faith in a Quack.  

The “describer” is therefore a pivotal agent.  

If the subject is important, there may be a market for descriptions with the more accurate gaining more market share. But, we may disregard descriptions and focus on other clues- e.g. if everybody describes Satyajit Ray's 'Sonar Kella' as 'mesmerizing' but if nobody turns up for its screening then you understand it is as boring as shit. By contrast, if you see a big queue for 'Sholay', that's the movie you go to see. 

It is important to be aware that description can take many forms.

Only in the sense that it is important to breathe. If you aren't already doing it, you are probably dead.  

What the anthropologist describes often does not take the form of numbers and data.

It takes the shape of stupid shit he pulled out of his arse.  

But the descriptions of what he or she has seen and, more importantly, experienced is vital for our understanding of the world. The concept of “thick description,” which we owe to Gilbert Ryle (1968) and Clifford Geertz (1973) and has been used by umpteen anthropologists, has vastly enhanced our understanding of traditional and remote societies and enabled us to intervene more effectively.

Fuck off! Anthropology turned to shit long ago- supposing it wasn't always shit. Still, there was a time when the Anthropology Dept. had the best drugs probably because it was filled with CIA agents.  

At times this intervention has been for the wrong reasons, for instance, to enable colonial domination;

Kenyatta was an anthropologist. He thought female circumcision was a very good thing. His descendants are very rich.  

but it has also helped to carry the development agenda further by helping extend the reach of modern medicine and education.

Which is what the Colonialists and the Missionaries did.  

Historically, we have learned about the motivation and purpose of other lives, which are distant from us, through the ardor and work of anthropologists.

No we haven't. We used to read the National Geographic because of all the bare breasted ladies featured there. Now we have Pornhub.  

These are very difficult to learn and comprehend with data and statistics alone. Living with the subject and acquiring an intuitive understanding is often a necessity. This knowledge has been put to good and bad uses, to help the poor living in distant lands and in traditional societies, and also to exploit people and spread imperialism and colonial control.  For good or for bad, the knowledge has been useful. The absence of such knowledge can be a big handicap.

It didn't stop lots of Indians making good money setting up shops in remote parts of darkest Africa.  

Consider terrorism. Because of the dangers associated with terrorist groups, we do not have studies of the kind anthropologists provided for remote societies. This is causing an insurmountable knowledge divide.

No it isn't. Torturers employed by Intelligence Agencies have a pretty good idea of what is going on. The Brits dealt with Indian terror cells pretty successfully. Independent India built on those skills.  

     Finally, a word of caution. The skeptics, from Pyrrho to David Hume and Bertrand Russell, were right; neither fact nor deduction can take you all the way to the best policy to implement.

God can, though those who claim He talks to them may have other ideas.  

The reason is that causality, whether or not it is there, can never be demonstrated.

It can be demonstrated well enough. If you have the right Structural Causal Model you can change outcomes- e.g. curing blindness by performing a particular type of surgery.  

In the end, causality lies in the eyes of the beholder.

No. Eyes are irrelevant.  

For me the most thought‐provoking observation on this comes from a tribesman from Nepal. The famous National Geographic photographer, Eric Valli, seeing the high trees these tribesmen climbed to gather honey, asked one of them if they don’t ever fall down from those trees. The answer he received was: “Yes, you fall when your life is over.”

The meaning is 'we are forced to do this dangerous work. Thus, we take a fatalistic view. What is the alternative? Will you give me some money so I can retire? No? Then, fuck off.'  

    Given the impossibility of discovering causality, for good policy it is not enough to have the facts; not enough to combine them with theory. I am convinced we need one more ingredient: common sense and what I have elsewhere called “reasoned intuition” (Basu 2014).   

None of this is true. Imitate what smarter peeps are doing or have done. Tell economists to fuck the fuck off. China rose by emulating its richer neighbors. India was prevented from doing so by blathershites who prated about 'equity' from their Ivy league ivory towers.  

