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Is There Hope for Economics? Yes – At Last!
By Shlomo Maital
Kremer, Duflo, Banerjee
Almost eight years ago, in November 2011, I wrote a blog about, among others, two MIT economists named Duflo and Banerjee, who FINALLY were asking the right question (why are so many people in the world so poor, and what can be done about it?) and FINALLY answering it, by doing field-based experiments with real money and real people, instead of building mathematical models of Alice in Wonderland. *
Together with Harvard University Professor Mark Kremer, they have been awarded the 2019 Nobel Prize in Economics. Duflo is the youngest economist ever to win it (she’s 46) and only the 2nd woman. She and Banerjee are spouses. Banerjee is of Indian ancestry. Duflo is French. (President Trump: Still think all immigrants are drug dealers, murders and rapists?)
I am an economist. And I was born too soon (in 1942). If I had been born in, say, 1982, I would have caught the wave of behavioral economics, which applied psychology to understanding how people really behave, instead of using abstract math. (My wife, a psychologist, and I published papers on behavioral economics as early as 1972 – but at that time, nobody was listening). If I had been born in, say, 1997, I might have done meaningful research in the field that helped build evidence-based policy.
Here is an example of powerful field experiments that change millions of lives, that I wrote about in my 2011 blog (based on an NYT column by Nicholas Kristof):
“Prof. Michael Kremer, a Harvard economist, helped pioneer randomized trials in antipoverty work. In the 1990s, Kremer began studying how to improve education in Kenya, Africa, trying different approaches in randomly selected batches of schools. One intervention he tried was deworming kids — and bingo! In much of the developing world, most kids have intestinal worms, leaving them sick, anemic and more likely to miss school. Deworming is very cheap (a pill costing a few pennies), and, in the experiment he did with Edward Miguel, it resulted in 25 percent less absenteeism. Even years later, the kids who had been randomly chosen to be dewormed were earning more money than other kids. Kremer estimates that the cost of keeping a kid in school for an additional year by building schools or by subsidizing school uniforms is more than $100, while by deworming kids, the cost drops to $3.50. (In a pinch, kids can usually go to “school” in a church or mosque without a uniform.)”
p.s. The Government of Kenya, impressed by Kremer’s study, supplied deworming medicine to nearly all Kenyan children, vastly improving their lives. It is incredible that in the West, we give deworming pills to our puppies and pet dogs regularly — but only Kremer thought to try giving it to African kids!
In the 1880’s the Economics profession made a terrible mistake. Two leading economists, Alfred Marshall and William Stanley Jevons, were rivals. Marshall had a practical, behavioral evidence-based approach. He defined economics as the “study of people as they work and live in the ordinary business of life.” Jevons? Well, he was a failed mathematician and physicist. He slapped together a few equations, to create an abstract model of economics – and economists loved it! They swallowed it! They dumped Marshall.
Why? Because the queen of science at the time was physics, and physics was highly mathematical. Maybe…economics could be as prestigious and ‘scientific’ as physics? Problem is – people are not electrons. You study them, not by quantum mechanics, but by observation and experiment. But it took economics 130 years to figure that out. And in the meantime, wrongheaded math-based pie-in-the-sky economics detached from reality did huge damage to the world – lately, in 2008, when we reaped what free-market greed-is-good economists had sowed..
Banerjee was born in Calcutta, India, to Nirmala Banerjee, a professor of economics and Dipak Banerjee, a professor and the head of the Department of Economics. Duflo was born in 1972 in Paris. She is the daughter of Michel Duflo, a mathematics professor, and his wife Violaine, a pediatrician. According to Wikipedia, “during Duflo’s childhood, her mother often participated in medical humanitarian project”.
In acknowledging her Nobel, Duflo noted that far too few women choose economics as a profession, and expressed the hope her Nobel would inspire more women to enter the field. What will you do with the money? journalists asked. She responded that when Marie Curie won her Nobel, she used the money to buy one gram of radium. Duflo said she too hoped to use the resources to further field research on poverty.
As Esther Duflo said herself, the importance of her Nobel, is that it will inspire other young economics students to follow in her footsteps, and ask real questions and find real field-based human answers on which effective policy can be built.
I wish I could start my career again. You have to know when to be born.
* Abhijit Banerjee & Esther Duflo, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. PublicAffairs (2011). Their new book: Good Economics for Hard Times, will be published in November 2019.
