Economics: The Pretence of Knowledge

Fred Hayek, one of the most prominent economists and political philosophers of the twentieth century once described Economics as "The Pretence of Knowledge". Nowhere has this been more in evidence than in the pathetic record of world economists in predicting the growth and development of India.

Abhijit Vinayak Banerjee, Professor of Economics in the department of Economics at MIT writes: "If you ask an economist today what the body of economic theory has to tell us about the stability of the capitalist system, or whether the poor countries of today are destined to catch up with the rich countries, or even whether free trade is better than some protection, he would throw up his hands (though in the next instant he would probably offer his own opinions)."

Niranjan Rajadhyaksha, columnist for Businessworld, writes "I have for long been sceptical about the ability of economists to exactly predict the really significant long-term trends that change the destinies of nations."

The folks over at the The Economist have been puzzling over and scratching their heads non-stop over the past few years trying to figure out what's happening in India. In recent years, leading Business schools in the West have made it a point to closely analyze the phenomena of the Mumbai dabbawalas and Lalu Prasad Yadav, two "outliers" that do not quite fit conventional wisdom. The Christian Science Monitor equated the managerial and organizational simplicity, the efficiency and on-time delivery record of the dabbawalas with that of a modern, sophisticated global chain like McDonald's. One important lesson The Economist should draw from this is that education is not everything - entrepreneurial spirit and risk-taking cannot be taught in schools.

Lalu Yadav's success with Indian Railways have been even more puzzling. How has a man with no formal education brought about a change of this magnitude? How has he transformed the loss-making organization into a profitable one without retrenchment and privatization? With no hikes in fare and freight charges? When Japan's railways faced the same problem a few years ago, did they not have to privatize in order to survive? Ironically, in the US, the bastion of capitalism, the Railways run at a loss and in Europe it survives basically on subsidies.

If you really want to understand the Indian economy, the first thing you need to do is tune out the economists and other "manufactured" experts. The next thing you need to do is become invested. Or maybe this order should be reversed.