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...Not that there is no truth in the statement but the offered reasons are often seriously deficient in their understanding of what economists do and the strengths and limitations of their tools and methods. The usual criticisms are the following: 1. Economists ignore the importance of psychology, sociology, history and culture. 2. Economists think of human beings as some abstract mathematical machines. 3. Economists write very simplistic models of the economy forgetting that they don’t exactly depict the real world and that these models rely on very strong, and perhaps untenable, assumptions. 4. However much the economists wish it to be, economics is not a natural science. Let us take these in order. A criticism like “Economists ignore the importance of culture” sounds profound until we realize that it is banal. ...Live Mint on Oct. 9, 2017, 4:20 p.m.
...One would be hard-pressed to think of government programmes that go from planning to execution without the involvement of bureaucrats. There is, however, an issue with this arrangement: Politicians come and go but bureaucrats only come and rarely go. We can vote out incompetent politicians but we don’t have a way to incentivise bureaucrats to work well. And incentives matter, unfortunately. So, do we just bite the bullet and endure the Sir Humphreys of the subcontinent? The short answer is, not necessarily. As recent research shows, the link between electoral consequences and bureaucratic performance is subtle. Politicians can and do provide incentives to bureaucrats if the stars are properly aligned. No, I am not talking about any cosmic interference here but there is indeed an element of luck involved. That element is how administrative and electoral boundaries are aligned. ...Live Mint on June 7, 2017, 3:33 a.m.
...Holmström’s work is in the field of studying the behaviour of employees in a firm and designing optimal reward schemes to incentivize them. Imagine the executive board of a company trying to decide its chief executive officer’s compensation. Should it reward the CEO if the stock price goes up? Imagine a bad CEO heading a company in a booming industry. Most likely, his company would do quite well despite him. In a seminal paper titled Moral Hazard And Observability, written in 1979, Holmström proposed the “Informativeness principle”. It says that the optimal contract should reward the CEO by linking his compensation to every outcome that can convey meaningful information about his effort. This may sound obvious but notice that rewarding the CEO for his firm’s stock price is suboptimal. And yet, this is how it happens in practice. In an empirical paper, Marianne Bertrand and Sendhil Mullainathan found that most firms reward the CEOs for luck. ...Live Mint on Oct. 14, 2016, 12:03 a.m.