Why Economists (Don’t) Tell (True) Stories
by Shlomo Maital
After decades of researching and teaching economics, I became increasingly troubled by my discipline. I did not find truth in the math and numbers economists love. Instead, in teaching managers and future entrepreneurs, I found truth in what economists largely despire – N ≤ 1, that is, stories about real people. Often, when I tried to make my seminar talks interesting and meaningful with narratives, I got the devastating criticism: Stories! A word worse than Nazi, Fascist, or pedophile, for economists.
This is why I was so delighted to read the article by Carmine Gallo in Forbes, published way back in January. Gallo reported a speech by Nobel Economics Laureate Robert Shiller at the World Economic Forum, in Davos. Shiller is a behavioral economist who writes wonderful insightful books about how people behave. Here is an excerpt of what he said in Davos, according to Gallo. Warning – it’s rather long, but I think worth the time.
“This week at the World Economic Forum in Davos, Shiller banged the drum on a topic that’s near to my heart — the power of narrative to drive human behavior. Shiller didn’t mince words. “Most people think in narratives, but economists are terrible with narrative,” he said. In a follow-up interview on CNBC, Shiller said, “Last year I chastised the [economics] profession for neglecting what you media people know. Narratives drive human behavior.” To study narrative is to examine ourselves. We think in story, process our world through the lens of story, and use storytelling to communicate ideas. One prominent economist believes that stories are the heart of human behavior. He says to understand the power of narrative is to understand financial booms and busts — and to prevent crises from getting worse.
Robert Shiller is a Nobel prize-winning economist at Yale. He’s written books and papers warning of bubbles in the stock and housing markets before they happened. “The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing,” Shiller said in his speech. “Narratives ‘go viral’ and spread far, even worldwide, with economic impact.” Shiller says that the same epidemic models that trace how disease or viruses spread can be used to describe the word-of-mouth transmission of an idea. Stories spread ideas like a contagion—infecting one person and another, and another. Some ideas, of course, are great ones and should catch on. But some stories—once they go viral—can have a damaging impact on world economies.
Stories continue to impact our economies today. Shiller says the financial crisis of 2007-2009 also followed “a narrative-based chronology.” Financial busts are “driven by a cadence of stories.” Stock market and housing bubbles are formed when people hear stories of easy money being made. Panics make declines worse as stories of losses go viral.”
Another narrative that Shiller and several other economists brought up in their panel at Davos is today’s prevailing storyline that humans will be replaced by machines. “
For decades, we have heard, every 15 years or so, the story of how very soon machines will replace humans. They never have, and never will. Economists preached the story how unbridled uncontrolled greed would make human society happy healthy and wise. It didn’t. So – economists DO use stories, they weave stories based on numbers – and very often, distressingly often, get it wrong. But no matter—people believe the stories, and economists continue to build false ones.
There is hope. Modern economics is dominated, among the young, by the effort to understand and research human behavior. And this work, pioneered by, for instance, Dan Ariely, is based on great narratives built on real people and real dilemmas. One day, mainstream economics will be as behavioral as anthropology or psychology.
Alas. I was born too soon.
One-Armed Nobel Candidate Economist Is Fired
By Shlomo Maital
Paul Romer Paul Krugman
Every day, members of my profession, economists, find new ways to make me deeply regret I ever became one. The latest episode is a story of two economists named Paul.
President Harry Truman, the US President who suddenly and unexpectedly took office when President Roosevelt died in 1944, once said famously: “Give me a one-handed economist! All my economists say, ‘on the one hand…and, on the other’”.
Economists respond: “Give me a break, Truman! We are objective professionals. Our job is to offer alternatives and explain the implications of each. YOU are an elected official. We are your servants. YOU are the one elected by the democratic process to choose and decide, not us! We simply show you the choices.”
I myself used to repeat that mantra, during a year as head of an Israeli government planning body. But I soon learned – reality is different. When economics is a value-free zone, it is useless to political leaders. State your values, state your position, clean up the jargon, speak in ordinary language, and keep one hand anchored deeply in your pocket.
The Guardian now brings us a shocking, infuriating episode in which a future Nobel economist is fired for demanding clarity and truth. The economist is Paul Romer. In his Ph.D. dissertation, he built a powerful new theory now widely accepted, called “endogenous growth theory”. But another Paul, Paul Krugman, a Nobel laureate, has for over two decades been a beacon of clarity and one-armed economics.