Researchers refuse to admit it, but it is true that there is no escape from the use of intuition, and the bulk of what we call “knowledge” that we acquire through life occurs casually, mainly by using common sense.

Fuck knowledge. Just imitate smart peeps. Fake it till you make it.  

It would be a mistake to insist that all knowledge has to be rooted in scientific method, such as controlled experiments.

Not in specific fields. I don't want to take an untested drug though, if desperate, I may have no other choice. But this yields statistical information.  

If one pauses to think of the number of things a child learns through non‐scientific methods, it is quite staggering.  

Mimetics is so effective because Evolution gave us something like 'mirror neurons'.  

As to why such knowledge, acquired through intuition and common sense, may have value, we have to recognize that our intuitions are what they are by evolution.

No. Our propensity for mimetic behavior, not any intuition we may currently have, is the product of evolution.  

They have survived natural selection and so their power must not be dismissed out of hand.

We mimic others who have learned to suppress instinctual or 'intuitive' responses. This is why, within a short period of joining the army, peaceful citizens are soon behaving like ferocious warriors.  

Evolution has shaped a lot of what we see in our economic life; this is widely acknowledged, but our understanding of the interface between evolution and economics, for which some foundations were laid by Maynard Smith and Price quite some time ago (see Maynard Smith and Price 1973; Weibull 1995) remains rudimentary.

Not really. Evolutionary Econ has burgeoned. What is strange is that Basu does not understand 'uncorrelated asymmetries'- e.g. that by which the guys doing best can be identified and emulated. Tardean mimetics is a 'bourgeois strategy'. I may mention that Evolution seems to use a Multiplicative Weighting Update algorithm like 'Hannan Consistency' to deal with Knightian Uncertainty. The math of co-evolved processes tames complexity something fierce. 

There is a foray into this in the conference book in the context of morality and other‐regarding behavior and their origins (see also Alger and Weibull 2013). But it is arguable that there are many other domains where this applies. The way common people acquire knowledge may not meet the test of scientific standards but cannot be dismissed out of hand.

Only in the sense that we can't dismiss out of hand the possibility that all those who perform CAT scans are truly cats.  

At the same time, one cannot be unmindful of the fact that casual empiricism can lead to superstitions that we have to guard against. I have argued elsewhere (Basu 2014) that what we need is “reasoned intuition,” that is, the use of intuition vetted by reasoning.

Why not argue that we need to use reasonable respiration to prevent ourselves suffocating?  

This is not a surefire method but the best we can do.  

Speak for yourself. I am able to breathe through my asshole.  

Data, theory, and intuition are the three ingredients for human knowledge and progress.

No. Experimentation and entrepreneurship are of the essence. You can have lots of data and a hefty theoretical apparatus and plenty of good intuitions while remaining useless and unproductive.  

But even with all three in place, skepticism, as philosophers through the ages have reminded us and as Keynes did in chapter 12 of General Theory, must be a part of the thinking person’s mindset.

Even more importantly, the thinking person should take a dump from time to time. I often used to remind Keynes of this but he would tell me to fuck off because he was dead and thus no longer needed to defecate. Nobody can say my three years at the LSE were entirely wasted.  

One problem with scientists who lash out against superstition but do not question scientific knowledge is the double standard. They fail to recognize that, when it comes to certainty about the future, scientific wisdom is as much open to question as many other forms of knowledge.

This is also the problem I have with the neighbor's cat. When I mention Pyrrho, it does nothing but purr. This is highly vexatious behavior. World Bank should take action.  

 Knowledge and Caveats As we head into uncharted territory and struggle with the world’s economic problems, recent ones include the United Kingdom’s vote in favor of exiting the European Union (I suspect this will persist in being an important problem when the conference book is published)., In addition, the decline in commodity prices, especially that of oil, is creating a lot of stress in commodity‐exporting nations and corporations that had invested in this sector. Questions are being raised about the readiness of the discipline of economics.

