Economics needs a new paradigm

The aim must not be merely GDP growth, but more urgently, fair inclusion and environmental sustainability

India will be a $10 trillion dollar gross domestic product (GDP) economy by 2032, the government has announced. The concern is whether the growth will create enough jobs. So far, India has generated fewer jobs every percentage point increase in GDP than other countries have with less growth. The governor of the Reserve Bank of India has sparked a controversy by saying that high growth of GDP is not a sufficient measure of a good economy. Bernie Sanders has grabbed the imagination of young people in the US with his vision of a “moral economy” in which the fruits of growth reach everyone, not only the top 1%. Around the world, GlobeScan reports, two-thirds of citizens no longer believe their country’s GDP reflects their well-being. Even the venerable The Economist has declared that GDP is an increasingly poor gauge of well-being and it is time for a new approach.

In his classic treatise, The Structure of Scientific Revolutions, Thomas Kuhn explains why paradigms are hard to change. In each science, whether physics, chemistry, biology or astronomy, a core idea is adopted by its community, and all its experiments and theories are built around this idea. There are long periods of what Kuhn calls ‘normal’ science during which it is heresy to challenge this core idea. Anyone who does is ostracized by the scientific community. Revolutions occur, he explains, when after many decades of accumulation of contrarian evidence, this idea is let go off and a new one replaces it. The process of learning of new paradigms must go along with the unlearning of old ones. For example, acceptance that the Earth is not at the centre of the universe, that matter has wave-like properties and that species evolve, required the letting-go of core beliefs to the contrary. Unlearning is not easy because vested interests in the established order will resist changes that diminish their importance. Thus, unlearning of a scientific paradigm often creates upheavals, not only within the scientific community, but in the wider body politic too when the state and the church are aligned with the established scientific order.

The science of economics is experiencing the pains of a paradigm shift. Mainstream economists failed to predict the recent global economic crisis. Now, they are searching for a “new normal”. James Galbraith says in The End of Normal: The Great Crisis and the Future of Growth that economists have redefined human experience into a special language limited to concepts that could be dealt with inside their established model. A core idea of the prevalent paradigm of economics is: humans are rational, self-interested beings. Another core idea driving economic policies is: markets must be made free to enable self-interested individuals and corporations to fulfil their material aspirations and produce more economic growth. Galbraith says, “Any refusal to shed the larger perspective—a stubborn insistence on bringing a broader set of facts or a different range of theory to bear—identifies one as ‘not an economist’. In this way, economists need only talk to one another. Enclosed carefully in their monastery, they can speak their code, establish their status rankings and hierarchies, and persuade themselves and one another of their intellectual and professional merit.” Thus, echoing Kuhn, Galbraith describes symptoms of a science stuck in an old normal.

Scientific revolutions change scientific paradigms. Political revolutions are often required to change economic paradigms. Karl Marx’s Das Kapital stirred revolutions in many countries in the 20th century. The human costs of those revolutions has made people wary of revolutionary political change as a means for changing the economic order. However, a safer option may not bring about the paradigm change required. This was the essence of the great debate between two political thought leaders, Edmund Burke and Thomas Paine, in the 18th century about the courses of the American and French revolutions. Burke advocated that some parts of the established order must be preserved to prevent chaos while making big changes. Paine countered that those pieces of the established order would protect their vested interests and prevent the paradigm change required.

That human beings have emotions, that they cherish many traditions of their communities, that they value their identities, that they have many aspirations that cannot be accounted in monetary terms, have become challenges for the dominant paradigm of economics. Such non-material values are difficult to include in a monetary measure of the economy. This is the conceptual challenge for economists. The challenge for economic policy reform, which Sanders points out, is that beneficiaries of the established paradigm will not let go.

The need for a new paradigm of economic policies, whose overriding aim must not be merely more GDP growth, but more urgently, fair inclusion in growth and environmental sustainability, is being realized around the world, even by economists. India is one of the most water-stressed countries; its cities the most polluted; its need for jobs for its huge population of youth the greatest. Leaders and their economic advisers have to urgently let go of the old paradigm of economics, and develop and apply a new one.

For India to realize its aspirations to be a global leader in the 21st century, it must lead the development of a new, democratic and inclusive, and sustainable, paradigm of economic management. To begin with, its leaders must report to citizens their plans and progress with a better scorecard than the growth of GDP.