In brief: Since MIT economist Robert Solow, we’ve known that half or more of all economic growth is caused by technological change. But Solow treated it as ‘exogenous’, outside the system. Romer observed that technological change is endogenous – it is created by what we do, in education, innovation, and R&D, etc. His two Journal of Political Economy articles published in 1986 and 1990, respectively, started endogenous growth theory and changed the world. He will win a Nobel Prize soon for this. It has changed the way everyone thinks about pro-growth policies and plans.
The Guardian: “The chief economist at the World Bank has stepped down from its research arm after staff were vexed by demands to write succinctly, including cutting superfluous uses of the word “and” in reports or emails. Paul Romer, 61, will leave the Development Economics Group (DEC), according to a staff announcement reported by Bloomberg. He had asked for shorter emails, while also cutting staff off if they talked for too long during presentations, it said. In response to press inquiries about internal “objections to my insistence on clearer writing,” Romer published writing guidance he had issued to DEC staff on a blog on Thursday. He said he suffered from dyslexia, making writing hard, but added “everyone in the Bank should work toward producing prose that is clear and concise. This will save time and effort for a reader. Thinking about the reader is an example of what I mean when I say that we should develop our sense of empathy.” Romer cut more US$1 million in annual expenses from the DEC budget, a body of more than 600 economists. But it appeared to be his attacks on convoluted, lengthy reports of that researchers took cause with. In an email to staff, Romer argued that the bank’s flagship publication, World Development Report, would not be published “if the frequency of ‘and’ exceeds 2.6 percent,” according to Bloomberg. He reportedly cancelled a regular publication that did not have a clear purpose.”
“Romer is credited with the quote “A crisis is a terrible thing to waste,” which he said during a November 2004 venture-capitalist meeting in California. Although he was referring to the rapidly rising education levels in other countries compared to the United States, the quote became a sounding horn by economists and consultants looking for a positive take away from the economic downturn of 2007–2009.”
Paul Romer wanted one-handed economists, who speak clearly, and paid the price. But is there a role-model for clear-thinking clear-speaking economics? There is. New York Times columnist Paul Krugman.
The Economist: “From a mono-manual perspective, at least, Harry Truman would have loved Paul Krugman, an economist who rarely hesitates to take a bold position—even when the subject is himself. In recounting the transformation of his twice-weekly New York Times column from a genial discussion of the “New Economy” into a widely read broadside against the Bush administration, the Princeton professor recently described himself as “a lonely voice of truth in a sea of corruption.”
Krugman has blasted Trump and the Republicans, and identified their scorn for economic truth.
In the 1930’s economics took a wrong turn. Influenced by the London School of Economics, economists decided to become like physicists and deal with only ‘pure science’, without ethical value judgments. At that moment, economics became irrelevant. And it remains so.
I hope Romer wins the Nobel Prize later this year. In his acceptance speech, I hope he tears several strips off the moribund walking-zombie economists there, hundreds of them, a whole building full of them at 1818 H Street in downtown Washington. That building is a wasteland desert, even though it is in the heart of Washington.
Forgotten Farmers
By Shlomo Maital
Today’s New York Times has an unusual Op-Ed piece by James Rebanks, a British sheep farmer, who lives in the lovely Lake District. (I recall hiking there, when I was a student at U. of Manchester 50 years ago). He is touring the US to promote his new book, a memoir, “The Shepherd’s Life”.
Here is a key passage: “Economists say that when the world changes people will adapt, move and change to fit the new world. But of course, real human beings often don’t do that. They cling to the places they love, and their identity remains tied to the outdated or inefficient things they used to do, like being steel workers or farmers. Often, their skills are not transferable anyway, and they have no interest in the new opportunities. So, these people get left behind.”
We economists spin theories from our comfy offices, about how the force of social Darwinism (competition for resources) drives efficiency. You’re a farmer? Herd sheep? Your country imports cheap mutton? Tough for you. Find another trade. That’s life.
This is the economic theory. It’s time to rethink it.
Economic freedom should also mean the freedom to choose our livelihood, and to engage in it as long as we wish. Farmers are so few, so forgotten, and are so threatened..Rebanks writes about abandoned farms through the US, but who cares? Who even notices? America is flooded with cheap (and mostly unhealthy) food from abroad.
