Almost universal acclaim greeted the award of this year’s Nobel Prize in economics to Abhijit Banerjee and Esther Duflo (jointly with Michael Kremer). It is easy to see why. While their profession is struggling to rebuild its reputation after the 2008 financial crisis, these two MIT economists are idealistic, likeable and admirably productive. That they happen to be married merely adds a pleasant side note to their story of formidable intellectual endeavour.
Duflo in particular is known as the high priestess of randomised controlled trials — experiments testing the effectiveness of specific policy interventions, much as clinical trials do in medicine. At 46, she was the youngest winner of the prize, and only the second woman. Rather than grand theorists, economists should see themselves as plumbers, she says: practical tinkerers interested above all in whether interventions actually work.
The duo’s 2011 book Poor Economics outlined how such experiments can help developing countries improve everything from school enrolment to immunisation rates. Their follow-up, Good Economics for Hard Times, is broader in scope but makes essentially the same argument: cutting-edge economic research can help fix thorny problems, from aiding communities recovering from trade shocks to setting ideal immigration levels.
The real world, they argue, is “sticky”, in contrast to the picture presented in textbooks. “Economics imagines a world of irrepressible dynamism,” they write, in which rational actors respond quickly to incentives. Not so in practice. The authors worry about “transitions”, meaning how people shift from job to job or from one region to another. The unemployed, anxious about risk and attached to where they live, are much less likely to move far to seek work than economic theory suggests.
Their first book won praise for both its empathy and insights into the complex, messy lives of people in poor countries. Their latest does much the same for those left behind in richer nations, especially struggling white Americans. “The rich and powerful step nimbly into pockets of economic success, but all too often the rest have to hang back. This is the world that produced Donald Trump, Jair Bolsanaro, and Brexit,” they write.
Trade is a good example. Almost all economists believe trade is beneficial overall, allowing those who lose out to be compensated. But for a country like the US, data suggest the gains are much smaller than many think, disruptions to communities are greater while politicians typically forget about compensation altogether.
The authors propose a new version of America’s postwar GI Bill to provide much more generous education and assistance programmes to trade-affected communities. As you might expect from immigrants — Duflo from France, Banerjee from India — they are keen on people movement, too. Evidence that migration lowers wages for poorer workers in countries such as America is flimsy, they argue.
Ultimately, they are concerned with the way economics can aid human dignity. “The goal of social policy . . . is to help people absorb the shocks that affect them without allowing those shocks to affect a sense of themselves,” they write. “Each and every transition can and should be a chance for government to signal its empathy.”
This might sound fluffy, but it is carefully argued and backed with research — albeit at the cost of making an otherwise impressive and important book read at times like a series of summaries of economic journal papers. Little space is given to how to make the political case for their radical ideas, either.
Yet Good Economics is an effective response to Banerjee and Duflo’s more thoughtful critics, some of whom argued that devotion to randomised trials had led to a narrowing of economics, in which complex questions that could not be scientifically tested should simply be set aside. The authors make a convincing case that empirical economics contains answers to many vexing problems, from populism to identity politics, especially when economists are willing to range outside their discipline’s confines. As they put it in their conclusion: “Economics is too important to be left to the economists.”
The writer is an associate professor of practice at the Lee Kuan Yew School of Public Policy
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