Economists used to be fond of borrowing concepts from physics. Equilibrium. Dynamic equilibrium. Volatility. Uncertainty. That sort of thing.
They also liked to use mathematics. Theorems. Algebra. Calculus. Sometimes even real number theory.
The combination expanded the analytical tools of economics way beyond what Alfred Marshall had begun in the early 20th century with his rudimentary curves and concepts.
All this happened because economists were obsessed with the idea of scientific proof. To prove a ‘theorem’ in some imaginary set of circular propositions was regarded as high academic achievement. Well, mostly. Sometimes the obvious also needed proving.
All this was fine as long as economics didn’t become a tool of politics. This happened on a massive scale after the Second World War when Keynesian economics caught the political imagination.
Keynes had written his masterpiece in 1936, three years before the start of World War II. Its prescriptions were intended for specific set of circumstances but the intensity of competition after the 1950s made it a major WMD in all countries that had genuine electoral democracy.
And thus two features of modern capitalist economies started to dominate politics. One was unemployment. The other was inflation. They continue to do so. Both had always existed but rarely as something to attack incumbent governments with.
So take any democracy and take any political manifesto there. And you will find these two guns blazing away like the Bofors howitzers. The politics is that when they fire together, governments usually don’t get re-elected. Sometimes even firing singly they do the job.
And there is a very strong reason for this. It can be found in what’s called Gödel’s Theorem. In 1933, a German mathematician called Kurt Gödel, proved a theorem in mathematical logic and number theory that in a system of propositions there would always be a proposition that could neither be proved nor disproved. For example, the proposition that God exists.
Unemployment
This is exactly the case with unemployment. You can claim any level without being able to prove it and no government can disprove it. This is particularly true of India where the workforce is twice the population of the US, or 700 million.
The Opposition can claim any level of unemployment and not have to prove it. The government can claim the opposite and not be able to prove it.
The problem goes beyond just numbers. It also has to do with definitions. A person is said to be unemployed when he or she wants to work but can’t find a job. That’s all. It’s such a point-in-time measure that it makes no sense.
From this comes the unemployment rate. It is the percentage of people in the workforce who are unemployed.
So how do you count all these people? Well, you don’t. You just make a guess knowing that it’s as likely to be correct as wrong.
After all you can have frictional, structural, cyclical, and seasonal unemployment. All happen because of different reasons. The thing is you can’t tell which is which. Hence the hard fact: it’s a lot of rubbish.
I can go on but let’s now turn to inflation because trying to measure it is just as annoying. It’s mostly a game of pretend.
Inflation
Inflation is both a political and bond market obsession. Both want it to be low. But, as with unemployment, you can’t measure with any significant degree of precision.
The decimal points like 3.4, 5.2, 6.4 etc are statistical constructs of the rate of increase in the price level over a base number which is in itself arbitrary. Statistically, the rate is correct.
But as a guide to policy it’s a blunt instrument which is why monetary policy is a broad spectrum antibiotic. You kill everything with it.
The problem is simply this: in order to get an average rate of inflation you need to measure the price level across huge swathes of a country. The bigger the country gets, the more inaccurate the average becomes.
To add to it the messy stuff that emerges is another problem of targeting some absurdly low rate like 2-6 per cent. Just think: to get there, inflation would have to be negative in many parts of the country! And this is the private view of the Central Statistics Office (CSO), never stated publicly.
But policymakers have to hang their coats on something because even if they are willing to take a laid back view of unemployment and inflation in economic terms, they have to take the political consequences very seriously. So they end up trying to solve a political problem with economic tools. And fail.