Economic unorthodoxies unleashed

Swapnil Pawar's book explores why the modern capitalist systems are grinding towards a halt

Rethinking Money and Capital: New Economics for QE, Stimulus, Negative Interest, and Cryptocurrencies
Author: Swapnil Pawar
Publisher: One point Six Technologies
Pages: 362
Price: Rs 399

This book is the newest addition to books by non-academics on the loose, without any leash or compulsion to stick to out-of-date orthodoxies. It is uncomplicated, devoid of jargon and with understandable mathematics (the emerging official language of economics). The book has the flow of a professional sports journalist. 

The book comes with a terse and helpful summary, so the readers can decide what portions would be worth their while. The author’s allegiance to Keynes is evident and the points have been brought out in lucid common-man’s language in the current-day context.

The central theme of the book is that the modern capitalist systems are grinding towards a halt due to: (i) mismatch in savings, which are more stable while investments are highly volatile but they need to match; (ii) excessive concentration and inequalities lead to inadequate demand and unemployment; (iii) inappropriate worship of money’s role; (iv) paucity or dwindling real investments in the last few decades due to professionals being fixated on quarterly results rather than long-term bets, given their incentive structure and sourcing of capital. These are called “fatal flaws”.

These will lead to slow growth and rising inequalities unless rescued by fundamentally new technologies that increase real investments sharply; otherwise, cataclysmic social changes will follow.

The author’s arguments might find resonance since, as observed, much of the current growth is led by services, which are a lot less capital-intensive and much of innovation these days is in low-cost automation and information technologies. Added to these are slower or even negative population growth in many countries and, most importantly, fewer wars, which were a great source of demand in capitalist economies.

Though the prognosis is convincing, the main solutions are a mixed bag — some limp, some already proving ineffectual and some good ones.  

First, the author pins his hopes on negative interest rates. Money has option value (the option to postpone consumption and time it at your will), which should be adjusted, and hence real interest rates should ideally be negative. This is a simplistic and flawed argument. No one sells goods at less than the market value just because the good’s worth is less in his hands. So long as there are people who demand what you have (in this case savings) at higher rates, positive interest rates will prevail. In a way, the option value is already embedded in the real interest rates and when option values exceed the value in alternative uses, negative real interest rates will become a reality, as seen in some countries. But there is no way to accelerate or force the issue.

Second, on the fiscal front the author advocates a fiscal policy board and universal basic income (UBI) to ensure adequate steady demand. A Fiscal Policy Board is already in operation in India in the form of the Finance Commission which prescribes many parameters the author craves for, except it is not involved in the day-to-day functioning. Arguing against excessive control by technocrats (more on this later) yet recommending this independent body seems antithetical.  

UBI comes with its own issues — the incentive structure, likely suppression of aspirations besides the adverse reaction of taxpayers indicate that it is not a linear solution. As someone observed, the feeling of gratitude soon transforms into a poisonous sense of entitlement.

In most cases, fiscal interventions and counter-cyclical investments are not the most efficient and often create inequities themselves. Besides, this has been advocated by several including Modern Monetary theorists before. 

Third, the author lays out his case well while discussing the problems with inflation control as the main monetary tool. He will have a whole lot of admirers even from official circles.  

The author would find many ready takers when he observes that the prevailing implicit assumption is technocrats with no answerability to the public are better placed to ensure against wrong decisions that ultimately hurt the common public than democratically-elected politicians. 

A recent evaluation of India’s inflation targeting by the World Bank (Working Paper 9422) has this to say: “The main threat to credibility… is that the central bank may abuse those same discretionary powers in the future by, for example, overly stimulating the economy in the manner of the classic time inconsistency problem. The solution, they show, is a cap on the target rate of inflation that penalises the central bank when that target is exceeded”. Distrust is of the highest degree — international intellectuals can’t trust the local central bank governors.        

The book might delight those who are outside economic officialdom and academia, such as professionals, investment bankers, media commentators who feel exasperated by several instances of excessive orthodoxy, unimaginative and ineffectual rigidities in policymaking.

To the “well informed individual who wonders about issues in macroeconomics” (the author’s target audience), a third of the book is unnecessary and already well known. The mathematical formulae could have been presented using formula functions in basic software making it easier to grasp.   

For academics writing for a general audience, the uncomplicated language and exposure to some essential ground realities might prove beneficial, although they will denounce its lack of academic rigour and avoidable pomposity.  

The reviewer is author of Making Growth Happen in India