Limelight | Avinash Dixit: The rest of WTO should expel the U.S. and preserve order among the remain

An economist of the highest pedigree, Prof. Avinash Dixit is currently the John J. F. Sherrerd ’52 University Professor of Economics at Princeton University. He is also the Distinguished Adjunct Professor of Economics at Lingnan University (Hong Kong), senior research fellow at Nuffield College, Oxford University and senior visiting research fellow at Green Templeton College, Oxford University. In this interview with Catharsis’ editor, Lalit Panda, he discusses the economics of investment and trade, economics of corruption, the future of economics and what being educated actually means.

LP: You have studied decision-making under conditions of uncertainty in detail in the past. With the growth of data analytics and the information sciences, would you say the dynamics for such decisions have changed? Do you think this also impacts governmental measures?

AD: Availability of huge and detailed data-sets, and advances in statistical and computational methods of analyzing these data, reduces some forms of uncertainty but not others. Firms may know more about their customers, but not about the impacts of climate change, nor about future shifts of government policies. They will still need the kinds of techniques for making their decisions on investment and innovation that Robert Pindyck and I discussed in our book Investment under Uncertainty. Of course they will have far better computers and programs to solve the dynamic optimization problems than the ones that existed 25 years ago when we wrote that book.

LP: Following the anti-corruption protests in 2011 in India, there was considerable focus on anti-corruption measures in India. How do you view the way the agenda has evolved since then? What should an ideal anti-corruption agency look like? India has also recently amended its anti-corruption law to ease, amongst other things, commercial decision-making. How should anti-corruption measures account for such interests?

AD: I do not think an anti-corruption agency established by the government will do much. Bureaucrats and politicians are the main beneficiaries from corruption; one should expect them to enact laws with plenty of loopholes and to enforce them weakly or not at all. A bottom-up social coalition can have better success (although still well short of 100%). As you say, there have been some such efforts in recent years. The idealism of their founders and leaders like Anna Hazare is admirable. But unfortunately they do not seem to have the right managerial and political skills to take their social movements to the next level, building the necessary coalitions and governance structures to be fully effective. I would like to see leaders of the business community, who do have such skills, deploy them to fight corruption. After all, in collectivity they are the main loser from corruption: in the aggregate they are giving money to bureaucrats and politicians. Of course each individual among them hopes to benefit by out-bribing the others. This is a classic game of Prisoners’ Dilemma: what seems in the interests of each, when done by all, hurts them all. The business community can resolve it by collective action: self-monitoring to enforce norms of clean behavior. I have expounded this idea in greater detail in research papers and in a recent Mint article, New ideas for fighting corruption in India, and retain hope that some group of respected business leaders will take it further.

LP: Given your previous interest in redistributive measures by governments, how do you think such politics in India will play out in the future? What role does this play in India’s development story and how do you think it should interact with general measures for institutional reform like contract enforcement?

AD: The policy I favour is a clean and simple one like the negative income tax proposed by Milton Friedman and many others. In my optimal world, the fixed component of this would be much smaller than the Universal Basic Income being advocated by many on the political left, probably less than 10% of GDP per capital for each person, and the marginal tax rate would be correspondingly smaller, probably around 20%. This will be supplemented by two things, firstly, a single-payer health care system that covers at least regular check-ups and preventive care as well as catastrophic expenses, and secondly, free education at least up to high school level. These will be funded from country-wide taxation, to ensure that local inequalities of income and wealth do not get perpetuated through unequal money for health and education.

But India’s politics is so dysfunctional that I see no hope of anything like this being implemented. (Of course the U.S. is just as bad or worse, and many other countries are not much better.)

LP: Given the present protectionist trends in international trade, of how do you think the situation will evolve as things go forward? Why would key players be employing the strategies that they are?

