Thursday, December 5, 2019

Nobel Prize winners explain how ideology/theory blinded economics (Michael Simkovic)

The Financial Times recently published an excellent profile of Esther Duflo, a French economist who shared the Nobel Prize in Economics with two of her co-authors for pioneering empirical work using field experiments (randomized controlled trials) to evaluate the effectiveness of social policies and the effects of taxation.  Over the last several decades, economics has evolved from a largely theoretical field, which from the 1960s to 1980s at times resembled conservative political assumptions restated in mathematical formulae (see, e.g., here, here, here, here, here, here, and here), into a largely empirical field more akin to science.  Law & Economics has followed, albeit more slowly.

From the FT:

“Duflo’s drive to spread the use of RCTs reflects her original motivation for entering economics — a deep-seated belief that research can influence policy. . . .


Duflo believes her research on what drives behaviour in poor countries carries important lessons for governments in the rich world. She also believes strongly that economists need to speak out more — if people distrust experts, it is partly because the best academics, wary of being misinterpreted, are leaving the field to ideologues and pundits.


Duflo and [her co-author] Banerjee contend that, in reality, people do not necessarily move to the best jobs, or invest in the most productive businesses; nor is there any evidence they work less in response to higher taxes. They care about many things — health, self-respect, clean air — more than they do about maximizing per capita GDP, an elusive goal that may no longer be the right priority for policymakers in the developed world. . . .     For her, the priorities in the US would include . . . a huge investment in early-years education, to create high-status jobs ‘that no robot is ever going to come to take’.


Duflo believes that an excessive faith in financial incentives is one of the big things mainstream economics got wrong. ‘You can see the long shadow of that misconception in our thinking on trade, in our thinking on taxation . . . in our thinking on social programmes.’


Although a reassessment is now under way, Duflo is critical of her profession’s reluctance to accept evidence that did not fit with accepted theories. She cites the example of Petia Topalova, an IMF economist whose early work at MIT showed poverty reduction was slower in areas of India that were more exposed to trade. Topalova’s conclusion — on the need to compensate losers from globalization — now seems self-evident. At the time, however, her paper was greeted with near-universal scorn — and she was forced to seek a career outside academia.


‘I wish I could say for sure that something like that would not happen again, but it might, with another blind spot,’ Duflo says. This failure on the part of economists to question their assumptions reflected cultural problems . . .


Duflo’s main message, though, is that economists — for all their flaws — have something to contribute.  ‘A focus on the right policies can make an enormous amount of progress. When I feel low, that’s what I think about.’ ”

Guest Blogger: Michael Simkovic, Of Academic Interest, Science | Permalink