Unlike eerie scientists whose experiences are limited to the confines of their laboratories, economic doctrines tend to spill out into the broader world from the academic cauldron in which they were concocted. Their impact is often overlooked as the results of the policies and systems they effect may take years (even decades) to materialize.

Keynesians thought they could tame the business cycle, smoothen the convolutions of the economy and abolish market dysfunctions. As Arthur M. Okune has put it : “Recessions are now generally considered to be fundamentally preventable, like airplane crashes and unlike hurricanes.”

Whereas I understand the general sentiment that drives this mindset, I cannot help but balk at the scent of hubris surrounding it. Furthermore, thousands of years of economic history have all but disproved our dear economist’s ability to bring any sort of permanent “fix” to the dynamic nature of the financial beast.

But what is there to “fix” anyways?

Our modern economists seem oblivious to the second and third order consequences of their prerogatives. Interventions that cause more harm than good in the medical field are qualified as iatrogenic, and the economical sphere is not impervious to similar unnecessary meddling.

What are the goals of economists? To abolish unemployment, banish recessions and control inflation?

Lofty goals I would say, but what tools do they have at their discretion to achieve them.

Aside from advising economic policy, economists can do very little directly. The levers of macro-economic power lie in the hands of institutional actors such as governments and central banks. These levers are typically declined into two prongs:

• Monetary policy and,
• Fiscal policy

Monetary policy is the avenue of India’s central bank, RBI (Reserve Bank of India). The chief aim of RBI is to maintain price stability by regulating inflation. That goal is achieved through controlling the money supply, interest rates and the availability of credit. Decisions taken by the RBI trickle all the way down to consumers and businesses.

Fiscal policy on the other hand is the avenue of the government. Through fiscal policy India’s government can stimulate the economy, especially during a downturn. And the way it does so is mainly through taxation and spending. Government spending on infrastructure projects is an example.

As we can see, through these policies, governments and central banks exert influence over the broad economy.  Increasing government spending during a downturn can in theory stimulate the economy by making work available to national businesses. On the other hand, a central bank can pull the brakes on an overheating economy that manifests symptoms of inflation by raising interest rates, thus restricting the availability of capital.  

Proponents of interventionism would cite the examples above to justify the necessity to “guide” the economy.

In opposition to that, others warn that measures undertaken to artificially manipulate the economy do not take into account unexpected second-order consequences that may arise as a result of the meddling. They also highlight that these policies completely ignore the centremost pillar of a healthy economy, productivity. 

As far as us investors and capital allocators are concerned, it is incumbent upon us to navigate the ebb and flow of the economy. Regardless of where you fall on the spectrum of economic doctrine, the end goals remain the same: first don’t lose money, and then only, make money.

Since we seldom have little influence over the policies drafted by high offices, we can nonetheless remain aware of the developments that occur at the macro level. Macroanalysis as such is critical for success and risk management.