The choice buster

PASSING THROUGH: James A Mirrlees

James A Mirrlees, who was awarded the Nobel prize for economics in 1996, is on holiday in India. He has already footed it to Allahabad and Khajuraho, and Rajasthan is the next stop in his itinerary.

During his travels what has struck him is the changes that have come over India's landscape. He finds the country more prosperous, and the roads much better.

It was not like this when Mirrlees last came to India in the 1960s as an adviser for MIT's India Project. "I remember taking the road from Ahmedabad to Mumbai. Large stretches of the road were unsurfaced, had disappeared, potholes and all. Of course, I had heard India had a problem with infrastructure, but the revelation was startling," he says.

This time around, it has been a different experience. "At Khajuraho, we have seen not only the sculptures, but also the countryside and how schools are run. Perhaps the best way to see whether a country is doing well, especially in India's case, is not the number of cranes working, but the number of children seen on the roadside with bags, going to school," he says.

"China is the other extreme, where you probably have too many roads and too much quality. It looks good in national income figures and they probably create a significant level of kickbacks for people who approve them. They have spent a lot on them, quite the opposite extreme."

Partly, because of the infrastructure, skyscrapers and all that you see around Shanghai, the general impression is that China is more developed than India.

"But, I'm not so sure that in income, the level of difference is that large," says Mirrlees, who is a more frequent visitor to China. But those are just surface impressions.

And surface impression is something Mirrlees has dealt with extensively. Born in 1936 in Scotland, Mirrlees won the 1996 Nobel Prize for economics, with William Vickery, for contributions to the economic theory of incentives under asymmetric information.

In plain language, he found a way to help formulate contracts in a situation where decision-makers have different information.

For instance, if the government thinks about raising income tax, it doesn't know if an individual will then decide to work less. If the government doesn't know this, how can it set taxes to optimise revenue without stifling the incentive to work?

Mirrlees found a solution to this, a solution that has provided the basis, not only for the construction of taxation systems across the world today, but for our understanding of a whole range of other markets and systems, including insurance, auctions, wages and share markets.

Some of this work was done at Oxford, where he is credited with creating the mathematical economics school. "I came to Oxford because they were desperate for a mathematical economist and they couldn't find one. Then they found me," says Mirrlees about his stint as Edgeworth Professor of Economics at Oxford from 1969 to 1995.

Every professorship in Oxford had to have a different name. "When I joined, it was simply called 'professor of economics' because it was either for mathematical economics or econometrics and that was such a mouthful. Some years later, they decided to call it the Edgeworth Professorship," says Mirrlees.

So, how important is mathematics in the study of economics? Mirrlees has an anecdote. At a high school in Hong Kong, where a lot of people study economics, a student asked him what he should do since he had not done mathematics but wanted to study economics.

"Maybe you should try sociology", was Mirrlees' answer, though in all fairness, he adds that he hasn't yet decided if it is too unfair an answer. But a lot of cases that economics deals with are like that.

For instance, how to deal with uncertainty or the appropriate shadow prices to use. "I can't see how to do that without mathematics. Virtually every question that comes up needs quite a bit of mathematics for solving it," he adds.

"In the 1960s, when I worked on planning, I got carried away with the idea that countries needed to raise more and more revenues. But over the years, I have had to acknowledge that in a number of countries, it would have been better to reduce the level of government revenue because of the extent of misuse," he says. India, he adds as an afterthought, is not among them.

Coming to what he is working on now, Mirrlees says he is revisiting taxation. "I am thinking of a paper on which commodities should be taxed," he says, adding that there has been an argument that only income from employment should be taxed.

But an argument like that raises different issues for, say, India or China, because a tax on labour earnings will yield very little revenue. So, the case for taxing various commodities is different in the case India.

He is also working on behavioural economics, which argues that since people do not necessarily make the best choices, there is a case for providing them with less choice to ensure better outcomes. But there, the trade-off with lower freedom will have to be considered.