It was supremely unready for COVID or Ukraine or Gaza. But this un-readiness did not greatly matter. Nobody expects economics professors to ever say anything sensible.  

The first thing to recognize, however, is not that economists misread or underestimated the crisis,

there was no crisis compared to what was to come 

but how this crisis shows that there is still a lot about the economy that we do not know.

Unless we can make a lot of money finding out 

   In any discipline, there is the disadvantage of not knowing exactly what we do not know.

Not if it is disciplined. Econ isn't. It is shit.  

Take, for instance, medicine. Given how little we know about the human body and brain, when we go to the doctor with health problems, in a vast majority of cases the right answer for the doctor to give is: “I have no idea.”

No. The right answer is 'your problem could be x for which we have a treatment. If, however, it is y, start making your Will. Meanwhile I'll arrange for tests at the Hospital.  

But we seldom hear this. Doctors almost invariably tell you what your problem is.

No. You tell them what your problem is. If they say 'I'll tell you your real problem. You are a worthless pile of shite.' you realize it isn't your G.P you are talking to. It is your Mummy who is scolding you.  

What should warn you that when doctors says they know what your ailment is but they often do not is that, even in the 18th century, well before the arrival of modern medicine, doctors seldom said they had no idea what ailed the patient. This is because doctors in the 18th century did not know and doctors now do not know what they did not and do not know.

Eighteenth century Doctors had the wrong structural causal model. Still, they were quite good at some things which is why they could make a bit of money.  

It is much the same with economists.    Among the areas of darkness that hamper development policy is our inability to link the micro and the macro.

What hampers 'development policy' is blathershites who don't get that development is about mimetics not mathematics or scolding Society.  

Suppose a government undertakes some intervention X in a thousand villages. X can be a conditional cash transfer, an employment creation program, or provision of a fertilizer subsidy. How do we evaluate the success of the program in removing poverty?

We don't unless we are paid a little money to do so. But that is wasted money. An intervention which folks in villages can end up fully financing themselves is one that is 'scalable' and which will actually raise people out of poverty. Otherwise, the donor gets to decide to do stupid shit and the economists have to go along with that stupid shit in order to get paid for 'Project evaluation'.  

Typically, we do this by collecting data on the well‐being of the people in these villages. If we are fussy, we may use all kinds of controls, including proper randomization.

Rossi's metallic laws apply. The one thing we can predict about any intervention is that a detailed and wide enough a study will show it was ineffective or mischievous.  

Suppose, through such a study, it is found that poverty has indeed gone down in the villages where X was implemented. Does this mean X is a good intervention? Not necessarily. Suppose the intervention X in a village has the following effect. It raises food prices a little and raises wages more.

Why would it raise food prices? There will be arbitrage. One may say 'food moved in from more deprived areas', but, if food prices have risen then there must be some market imperfection or high transport costs. Focus on that.  

This will indeed lead to lower poverty in the village. But since a rise in food prices typically cascades across the whole economy,

only if there are open markets and transport isn't a big problem. But, in that case local food prices won't rise.  

this intervention could mean that in other villages, which will only feel the full rise in food prices and a negligible effect on wages, poverty will rise.

That's what happens if food is sucked in from more deprived regions. 

So it is entirely possible that the nationwide effect of the intervention will be no effect on poverty or even an increase in poverty, though poverty falls in the villages in which the intervention occurs. 

Indeed, there may be a mischievous type of 'crowding out'. Smart peeps in the poor country prefer to work for AID programs rather than set up enterprises. Dependency has increased. Sooner or later there is 'compassion fatigue' or else a financial crunch. The country finds itself worse off than if it had tried to rise by its own efforts.  

These links between micro interventions and macro effects are poorly understood.

Only if we are paid to pretend to not understand the fucking obvious.  

We need to invest in this kind of research much more if we

are using other people's money. If it is our own, we say 'we don't need no stinking research.'  

are to succeed in battling nationwide and even global poverty and to combat inequality.   

