For India, economic entropy presents both an opportunity and big challenge

Entropy, or the disorder in a system, is a concept not usually used to understand economic trends, but it best describes the disorder and randomness at work today, writes T N Ninan

Since the start of 2022, clouds have been darkening over the economic horizon as short-term growth prospects dim, energy costs rise, the trade balance turns more negative, the fiscal balance deteriorates, portfolio capital flows out, the rupee drops, companies get more cautious, markets turn nervous, and consumers feel the inflation pinch. There are proximate causes for all of these, many of them global in origin, but it would be a mistake to focus on just them. Longer-term trends need to be understood.

Entropy, or the disorder in a system, is a concept not usually used to understand economic trends, but it best describes the disorder and randomness at work today in determining the medium- if not long-term course of events. Entropy is supposed to increase with time, whereas economic trends move in cycles; but if the cycle is long enough (the Kondratieff technological cycle, for instance, supposedly lasts 60 years) the difference is not material.

Several elements go into the complex molecules of increased economic entropy. First comes the disproportionate weight of globalisation on weak shoulders, in both rich and poor countries, simultaneously with the rise of national and global elites commanding previously unimaginable wealth. Second, the more dramatic manifestations of sudden wealth have grown out of the ideological triumph of financial capitalism (one of the causes of the 2008 financial crisis), followed now by the rise to prominence of venture capitalism, and in a third but parallel development the rise to power and influence of Big Tech.

This reincarnation of the Great Gatsby age has been accompanied by the rise of winner-take-all (or platform) businesses and their start-up wannabes, the replacement of secure jobs with the uncertainties of the gig economy, and disruptive disintermediation. Three examples are traditional finance because of digitisation and big data; the media because of sponsorship by Big Tech of toxic, unmediated content; and retailing because of e-commerce. These seminal changes, generating a tendency towards binary societies of plutocrats and proles, have been challenged by a fourth trend: The forced entry into the rich countries (with under a sixth of the world’s population) of large numbers of immigrants from poorer ones. Fifth, there is the power shift caused by the rise of China (and some smaller economies, like India’s), shaking up old power balances but the churn not settling into new ones.

Add to this the biology-driven havoc of a succession of epidemics/pandemics — the mad cow disease, SARS, bird flu, Covid-19, and for all one knows monkeypox — caused by, among others, dangerous research work in secret labs and the industrial farming of animals and birds (to which there is a growing backlash, even from the likes of the financier Carl Icahn, who has confronted McDonald’s over its treatment of pregnant pigs). One result has been the unwinding of supply chains and wounding of the travel and tourism businesses: The movement of both goods and people has got disrupted. Finally, add the technological changes being force-fed by global warming, making not just specific industries but entire sectors (energy, transportation, manufacturing) confront sudden discontinuity.

The economic consequences of these multiple, random elements of disorder have been disorienting, like the financial crisis of 2008. Caused by a dangerous cocktail of uncontrolled financial capitalism mixed with the political urge in the US to provide housing to economically stagnant income groups, the “solution” was massive surges in public debt. When Covid 19 posed a challenge, there were off-the-wall monetary policy responses. The fallout of the attempted rollback now is not just stagnation but perhaps recession, combined (in another deadly cocktail) with inflation and possibly a bear market for stocks.

Political-economy responses mirror the disorientation, from the rise of political nativism and economic nationalism to the spread of alternative truths, pace Brexit and Donald Trump. The ideological challenge is to the liberal-democracy ideal through strongman rule, even as the shifts of power (both up and down) have forced country after country to up defence spending — not usually a good harbinger. The cycle of events could even end the Chinese super-growth story. While India could benefit from that, it must recognise that entropy is the larger reality to be reckoned with.