During this isolated COVID-19 existence, many of us long for the chance to socialize. But there's one social experience that many economists might not miss: finding oneself in an argument with a non-economist acquaintance about some public policy measure or predictions about where the economy is headed. Why does this happen so frequently? Why do surveys show that economists are quite unpopular and that the general public often strongly disagrees with economists’ views – even on topics where economists offer extensive evidence in support of their theories?
The new book by Abhijit Banerjee and Esther Duflo, Good Economics for Hard Times, starts from the premise that there is something amiss when economists are so unpopular and distrusted, and when their perspectives diverge from so many other people's views (and lived experiences). At the heart of the book is a basic question aimed at economists themselves: Where have we gone wrong?
One major clue is that most theory begins from models with few transition costs; most assume people can seamlessly move across sectors and geographies to find their most rewarding opportunities and acquire the new skills needed for these opportunities. From the book's outset, Banerjee and Duflo point out that this does not fit the facts: for example, if anything, migration is far too rare given the relatively large differences in real wages. The factors of production – particularly human labor – are far more ‘sticky’ than we think they are (or ought to be).
The authors go on to argue that this is not simply a matter of a missing term in a theory that would better fit the data. Very few economics studies consider dignity, autonomy, or a sense of purpose explicitly as a goal or outcome for human choices – nor the frustration and disillusionment that result without these. Incorporating such concepts might lead much of economics to quite different conclusions. As Banerjee and Duflo argue, ‘restoring human dignity to its central place… sets off a profound rethinking of economic priorities and the ways in which societies care for their members, particularly when they are in need’. In this spirit, Banerjee and Duflo follow in the footsteps of another Nobel-winning development economist, Amartya Sen, who broadened our understanding of poverty and growth to incorporate human capabilities.
The book is organized into two sections: in the first, the authors present widely held opinions of the general public that contrast the evidence-based consensus among economists. For example, popular views of immigration are heavily distorted by racist alarmism and overreliance on a simplistic interpretation of labor demand that wrongly suggests immigration hurts natives’ economic prospects. In contrast, evidence from economics studies in settings as diverse as lava-engulfed Icelandic islands, the lifting of the Soviet restrictions on migration to Israel, and the Mariel boatlift of Cubans to Miami has shown little in the way of negative impacts on similarly skilled residents at these destinations.
In the second part of the book, the authors turn to topics that are equally as salient but for which economics does not yet have a real consensus. They insightfully discuss the contradictory evidence behind the role of carbon taxes in curbing long-term climate change, how increasing taxes on the top earners might change the overall distribution of income, and how to improve the legitimacy and popularity of government around the world.
The book spans the developed and developing worlds. It is actually quite rare for those whose work focuses on international development to write about the experience in the US or Europe. But doing so is helpful for Banerjee and Duflo largely because it reinforces a sense of humility when examining the experience in the developed world. For example, we actually know quite little about why the US and Europe experienced a post-WWII boom in economic productivity, which becomes painfully obvious from the series of policies subsequently advocated by the West to developing nations.
This spirit of humility is carried through the book, and explains why sometimes the authors offer little in the way of resolution for some clear contradictions. For example, relaxing the strident view of preferences as consistent, coherent reflections of an individual's well-being is clearly something economics needs to attempt more seriously, but doing so might also push a government to make some choices for its citizens (such as by restricting transfers to in-kind rather than in cash). At the same time, Banerjee and Duflo provide evidence that unrestricted cash transfers often lead to better outcomes. So, as good economists, we should continue to be open to contradictory evidence and explore their underpinnings.
Toward the book's end, Banerjee and Duflo do offer some important policy recommendations. A few of their proposals are new (subsidies for employing older workers in areas and sectors hard-hit by trade or automation; guaranteed jobs caring for the youngest and oldest among us), but most are either a scaling up of successful programs (assistance for those hurt by trade; vouchers allowing people to move from low- to high-opportunity neighborhoods) or a return to the much more extensive government welfare system enacted in the US in the 1960s and 1970s and funded by the higher tax rates of that era.
Interestingly, the first set of recommendations promotes ideas – such as the role of dignity and purpose in peoples’ choices and lives – for which little evidence yet exists in economics. This may seem a bit ironic coming from two highly prolific researchers who won a Nobel Prize for their revolutionary approach to empirical evidence. But this forward-thinking approach throws down the gauntlet for modern economics, challenging it to reinvent itself and in doing so build trust beyond our inner circles. Here's hoping we economists are courageous enough to take it on.