Very true. Suppose some scammers steal Basu's identity and grab all his money. Will he do research on global poverty and the combatting of inequality or will he try to get his money back or- if that is impossible- look around for the quickest path to restore his opulence? This may involve setting up his own 'Only Fans' account. 

There are other micro‐theoretic areas, such as, finance and the psychological foundations of human behavior, where economics has made great strides,

some new fads were created. What happened to 'nudge'?  

and which receive attention in the conference book. But there are still many open questions. In finance there is an increasing recognition that there is no such thing as an ideal regulation.

When was this not known? Something like 'Goodhart's law' was known to medieval City states.  

This is because financial products are amenable to endless innovation. Banks and financial organizations will keep developing new productsthe way the medical industry keeps discovering new drugs. And with each such financial innovation we may need to modify and make our regulatory regime more sophisticated. Hence, this is one area where we have to reject the language of optimal regulation, which has a static connotation, and be prepared to have regulatory bodies that are flexible and ready themselves to innovate.

Competition between jurisdictions would have that effect though it is likely you will have differentiated 'Tiebout models'.  

This is complicated by the fact that in signing on to financial products people are often not rational and instead give in to emotions, hyperbolic discounting, and framing delusions, as pointed out repeatedly in the new behavioral economics literature. 

There is a bandwagon effect or 'the madness of crowds'. But the bigger problem is there are enormous technological and geopolitical changes underway. This was not obvious at the time of Brexit. But it is obvious now.  

  One possibility is to think of labeling certain financial products as “prescription goods” and creating the equivalent of doctors in finance who have to sign off before a person is allowed to buy a financial product. We could, for instance, decide to allow a balloon mortgage but before someone can commit to it, one has to get a “finance doctor” to sign off on the financial viability of the person to take on such a contract. This cannot be done by mechanically following practices in medicine, but there is a case for giving serious thought to such an architecture.  

Basu forgets that there were 'prescription mills' feeding America's opioid addiction. Moreover, real estate bubbles were not prevented by licensing realtors or requiring valuations from Chartered Surveyors.  

    The interface between economics and psychology, and, more specifically, behavioral economics, has witnessed great strides; and we have tried recently to bring this to bear on the agenda of development policy, with our World Development Report on Mind, Society, and Behavior (see World Bank 2015a). By drawing on evidence from laboratory experiments and field observations from around the world, behavioral economics teaches us a lot on how and where we should intervene.

What did it teach the World Bank about how to respond to COVID? Nothing at all. It turns out going for herd immunity is the only option for most of the world.  

However, there is a risk of this discipline becoming a catalogue of findings. I call this a risk because of a propensity to think of the findings as set in stone, not realizing that they may be true in some societies at certain stages of development, and could be different at other places and other times.   What is also needed is an effort to marry these findings more effectively with the concept of equilibrium

Why? The link between liquidity and volatility are much better understood now. Moreover, 'private information' is burgeoning more rapidly for a variety of reasons. Thus we are speaking of 'far from equilibrium' dynamics.  

(Akerlof and Shiller 2015) so that we can leverage them to get much more out of them and also to be able to predict better how these findings are likely to change from one society to another and also evolve over time. To my mind, one of the great contributions of traditional economics is the idea of equilibrium, which has many manifestations, from the general competitive equilibrium to Nash.

correlated equilibria are a better solution concept.  

The needed agenda is to broaden the description of individuals from the narrow homo economicus to that of more real individuals with quirks, irrationalities, and social norms, and then use the idea of equilibrium in conjunction with this.

Why bother? There is an arms race between 'public signals' and screening devices which maintain separating equilibria.  

 What makes this intellectually challenging is that for most real phenomena, which seemingly rely on human irrationality or adherence to social norms, it is possible, with analytical ingenuity, to reach the same conclusion with perfectly rational individuals.

Or, better yet with Muth rationality provided we understand that for any coordination game there can be a discoordination game permitting hedging and income effects.  

