Why Kaushik Basu's stint as adviser was no 'game-changer'

Nearly 30 years ago, a professor at the Delhi School of Economics paused in the middle of a class to share an odd bit of family anecdote. His sister, he said, could never remember which was her left hand and which was her right. She, therefore, put a distinguishing mark on one of her hands, the better for her to know left from right.

There is little in the anecdote to connect it to a larger point of economic wisdom, and decades later, one of the students in that classroom asked the Professor why he had narrated that engaging (but wholly irrelevant) story.

Prof Kaushik Basu - for it was he who had shared that bit of trivia - confessed he didn’t remember at all.

As Basu joins the World Bank as chief economic adviser, after a stint in a similar advisory capacity in the Indian government, many more of his students over the years are today recalling with endearing fondness the engaging manner in which he made the dismal science of economics come alive in the classroom.

In particular, Basu’s writings and shared wisdom on the topic of game theory - a branch of mathematics that focuses on strategic decision-making and constructs mathematical models of “conflict and cooperation” between intelligent rational decision-makers - offered an amusing way of looking at everyday aspects of policymaking.

Even when he served as chief economic adviser to the Government of India, Basu brought the same quirky game theory approach to economic policymaking. Last year, for instance, he initiated widespread debate with a radical idea to combat bribery , employing the same game theory principles.

Basu argued controversially that in cases of “harassment bribes” - that is, where an ordinary citizen pays bribes under duress in order to secure a service that is rightfully his - the state should give the bribe-giver full immunity from punitive action, and declare the act of giving a bribe in such cases as legitimate activity. The bribe-taker, on the other hand, should be punished - and required to return the bribe.

Basu’s counter-intuitive rationale was that if the law were altered in this manner, the interests of the bribe-giver and the bribe-taker would diverge. “The bribe-giver will be willing to cooperate in getting the bribe-taker caught.” And knowing that the risks of punishment for bribe-taking had increased, the latter would be deterred from taking a bribe, he reasoned.

It was a theme that Basu addressed repeatedly in his interventions in his capacity as adviser. For instance, in the Economic Survey of 2010-11 , which he wrote, he argued that “in crafting good economic policy, it is important to treat the various players on the market… as reasonably self-seeking rational agents.” If they had the opportunity to earn some extra money with little effort, he reasoned, “they will seize the opportunity. Hence, to cut down on corruption and pilferage, we have to design policies in such a way that there is no incentive for ordinary citizens and the enforcers of the law to cheat.”

Far too often, according to Basu, “noble plans” to reach out to the poor and increase the welfare of citizens had failed because policymakers assumed that the policies were “delivered by flawlessly moral agents or perfectly programmed robots.”

In fact, Basu sometimes sounded almost evangelical in his argument that a “moral order” in society is the surest trigger for economic activity. “Societies in which interpersonal trust is greater are societies that exhibit faster economic growth.” That’s because a modern and efficient economy critically depends on contracts and the ability of individuals to rely on these contracts, and the “best enforcers” of these contracts is “our word of honour and the ‘culture of honesty’ and trustworthiness.”

Which leads one to wonder: So, what was a man with such high expectations of morality doing in government?

In fact, it is difficult to account for why men of heightened economic wisdom - such as Basu himself, and his successor Prof Raghuram Rajan - take up advisory roles in the Indian government, particularly when the government appears not to heed their counsel.

Basu told this interviewer a while ago that he was excited by the prospect of “being within the Government and making policy for India.” Even if he didn’t approve of everything he saw, he enjoyed every bit of being there, he added.

In his book Prelude to Political Economy , Basu addresses the issue of how an adviser can most efficiently advise governments, again employing game theory.

It is hard to know the precise nature of the “advice” that Basu gave the government, but seeing that his tenure in office as Chief Economic Adviser coincided with a period when the government pretty much ran the economy into the ground, it’s a fair bet that Basu will be less than pleased to have been associated with that particular phase of macroeconomic failure.

Worse, given the heightened level of policy incoherence that characterised the government’s economic policymaking, it appeared that its left hand did not know what its right hand was doing - which is just a sort of variation on Basu’s sister’s own inability to tell left from right.

Which is why one suspects that for all the brave face that Basu puts on his tenure in office as economic adviser, the fact that none of his game-changing ideas were implemented by the government must surely rankle with him.

For all of Basu’s well-earned reputation as a game theorist, his tenure in government wasn’t characterised by intelligent, rational decision-making by the government. Here’s hoping that his stint at the World Bank proves a little less ineffectual.