Rural America matters. So does rural EVERYwhere. Rebanks is right. Time to rethink the cruel free-market theory economists sold the world.
Last Saturday (shabbat), I had the privilege to read a passage from the Bible, Kings 2, in our synagogue. The passage tells how young King Joash restores the Temple, by raising crowdfund money, “everyone according to his heart” and to his soul. Money. Heart. Soul. Those three things must go together in any economic system that claims to be just and fair. An economic system without a heart or soul is unacceptable.
Nobel Prizes 2016
By Shlomo Maital
This year’s Nobel Prize winners:
Medicine/Physiology: Yoshinori Ohsumi, Japanese cell biologist. He discovered how cells recycle their wastes – an amazing and complex process that keeps cells from choking on garbage. Ohsumi asked a question that intrigued him, but that interested few others…
Economics: Oliver Hart (Harvard) and Bengt Holmstrom (MIT): contract theory. Especially “incomplete contracts”. See Hart’s American Economic Review 2001 article on financial contracting — enlightening, especially for Venture Capital.
Physics: David Thouless, F. Duncan Haldane, J. Michael Kosterlitz. Their mathematics (based on topology) revealed insights into ‘extreme state’ matter (e.g. very low temperatures, super-cooled, etc.), and may lead to important new products, perhaps in semiconductors and computing.
Chemistry: Jean-Pierre Sauvage, J. Fraser Stoddart, Bernard Feringa: synthesis of molecular machines. These tiny machines, the size of a single molecule, can do actual mechanical work. Also may lead to important innovations one day.
Note the common denominator: Willingness to ask really good questions, questions others aren’t asking, ability to take risks in research, tackle very challenging hard problems, and in some cases, defy the establishment by choosing a research direction others think is a dead end.
And the Peace Prize? To Colombian President Santos, and the peace agreement that ended 50 years of senseless civil war. We learn from Colombia what we already know, from Britain’s Brexit vote – beware of referendums, you cannot be sure what they will yield. Colombia will revote its peace agreement, narrowly defeated in a referendum, and gain approval. But Britain? Britain will leave the EU, for certain, a result very few expected, with major consequences for Europe and the world.
Nobel Prize for Economics: Jean Tirole Takes on the Giants!
By Shlomo Maital
Jean Tirole
The Nobel Committee that selects winners for the Economics Prize has sent a message. This year (today, actually) they announced the winner is Jean Tirole, a French economist, who teaches at Toulouse, and who studied at MIT. He is honored for the following (according to the London Guardian):
“This year’s prize in economic sciences is about taming powerful firms,” Staffan Normark, permanent secretary of the Royal Swedish Academy of Sciences, said as he named Tirole the winner of the 8m kroner (£700,000) prize.
Tirole, 61, began his work on regulation and oligopolies in the 1980s and published an influential book in 1993 with the late Jean-Jacques Laffont on regulation. The judges said Tirole is “one of the most influential economists of our time”.
They added: “He has made important theoretical research contributions in a number of areas, but most of all he has clarified how to understand and regulate industries with a few powerful firms.”
The panel said Tirole had shown the “deep and essential differences” between regulating companies in different sectors, such as telecom companies or banks. Imposing caps on prices could reduce the influence of monopolies in some sectors, but not in others, the judges said, pointing to Tirole’s use of game theory and contract theory.
“In a paper last year, Tirole scrutinised, with Roland Bénabou, the pay and motivation structure in industries such as banking. They write about a “bonus culture that takes over the workplace, generating distorted decisions and significant efficiency losses, particularly in the long run”.
Tirole did not share the prize but won it alone. It is the first time since 1999 that an American has not at least shared the Economics Prize.
Will policymakers and politicians listen to Tirole? Yesterday I spoke with a family friend, a lawyer, who is leading a class action suit against a Detroit mortgage bank. He affirmed that the U.S. Justice Dept. has never prosecuted a single criminal case against Wall St. offenders, who nearly destroyed the world. They’re just too powerful, he said. Some groups spend $400,000 A DAY on lobbyists in Washington. Apparently, it’s a good investment. I am fantasizing a court case, criminal case, in which Jean Tirole is called as a witness for the prosecution.
TIMnovate 