In the end this calls for the use of judgement and intuition in deciding what assumptions we should rely on. The World Bank has been increasingly engaged in this difficult area.

But it can only hire the second rate and thus is doomed to play catch up.  

One important arena of policy making, a big task faced by those at the helm of policy, is the control of corruption. Traditional economics treated an act of corruption, whether to pay a bribe to get an illegal electricity connection or not, on par with whether to buy an apple or not—an exercise in narrow cost‐benefit analysis (see Bardhan 1997; Mishra 2006).

Bardhan and Mishra weren't 'traditional economists' by any means. The standard view was that the thing was a crime. It should be punished. However, since the underlying problem was that of inelasticity and thus economic rent, the solution involved either suppressing the market, if it was repugnant, or else opening it up and thus raising elasticity and getting rid of economic rent.  

It is not surprising that we have been so singularly unsuccessful in controlling corruption.

At the World Bank? Do its officers pay bribes to get nice assignments?  

To understand this phenomenon it is important to bring in psychology and political institutions.

Only if it is important to do so in the case of rape and murder. I suppose, in a corrupt enough country you can get away with both.  

Development policy cannot be built on economics alone.

It should be built on scolding Society. Also, senior officials should admonish cats to properly perform CAT scans.  

 Money and the Man of Influence  ...something I learned by fire, during my nearly three years as a policy maker in India, 2009‐12. Although monetary policy was not my charge, it became clear during this time that many of our interventions were based on imitating policies followed by central banks in advanced economies, unmindful of the fact that their contexts differed.

Why was this? The answer is that Manmohan wanted to carry out fundamental reforms and felt that reduced reliance on the Left meant this was now feasible for UPA. He would soon use the excuse of Moody downgrading as an equivalent to the foreign-exchange crisis of the early Nineties which had enabled him to reform Trade policy. Thus his strategy had to do with pretending the RBI was like the Fed and that a poor country like India needed to please the markets in the same way the OECD countries did. But, for India, RBI is merely there to raise money for the Government. It can't protect non-existent 'widows and orphans' or 'Institutional investors'. Still, hiring Rajan- albeit a cosmetic move- did rally markets. 

        One reason for this deficiency is that we do not understand the functioning and role of money in a market economy the way we understand, for instance, the Walrasian general equilibrium system for real goods and services.

Our understanding of Walras' law is like our understanding that it would be nice if cats could perform CAT scans.  

Money in general equilibrium was part of a big research agenda in the 1980s, but has remained incomplete.

We don't know what is or isn't money. The thing is credit, that is faith.  

One reason for this is that it is mathematically a very hard problem.

like the problem of figuring out which neurons must fire in feline brains if cats are to perform CAT scans.  

But it must not be abandoned for that reason.

Because one should never abandon doing useless shit.  

In the rush to solve the next morning’s problem, often these deep questions take a back seat.

like the very deep question of whether dogs will be upset if cats perform CAT scans.  

But as the world struggles to cope with the slowdown and the widespread use of negative interest rates does not seem to work, and in fact has a negative backlash from which no one is able to individually break out, it is important for economists to keep up some of this fundamental research.

Because, otherwise, there might be 'gain of function' research in a lab in Wuhan which causes a global pandemic- right?  

If the full general equilibrium model took some 75 years, from Jevons and Walras to Arrow and Debreu,

and was discovered to be useless within 25 years.  

and the study of money in equilibrium started in earnest in the 1970s and 1980s, we have little reason to abandon it as unsolvable.

Money is faith in its ability to command future resources. You can arbitrarily fix it at any value so as to show that true cats are indeed performing CAT scans.  

To see the mystifying nature of money, one can look at a very different problem—the power of peddlers of influence. With the U.S. presidential election in the offing, there is a lot of writing about lobbying, influence peddling, and corruption. In my youth in India, I remember talk about “persons of influence,” referred to in those days as “men of influence.”

or 'dalals'- i.e. pimps or fixers who could get your work done for you.  