AD: This is very difficult to forecast because it depends so much on Mr. Trump’s whims. But I do see a real danger that his actions will endanger the whole rule-based system of trade governance permanently. Although some countries may be tempted to strike deals with the Trump administration to preserve what they can of their trade with the U.S., they should recognize the large long-run cost of collapse of the whole order. In fact I think that so long as the U.S. is in the WTO (or, for that matter, in any international organization), Mr. Trump will always keep gumming up its working. Therefore, the rest of WTO should expel the U.S. and preserve order among the remaining members. The U.S. now accounts for less than 25% of the world’s economy. The rest of the world is economically as large as the whole world including the U.S. was just 20 or 25 years ago, and it is growing fast. It can do perfectly well without the U.S. Lost exports to the U.S. can soon be replaced by trade with other members and by internal markets of fast-growing emerging countries. In fact the rest of the world can do better because it can maintain a more harmonious and less capricious order among the remaining countries. I know that expelling a country from the WTO would require unanimity and you may wonder whether the U.S. would vote for its own expulsion. I don’t think it will come to that. I am sure that as soon as such a move is initiated, Mr. Trump will immediately quit the WTO with a tantrum of tweets.

LP: Are there any subject matters that have particularly caught your interest recently or that you have otherwise been working on? What would you say economists and social scientists should especially look out for in the coming years?

AD: Perhaps the biggest open research question in economics is better integration of macroeconomics and financial economics. It is attracting a lot of attention, but real success is still some way off. Second, economics has benefited from input of psychology about individual preferences and decisions. It should seek similar input from sociology about how preferences are formed and influenced by family, schooling, peers and so on. And of course policies to deal with climate change should be at the forefront of research agendas bringing together economics and many other sciences. I am currently doing some work on the last two of these three. Alas, I never understood macroeconomics well enough to contribute to it.

But I don’t really believe in any long-run planning or top-down imposition of research agenda. Good topics should emerge organically and bottom-up, from trials and errors of adventurous individual researchers and small groups. So my attitude toward the future is “Que Sera, Sera.”

LP: As a brilliant student yourself, and also a professor, how do you think education should be utilized for? What makes an educated person?

AD: You left the toughest question for the last! I would say education has a consumer good aspect and an investment good aspect. The first is what you enjoy, what makes you a more complete and better human being, and what gives you a broader understanding of the world around you. This can be history, literature, music etc., roughly speaking, humanities and social sciences. The second is a set of skills that are employable and give you enough income to take care of your family. These are often STEM subjects: science, technology, engineering and math. Education has a broader social purpose also: society functions better if its members are more complete human beings and better and more skillful workers. An economist would say these are “positive externalities”. Within this overall framework, people have many choices, and diversity of choices made by different people also has value for society as a whole. To sum up in the form of advice to high school seniors contemplating college, I would tell them to major in a STEM subject, but to take as many humanities and social science courses as they can, to become a fully human member of society. (Sorry to say I think business schools often have negative value.)

LP: What kind of negative value? An extension to that: do you think business and entrepreneurship can actually be learnt in business schools? Most of the world’s greatest innovators and entrepreneurs never went to business schools. It seems to me that such a rigid and formal approach to education only harms the entrepreneurial spirit. What do you think?

AD: I should say at the outset that I have never taught in a business school, so my thoughts are results of impressions formed from the outside. I think that the actual materials taught in most MBA programs – accounting, marketing, rudiments of finance such as beta and hockey-stick diagrams, rudiments of strategy,etc. – are easy and can be learned from textbooks and stuff available on the internet, without paying six-figure sums to a prestigious school over two years. What individuals get by attending business schools is networking with other students and alumni – connections and friendships that last over many years. These networks often turn into cliques of managers and board members that serve for collusive actions to the detriment of society as a whole. Worse, the graduates emerge with a sense of elitism and entitlement that is usually unmerited, and an equally unmerited belief that they can do nothing wrong. I agree with your remark that “most of the world’s greatest innovators and entrepreneurs never went to business schools.”

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