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A book for future Fed chiefs

Sreya Ray  |  New Delhi 

This book asks questions we should have asked our leaders and international agency heads. It does an excellent job defending the role, relevance and realism of economic theory in the context of welfare, law and policy-making, and globalisation. Basu mentions that his writing came out of his frustration with the tangled web of policy-making and legislation, which often fails to incorporate economic knowledge and common sense.
The section "Law, Rights and Well-Being" makes for an exciting read because the findings and questions raised are well-reasoned yet potentially controversial and will raise the hackles of populists and the merely altruistic. The platform is social choice theory, which concerns what individual rights do for the welfare of society and how these rights conflict with the Pareto principle. Public policy and economic development traditionally seek to achieve Pareto efficiency through proper resource reallocation and welfare instruments. What would happen if a person had the right to waive or trade his legal rights? Pareto says that if two rational individuals or parties set a deal, the outcome of which does not affect others, then the state has no right to prohibit such a deal as Pareto efficiency has been achieved (i.e. the individual has been made better off without cost or adversity to another individual). This revelation has major implications for legislation on sexual harassment, labour rights and relations, employee unionisation, and child labour.
Consider a scenario where a candidate accepts an offer of employment with excellent benefits but must give up her legal right not to be sexually harassed. She weighs her options, finds the offer too good to pass up, agrees to the terms of the contract, and it is assumed that no one else suffers the fallout of such a deal. It appears legit and ethical, because she could have backed out and retained her rights. In real life, however, does she really have the right to waive her rights? Basu thinks perhaps not, as the consequences of the deal fit in with his "large numbers" argument. The action of just two people signing a contract with questionable terms may not affect others, but when hundreds of people sign such contracts, there will be adverse effects on the population, with respect to a rethinking of morals, norms and permissiveness. This revelation has major implications for legislation on not only sexual harassment, but also labour rights and relations, employee unionisation, and child labour, and these have been explored in detail.
To those urban, upper middle-class Indians who are rollicking in the consumerist benefits of globalisation and trade/capital flows liberalisation, it is time to wake up and read the third section, which addresses concerns raised in the wake of increasing globalisation. A startling new perspective is offered: globalisation opens borders but erodes global democracy. For instance, non-Americans cannot vote for the US President, but his/her foreign and trade policies can affect their countries; examples include the Cuban embargo and the economic sanctions on India and Pakistan post the 1998 nuclear tests. Diplomacy can only be of so much help. In this global democracy, nations are clearly not equal. There are invariably richer, more powerful nations, and then there are the Others. It is not always the worldly consumer or the subsidised farmer who wins or loses in this game: there are many more players and pawns than one might assume.
Basu's easy yet elegant style is a hallmark of this book. He peps up potentially dry economic analysis with contextualised and humorous anecdotes. Future Fed chairmen could take a leaf out of Basu's concise yet lucid method of dissemination of economic news and findings. To the average reader with not much more than a basic understanding of mathematical economics, the technical workings may seem eye-watering, but are absolutely necessary for substantiation. A disclaimer on the inside jacket will warn that this book is only for students of economics, academicians and those technocrats with a philosophical bent. Basu is being too cautious: the essays on law and globalisation are entirely readable and recommended for these who are not sure where to stand on the slippery slopes of progress.
Kaushik Basu
Oxford University Press
Price: Rs 650; Pages: 265

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First Published: Fri, November 23 2007. 00:00 IST