I recall being baffled by one particular person and wondered why he was so well‐off. He had no special skill, no resource. He was just the man of influence (let me call him M). In those days, there was a wait of six years to get a phone connection. If you needed it sooner, you could try calling M and requesting his help. He would call up the relevant person in government; and more often than not the favor would be done. If someone needed to get a child into a good school, she could ask M and if M agreed he would request the school principal to make an exception and take in this kid out of turn. It struck me much later what he was doing and I wrote it up as a model of the man of influence (Basu 1986). M was a person with a mental ledger of favors done. If i needed something from j, whom she did not know, she could ask M to ask j. Then j would do the favor not because j cared for i or ever expected to need a special favor from i, but because j knew that someday he would need a favor from k and would need M to make a request to k. It is M that no one wanted to offend because M was a clearinghouse with a memory. This is what made M a man of influence.

We may say he was a 'market maker'. He was 'netting out' transactions he facilitated for a profit. However, it is likely that he had a political patron- e.g. Chandraswami who had Narasimha's ear. Sadly, in most such cases, there is an element of fraud. Some paid big money and got nothing. They may have had to pretend otherwise or else the vultures would have started circling. 

In some sense, a man of influence is like money or blockchain. It is a record of information and works only because everybody thinks it will work.

It may be a Ponzi scheme. The Dalal may turn out to be a Natwarlal.  

This description and even the model is easy enough. But its integration into a full general equilibrium model is extremely hard

it is easy enough if you introduce a category of ontologically dysphoric goods whose supply is its own demand. Did you know that the Institute of Socioproctology can certify your cat to perform CAT scans for the low low price of $ 9.99?  All the dogs in the neighborhood will be so jelly. 

and remains an open agenda, thereby handicapping policy makers greatly and forcing them to rely on intuition and guesswork more than hopefully will be necessary in the future. 

Policy makers don't look at general equilibrium models. It is known that their solution is a time class exponential to the life-time of this Universe.  It is a different matter that you might pay a guy a little money to pretend otherwise. But then you can also get CAT certification for Moggie. 

  Politics and Economics In discussing development policy, I have been stressing the role of economic theory and empirical economics in brief, input from professional, scientific analysis. The lack of this dooms many a developing economy.

No. Countries which actually developed- Japan, South Korea, Taiwan etc- didn't bother with mathematical econ though some of them had a few such nutters whom they happily packed off to the LSE or other such places.  

But it is not always easy to marry scientific analysis with the ground realities of politics. Maybe because I moved so abruptly from academe to policy making,

his one achievement, he says, was to get access to the toilet used by senior IAS officers. If even the PM, who was an economist, could not do make policy under UPA, fuck could Basu do?  

I cannot be unmindful of the importance of the role of how one engages with politics and politicians. When I moved from Cornell to the Indian government at the end of 2009, I quickly became aware of the potential conflict between the prescription coming from theoretical economics and political compulsions. One quickly learned that when a politician tells an economist, “You are so good at theory,” it is meant to be a devastating criticism. 

If your boss is saying you are good at something other than your job he is suggesting you were an affirmative action, or otherwise cosmetic, hire. I've often been told I draw very nice pictures of cats by those who had to mark my examination scripts. Sadly, on entering the job market, I no longer received such praise. I was summarily fired.  

  I have recounted in Basu (2015) how at one of my first meetings, in my new job, with the Prime Minister and some of his advisers, discussing how to control food inflation, which was then at double digits, I spoke at some length on changing the manner in which food reserves are released in India to get the maximum dampening effect on prices.

Increase the supply. Food prices will fall. Also, why the fuck are we letting rats eat food meant for the people?  

I basically drew some policy lessons from the logic of Cournot equilibrium.

Which is irrelevant. There is no duopoly in the food market.  

I was delighted that my suggestion was accepted, which, I now believe, I owe as much to Cournot’s excellent theorizing as to my not uttering the words “Cournot” or “equilibrium.” 

