Does Economic Theory Inform Government Policy?

Abstract

This article addresses the interconnections between two seemingly disparate worlds—the world of abstract economic analysis and the world of policy and politics, drawing on the author’s personal experience in the two worlds. A fundamental premise underlying the analysis is that it is a society’s ideas and beliefs that are ultimately responsible for its development. The absence of good, scientific ideas proves to be the biggest stumbling block in crafting good policies. Keynes was right when he wrote that ‘the power of vested interest is vastly exaggerated compared to the gradual encroachment of ideas.’ So was Nehru when, in 1929, in a speech in New Delhi, he urged his young audience: ‘The world is moved by ideas.’ India today stands on the cusp of a major economic take-off. It is up to us to seize the moment. To do so, however, we need to bring the best ideas from the world of scientific enquiry into the humdrum world of politics and policy. The aim of this article is to illustrate by drawing on real-life examples, that it is possible to do so.