The eternal asymptotes | Business Standard Column–05.11.2017

In mathematics there is a concept called asymptotes. There are many definitions but the simplest is an asymptote is a line which is tangent to a curve at infinity. That is, two never touch even though they come infinitely close.

The term itself is, like most things western, of a Greek origin. It means ‘not falling together’. And it reminds me very powerfully of economics and politics.

Reason, as in the case of asymptotes, tells you they should come together. Experience tells you otherwise.

So what we have is economists blathering on as if there is no politics, and politicians carrying on as if there is nothing like economic sense. It is not hard to guess who wins. As a result is every country in the world is in a mess.

An example

Consider India’s demonetisation experience. Although it had no justification whatsoever, both politicians and economists have defended it.

The politicians say it was to eliminate black money. If that was the objective they would have been better off reducing taxes instead of increasing them a few months later via the GST.

The economists are less certain but they say demonetisation will help in going digital. They are, however, unable to decide which costs less – cash or digital transactions. Truth is, it doesn’t matter.

In the event, the political argument for demonetisation sold better than the economic argument. The BJP won the UP election and, after an initial spurt in digital transactions because there was no cash around, people have gone back to good old cash which no one can trace.

After all, who wants to pay such high taxes and also tangle with a tax bureaucracy whose arbitrariness is reduced only by ‘other’ means? Economists, when they discuss efficient taxation, don’t factor this in because corruption is about politics, not economics. Indeed, it is an integral part of it.

Equity V Efficiency

It’s not just in taxation where this disjunction exists. You find the same thing in the application of macroeconomic and microeconomic principles.

Ever since John Maynard Keynes formalised macroeconomics via his famous identity that requires the government to be a major player in the economy, politics became the gorilla in the room. Economists, however, simply ignore it.

But when it comes to microeconomics or issues of firm and industry level efficiency, it is the politicians who turn a blind eye. They pretend efficiency is irrelevant to the larger goal of equity which is the main concern of politics.

Result: asymptotic policies. You can see them all over, even in China where politics is not about people but about factions and warlords.

Indian problem

India’s problem, however, is a much bigger one. Here the gap between the line and the curve is very large, not infinitesimally small.

Three Budget items bear witness to this: subsidies, wages and pensions and interest on past debt. Each of these is an economic measure of a political need.

An equivalent economic measure of efficiency would be something like the incremental capital-output ratio which is very high in India. This ratio measures the amount of capital needed to increase output by one additional unit.

If you study the economics literature you will find every reason listed and explored except the most obvious one – equity, or what is the same, politics.

The best example of this is the Industrial Disputes Act. It is designed to promote equity at the expense of efficiency. The most deleterious fallout is the scale of manufacturing in India – tiny.

Conclusion

Rapid growth is the result of rapid capital accumulation but the political concern with equity prevents it. The Modi government is an excellent example of this. Its efforts to close the gap between the line and the curve are doomed to end in very marginal success.

via The eternal asymptotes | Business Standard Column

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