If we are to make the best use of the tools economics offers, we ought to think about what we are striving to achieve. The decisions we make now will affect our pattern of living. SAMPAT MUKHERJEE puts together some questions about life in 2050 that are worth pondering about.
Economics is a social science and, therefore, an inexact one. It can just help us to understand and improve an imperfect world. In the final diagnosis, it appears that it is just a set of tools. If we are to make the best use of these tools, we ought to think about what we are striving to achieve.
We must first define the ‘good life’ before economics can take us there. Here are some unanswered questions about life in 2050 worth pondering about, because the decisions that we make now will affect our future — our pattern of living.
Productivity growthHow many minutes of work will a loaf of bread cost?
It is the productivity question. Almost every aspect of economic life is a means toward this end (and other ends, too). If productivity grows at 1 per cent a year over the next half century, our standard of living will be 50-60 per cent higher by 2050. If productivity grows at 2 per cent a year, then our standard of living will nearly triple in the same time frame — assuming we continue to work hard, save and invest more and take risk.
Economic theory predicts that as our wages go up, we will work longer hours — up to a point, and then we will begin to work less.
Productivity growth gives us choices. We can continue to work the same number of hours while producing more. Or we can produce the same amount by working less. Or we can strike some balance. Let us expect, with cautious optimism, that Indians are going to make up their minds one day and decide how much they will work.
Bridging the inequalityHow many people will be active?
Even if the economies of the West are booming, we find a striking dichotomy between the rich and poor.
What are we willing to promise the most disadvantaged? In market economies of the developed world there is a comprehensive social security system (called safety net). General benefits are mandated by law; healthcare is a birth right. This leads to a more compassionate society in more ways than one. Poverty rates and increase in inequality are low.
It also leads to higher unemployment and a slower rate of innovation and job creation. Workers, bundled with several mandatory benefits, are expensive. Since employees cannot be fired easily and quickly, firms are slow to hire them in the first place.
In this context we may compare the American system with that of the European. The American system is a richer, more dynamic, more entrepreneurial economy — and harsher and more unequal. It is conducive to creating a big pie in which the winners get huge slices. The European system is better at guaranteeing at least some pie for everybody. Capitalism comes in different flavours. Which one will be chosen?
Socio-economic issuesWill we use the market in imaginative ways to solve socio-economic problems?
The simplest and perhaps most effective way to get something done is to give the persons involved a reason to want it done. We all nod, as if this were the most obvious point in the world — and then go out and design policies that do just the opposite.
We have a public education system that does not reward teachers and principals when their students do well (or penalise them when their students perform badly). We assess more of our taxes on productive activity, like work, savings, and investment, when we might raise revenue and conserve resources with more “green taxes”.
If economic agents get the right type of incentives, then markets can be used to solve all kinds of problems. In truth, markets do not solve social problems on their own (or else there would be no social problems). But if we design solutions with the proper incentives, we feel a lot more like smooth sailing in a rough sea.
Role of governmentAre governments redundant in an age of discontinuity?
Many countries have abandoned the central planning system in the late 1990s and have embraced the market system. Mixed economies have introduced public sector reforms, which led to a fall in the size of the government. But all these do not imply that the government has become less important over the years. Government has as much to do as ever. What keeps world leaders awake at night: Global warming? Drugs? Terrorism? Trade war? Financial crises? None of these problems can be addressed properly without government; indeed, none can be managed successfully without co-operation among governments.
Business cyclesDo we really have monetary policy figured out?
The Japanese economy, one of the largest and most productive in the world, has been stagnant for more than a decade. The Nikkei Index, Japan’s equivalent of the S&P 500, is no higher today than it was in the late 1990s. This should give us pause.
We have not conquered the business cycle (the economic ebb and flow that leads to periodic recessions).
At best, we have managed to tame it. In the 50 years before the Great Depression, the US economy was in recession roughly half the time. Since then, it has been in recession less than 20 per cent of the time. We have gained on better understanding of both fiscal and monetary policy. Consequently, the economic ride has been smoother.
Still there is plenty to worry about.
The ‘dark’ continent?In fifty years, will ‘African tigers’ refer to wildlife or to development success stories?
There is no silver bullet for economic development. Will the world be significantly less poor in 2050? The answer is not obvious. We can imagine an East Asian scenario, where countries transform themselves in a matter of decades. Or we can imagine a sub-Saharan African scenario, where countries stumble from decade to decade without any significant economic growth at all. The first scenario will lift billions of people out of poverty and misery; the second one will not.
When we raise the question as to whether poor countries will still be poor a half-century from now, the question seems distant and abstract.
But if we provide a more precise specification and raise questions about things that will distinguish poor countries from their rich counterparts, then global poverty seems more traceable. Will governments in developing countries create and sustain the kinds of institutions that support a market economy?
Will they promote export-oriented industries that will enable them to break out of the trap of subsistence agriculture — and will the advanced countries open their huge markets to those products?
Will the rich countries use their technology and resources to fight the diseases that are ravaging the developing world, especially AIDS?
Will the family of a baby girl born tomorrow in rural India have an incentive to invest in her human capital so that Amartya Sen’s ‘missing women hypothesis’ becomes a thing of the past?
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