Because Manmohan or Montek or anybody with an Econ degree would say 'There is no fucking duopoly here you fucking cretin!'  

  One gets a fascinating glimpse of the interface between the world of economic ideas and political compulsions in developing countries from Arthur Lewis’s experience as Chief Economic Adviser to the Ghanaian Government.

No. The Ghanaian entrepreneurial class had made the mistake of recruiting Nkrumah who had even more degrees than the utterly useless Krishna Menon. They soon realized their mistake and got rid of that over-educated imbecile.  

He was invited to take this up by the country’s first Prime Minister and President, Kwame Nkrumah. The United Nations and the United States tried to block this on the ground that Lewis was

a fucking darkie. Back then the US still had Jim Crow. 

“not very sympathetic to the Bank [the International Bank for Reconstruction and Development, commonly referred to as the World Bank]” (Tignor 2006, p. 147). There were also concerns, such as the one expressed by A. W. Snelling, an official in the British government, that “Lewis is a socialist, but a moderate one” (Tignor 2006, p. 148). 

Like Coase, his supervisor at the LSE was Arnold Plant. However, Lewis's elder brother- like some other brilliant West Indian lawyers and entrepreneurs- had settled in Ghana some twenty years previously. He was close to one of the leading Pan-Africanists of the period. 

  Lewis’s tenure began extremely well, with Nkrumah personally excited at the prospect of Lewis steering the Ghanaian economy to a takeoff. On taking office, Lewis plunged into work, especially related to the Second Five‐Year Plan, with widespread support from others in government. But soon Lewis’s idea of what constitutes good economics and Nkrumah’s insistence on political compulsions came into conflict. Seemingly small differences of opinion, for instance, whether to spray cocoa trees that had been attacked by capsid beetles (pardon me for having forgotten who took which side), became the cover for deeper conflict—the professional economist’s insistence on good economics, and the politician’s stubbornness about what is politically good.  

Lewis, like his brother, wanted an already prosperous country to rise up yet higher. Nkrumah wanted money for white elephant projects.  

Lewis left office at the end of 1958, with Nkrumah’s letter, gracious but recognizing that they could not work together, in his pocket: “The advice you have given me, sound though it may be, is essentially from the economic point of view, and I have told you on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future.” (Nkrumah to Lewis, December 18, 1958, quoted in Tignor 2006, p. 173)  

To be fair, many young people, at that time, thought Africa would rise very rapidly. Sadly, this meant letting its industrious peasants and artisans and entrepreneurs grow richer. This would also mean they would build beautiful new Churches and Mosques rather than worship Kali Marx in a proper fashion.  

  Interests and Ideas .  Some months after I moved from academe to the Indian government, a reporter asked me: what was the one thing that I had learned in this transition?

Manmohan has no power. He is a 'prone minister'. That was the answer the journalist was looking for.  

Unusually for a question of this kind, I had an answer. The reader may recall Keynes’s beautiful observation on the power of ideas, which ended with the following: “I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”  

Unless those vested interests kill people who let ideas encroach upon them.  

As an academic, I loved the observation but did not believe in it, viewing it as a self‐serving remark of a professor.

Keynes held high positions in Government before becoming a Professor.  

It was only after I joined the Indian government and sat in interminable meetings with ministers and bureaucrats that I came to believe in Keynes’s observation.  

Everybody else believed that UPA did what the billionaires told it to- provided Madam Sonia's advisors could be squared.  

Ideas play an unbelievably important role, and so those in the business of ideas have a special responsibility. 

The one idea which took hold in India, while Basu was C.E.A, was that Modi and the Hindutvadis would do a better job running the country than a nice Italian lady pulling the strings of an elderly Sikh gentleman. But this was because Rahul was a moon-calf. 

 As a consequence, I view this conference and the book not just as an intellectual contribution, but as a critical ingredient for the work that is meant to be done in an organization such as the World Bank.  

Nobody else did. The World Bank has shit for brains.