Economics Nobel:  When Economists Encounter the Real World

By Shlomo Maital

David Card, Joshua Angrist and Guido Imbens

   The late Alan Krueger

I LOVED! this year’s choices for the Economics Nobel.  I learned years ago that powerful insights emerge, when we economists leave our offices and encounter the real world.  And these three brilliant economists proved it.  All have Harvard backgrounds.

      1.  David Card:

     According to The Economist,  “This year’s prizewinners  [used] “natural experiments”, in which some quirk of history has an effect similar to an intentional [randomized] trial. In a landmark paper published in 1994, Mr Card and Alan Krueger studied the impact of a minimum-wage increase in New Jersey by comparing the change in employment there with that in neighbouring Pennsylvania, where the wage floor was unchanged. Although theory predicted that a minimum-wage rise would be followed by a sharp drop in employment, such an effect, strikingly, did not seem to hold in practice. The paper inspired further empirical work and injected new energy into thinking about labour markets. Krueger, who died in 2019, would probably have shared the prize had he lived.

   2.  Joshua Angrist:

     The Economist:  “Mr Angrist, together with Krueger, used a similar technique to examine the impact of education on labor-market outcomes. Because students of a more scholastic disposition are likely both to spend more time in school and to earn more in work, what looks like a return to education could in fact reflect natural aptitude. In order to determine causality, the researchers made use of odd characteristics of America’s educational system. Although laws typically allowed students to drop out of school when they turned 16, all students born in the same year began school on the same date, regardless of their birthday. Those born in January, therefore, received more schooling, on average, than those born in December—and, the researchers found, also tended to earn more. Since the month of a student’s birth may be assumed to be random, they concluded that the added education caused the higher earnings.  The study of schooling found that an extra year of education raised subsequent earnings by 9%.”

    3. Guido Imbens

     The Economist:  “Such a [large] effect seemed implausibly large to many economists. But that reflected a difference in definition, concluded Mr Angrist in work with Mr Imbens.  … Together, the researchers developed statistical methods to make the conclusions from natural experiments more useful.”

    At long last, Economics has discovered the real world.  Behavioral economics is leading the way.  And ‘natural experiments’ are joining.   The result is a credibility revolution —  economic research that is relevant and believable, anchored in reality.     

    The Economist:  “The credibility revolution, like any big upheaval, has had its excesses.  …Yet the innovations developed by this year’s prizewinners unquestionably changed the field for good, illuminating questions once shrouded in darkness and forcing economists to push theory in directions that better describe real-world experience—a cause, indeed, for celebration.”

    Alas – I was born much too soon.