Posted by: Vikram | December 15, 2016

Is it right to let economists judge demonetisation ?

Imagine one comes and tells some Indian economists of a radical move by the US government. The US government will remain shut for three days in the middle of the week, and only skeleton crew of police and emergency medical personnel will be required to report for duty. How would our economists respond ? As economists, they would be aghast. They would point out that since 40 out of every 100 dollars spent in the US is tied to the government, a government holiday for 3 days will pretty much mean that no private businesses operate either. And crafty workers will simply take two more days of sanctioned leave to enjoy a complete week’s break. The economic loss would run into billions of dollars, projects would get delayed and even medical procedures might have to be postponed. Column after column would be produced on how this would be a horrific move.

Of course, next week is Christmas or winter break in the US, and these holidays are traditional in the Christian world. People expect to not have to work on these days, and enjoy the holiday spirit. And knowing the reality of these holidays, not a few economists will wax eloquent about how they rejuvenate the workforce, build and reinforce family and social bonds, and so forth. Why this lack of consistency ? It is because there are questions that economics can answer easily, and those it cant answer very well at all. Look at everything in short term monetary terms, and economics becomes simple. Try bringing in politics, society and other intangibles over the long term, and economics starts looking extremely limited in its ability to predict.

Demonetisation is a terrible move in terms of short term monetary policy, it is akin to depriving a body of a very large percentage of its blood supply in one go. Any doctor would be horrified if a healthy person did such a thing to themselves. But what if this blood, in addition to nourishing our organs, was also feeding cancerous tumours and other unwanted growths. What if the choice was between cutting off the supply to these tumours now, putting the rest of the body through some pain, versus expensive, risky and potentially fatal surgery down the line ?  A smart patient and a good doctor would agree that its better to suffer the pain today rather than risk death later.

Economists cannot be good doctors because they have extremely limited tools for prediction. So the default position is to rely on the past, and stick to conservative policies. They are brilliant people to lean on when we want to understand the world we live in, but not so much when we want to change it. Narendra Modi was elected on a platform of change. One hopes that he will continue to try and change the disastrous monetary and cleanliness habits of Indians, and stop trying to change their dietary preferences.

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