BACK OF THE BOOK

Nuclear weapons engineering and weather prediction have to use supercomputer simulations. This is because they are systems that are not predictable, in any practical sense, by studying the equations of physics. They exhibit 'complex emergent systems' behaviour with (some notion of) order arising out of chaos, just as wind tunnel simulations often show unforeseen behaviour that would have been impractical to discover theoretically.

Similarly, the central thesis of Paving Wall Street: Experimental Economics & the Quest for the Perfect Market by Ross M. Miller, is that economic simulations can test practical issues related to market mechanisms in ways that theoretical economics cannot.

This engagingly written story of the little-known area of Experimental Economics is inspired by the author's work with Vernon L. Smith, who shared the 2002 Nobel prize in Economics. The book first answers one of the most vexing fundamental questions of economics: how does the 'Invisible Hand' work whereby mass opinions somehow come together and manage the economy better than could, say, a well-educated intellectual planner?

Paving Wall Street By Ross M. Miller John Wiley & Sons Price: Rs 1,500 PP: 174

The book shows how Vernon Smith's clever economic experiments demonstrated the robustness of F.A. Hayek's famous hypothesis that markets can allocate stuff efficiently even without perfect information available to all participants, if bids and offers are the only information traders reveal.

Economic experiments are simply simulations of a market, using experimental subjects as traders and highly simplified rules to capture the economic essence of a trading situation. To everyone's astonishment, such simplistic classroom games showed results remarkably similar to real markets. First, prices rapidly converged to the efficient equilibrium point, as if everyone had perfect information.

Furthermore, even more interestingly, Smith's experimental markets showed many complex and mysterious effects such as bubbles and crashes, for which neo-classical economics still has no good explanation but often occur in real markets.

Miller also describes how Experimental Economics has shown that forward markets can prevent or reduce the formation of bubbles. For this part alone, this book is a 'must-read' for anyone considering the issue of forward trading in Indian stockmarkets. The only pity is that Miller spends far too little time explaining his ideas on why derivatives prevent bubbles and crashes, compared to the extensive and clear expositions he presents about everything else.

On a bigger picture level, this book is significant in the 'uber-paradigm' it represents: the interdisciplinary nexus of Artificial Intelligence (AI) and Economics, which is a trend necessitated by data overload. Tech fads and bubbles may come and go, but we will always have to deal with worsening data overload. And this will intertwine machine learning, data mining and automated decision-systems increasingly in every facet of life. The fact that Google has now become a verb as well as a noun is the most obvious example.

Sure enough, Miller's pet idea is the 'Smart Market', an intelligent market mechanism that allows for more efficient information aggregation and price discovery, and leads to better trade executions for all market participants in general.

The reader may then be motivated to explore further the economics-machine learning nexus, and look at how this new paradigm leads to results almost unattainable so far. For example, the new learning systems technology of Kernel Machines can now develop, in a day, a system for postal services to read handwritten addresses automatically, which matches the accuracy that took years of engineering work using the older Neural Network technology. Besides Wall Street, areas as diverse as marketing, medical research and even real estate are now beginning to feel the effects of the orders-of-magnitude level breakthrough represented by this new paradigm. But then, that's a subject for elaboration in another column.

The Burden Of Democracy By Pratap Bhanu Mehta Penguin Price: Rs 195 PP: 176

Would you judge Indian democracy at face value? Try it. Not democracy as an artificial ideal that's worshipped, but as a human-formulated satisfier of human needs-a very wide set, in this case, including the presumed need to keep any romantic eyes from welling up in tears. India's economic imperative, of course, is rapid GDP growth-and Jawaharlal Nehru University professor Pratap Bhanu Mehta acknowledges the failure of redistributive policies; but this growth still needs to be the kind that's long-term sustainable rather than fissiparous.

What makes India's post-1947 democracy experiment peculiar, Mehta contends, is that it was not preceded by a cohesively passionate revolution against social inequality (even the 'transfer-of-power' was fissured). Indian democracy since has internalised old inequities-as evident in today's identity politics. Thus India's ''burden of democracy'', paradoxically, is its continuing inequality-which, as he quotes a Japanese businessman as observing, subverts the merit-based allocation of human resources so crucial to global success. Had Mehta asked a Chinese, he might also have identified that other big agony, the demographic disadvantage of Indian inequality: disproportionately small domestic markets. Simply put, too many marginalised at home make for too little business power globally.

To help market reforms empower India Inc, Mehta recommends granting the marginalised a stake in the process. Sure enough, Tocqueville's concerns on tyranny find due place in this zippy 176-page read, as also a plea for equity on the negation of ''natural authority''.

What's critically needed is the liberty to debate it all, as Harvard man Fareed Zakaria might say, arguing that democracy was preceded by liberty in the West, and it's constitutional liberalism that deserves precedence even now. And if thrive a country must, rule must the Law.

Yet, it's a struggle satisfying all the needs democracy ought to. The 1990s' opening up of the one arena in India that influences democracy most-news media-to audience buyers, but not really sellers, has given us an AI-happy 'market' that favours audience size vastly over diversity, thus cramping the choice space for both information and ideas. Sad.

-Aresh Shirali