Economics and the Economic Crisis: Who is to blame?

At my university, a generous alumnus, Stephen Bruce, has funded an initiative on “Rethinking Capitalism.” As the fallout of the financial crash of 2008 drags on, now with the banking crisis in Spain, the topic seems inordinately relevant. Even in India, the crisis has given critics of economic reform ammunition against that direction of policy, aside from the direct impacts on India of the weakening global economy.

In April, the Bruce Initiative took its efforts from the redwoods of Santa Cruz to the closest academic precincts of the centre of capitalism, with a conference at New York University, a stone’s throw from Wall Street. And the opening remarks were delivered by NYU’s Goddard Professor of Media, Culture and Communication, who happens to be a very famous expatriate Indian, Arjun Appadurai. Professor Appadurai began as follows, “Why does there appear to be no one to blame for the ongoing destruction of the economy, society and environment? The government, banks, experts, and regulators have all claimed innocence, while taxpayers have had to speculate on their futures. It is time to point the finger: it is the discipline of economics that has brought about this state of affairs. From business to the media to academia, economists now run the world.” I have heard this sentiment in different forms from several colleagues across the other social sciences and the humanities, along with complaints that economists should now show more humility, since we got things so wrong.

Are economists to blame for where we are now? My first thoughts on reading Appadurai’s remarks were that he was tarring the whole profession with the misguided optimism of a part of it—Alan Greenspan musing on the taming of the business cycle, for example—and that he was confusing economists with business people and politicians, who indeed did much to bring about the current mess. Towards the end of his brief talk, however, Appadurai states, “We can move toward a new form of social inquiry that looks at the relationship between quantity, quality and personhood. This is a different theory of social action that moves away from rational choice.” So clearly he has a problem with the core methodology of economics.

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How fast are India's states growing, and why?

Three years ago I did the following calculations based on per capita state domestic products:

State	1993-94	2003-04	Growth (percent)	Growth rank
Andhra Pradesh	7416	11756	58.52	5
Bihar	3037	3557	17.12	18
Jharkhand	5897	7732	31.12	13
Goa	16558	30506	84.24	1
Gujarat	9796	16780	71.29	3
Haryana	11079	15752	42.18	9
Karnataka	7838	13141	67.66	4
Kerala	7983	12328	54.43	7
Madhya Pradesh	6584	8284	25.82	16
Chhattisgarh	6539	8383	28.20	14
Maharashtra	12183	16479	35.26	11
Orissa	4896	6487	32.50	12
Punjab	12710	16119	26.82	15
Rajasthan	6182	9685	56.66	6
Tamil Nadu	8955	12976	44.90	8
Uttar Pradesh	5066	5975	17.94	17
Uttaranchal	6896	9471	37.34	10
West Bengal	6756	11612	71.88	2

You can see that over the decade used in the table, the three slowest growing states were poor ones: Madhya Pradesh, Uttar Pradesh, and Bihar. Punjab, a rich state, grew quite slowly too.

There is newer data now, and here is a calculation for a later seven year period. It leaves out Uttarakhand (Uttaranchal) and Goa, since they are quite small.Note that the data for per capita SDP are not comparable across the tables because they use different base years for the constant price index in which they are measured.

	99-00 SDP PC	06-07 SDP PC	Growth	Rank
Andhra Pradesh	15507	22835	58.56	6
Bihar	5786	8167	62.43	3
Chhattisgarh	11629	15660	51.74	8
Gujarat	18864	27027	62.02	4
Haryana	23229	37314	85.75	1
Jharkhand	11549	14252	39.40	13
Karnataka	17502	22952	43.62	11
Kerala	19461	30044	63.67	2
Madhya Pradesh	12384	12881	18.95	16
Maharashtra	23011	30982	50.83	9
Orissa	10567	15528	59.02	5
Punjab	25631	30041	32.58	15
Rajasthan	13619	16460	39.69	12
Tamil Nadu	19432	28320	54.81	7
Uttar Pradesh	9749	11334	33.95	14
West Bengal	15888	21753	48.90	10

Haryana and Kerala do a lot better in this later snapshot. Karnataka does relatively worse. Bihar also does a lot better. Uttar Pradesh, Madhya Pradesh and, yes, Punjab are still growing relatively slowly over these seven years (the periods do overlap).

All kinds of things can affect growth rates, but my guess is that governance matters a lot.