Rational policies for the irrational.

"The deep recession that followed the near-collapse of the global financial system in 2008 caught nearly everyone by surprise -- including the experts who were presumably the best equipped to see it coming," wrote Prof Kaushik Basu. Small wonder that experts were "blamed for arrogance, complicity, or being just plain overrated". Why are experts blindsided? Because no expert can become known for correct predictions because then their "predictions can become self-fulfilling prophecies: if they predict, say, a stock-market crash, everybody will begin to sell their shares, bringing about the predicted outcome". Experts may be motivated by self-interest. "In the 17th century, the economist and investor Sir William Petty was tasked with surveying large swaths of army land, much of which lay fallow, in Ireland. He did a good job, using some truly innovative methods. But he also ended up personally owning much of the land he had surveyed." It maybe that experts are able to calculate monetary effects of policy on the economy but are unable to predict long term consequences because they have no control on policy or on human behavior. Experts were right in predicting that demonetization would result in a fall in growth of the GDP but are wrong to say that free trade is beneficial to all. According to theory, "There are winners and losers, but net gain to society is positive. The winners can compensate the losers and yet be ahead," wrote Ajit Ranade. As India's trade to GDP ratio has climbed to 50% from 10% in 1990 and we have been busy signing free regional trade deals, our trade deficit with the 10 Asean nations, Korea and Japan has more than doubled. While cheaper goods have flooded in we have not gained in services. Trouble is that economics is logical and logic doesn't always work with human beings. "Humans are born irrational, and that has made us better decision-makers," wrote Olivia Goldhill. This might explain the financial crisis. "If you fine-tune on the past with an optimization model, and the future is not like the past, then that can be a big failure, as illustrated in the last financial crisis," said Gerd Gigerenzer, Director of Max Planck Institute for Human Development in Germany. Just as the self creates a narrative about itself, so politicians create a narrative about the state, wrote Prof R Hausmann. Central banks have not learnt from the crisis and are busy creating another asset price bubble, wrote A Nageswaran. Are human beings really completely irrational? The deaths of 30 people protesting against the rape conviction of a self-proclaimed saint in Chandigarh yesterday tends to support the theory. The economics of biology and markets are not the same.