REVIEW: Good Economics for Hard Times: Better Answers to Our Biggest Problems, by Abhijit Banerjee and Esther Duflo
A recent YouGov survey confirmed that economists are the least trusted professionals in the UK today. Brexit is only the latest contributor to the public’s understandable rejection of a profession that has either failed spectacularly to raise the alarm over impending crises or have provided theoretical justifications for the inexcusable practices of bankers and the wild claims of politicians.
Who can forget the Queen’s devastating question, in the aftermath of the 2008 crash, to members of the Royal Economic Society: “Why did no one see it coming?” How can Nobel Prize winning economists be forgiven for providing the theoretical sermons that steadied the financier’s hand concocting the structured derivatives that Warren Buffet would later describe as “weapons of mass financial destruction”?
A new book, entitled Good Economics for Hard Times: Better Answers to Our Biggest Problems, is the latest attempt by professional economists to defend the profession. It is, happily, an excellent antidote to the most dangerous forms of economics-bashing: the attempts of opportunistic politicians to weaponise understandable discontent with mainstream economics and politics and to press it into the service of a xenophobic ideology that denies facts and serves the interests of a nativist, global oligarchy.
The book’s authors, MIT academic economists Abhijit Banerjee and Esther Duflo, write beautifully while in full command of their economics – a rare combination of skills. They look into the most crucial issues humanity faces (migration, trade wars, the scourge of inequality, climate catastrophe) with a combination of humility over what economics cannot tell us and pride over its contributions to our limited understanding. In every page they seek to shed much needed light upon the distortions that bad economics bring to the public debates, while methodically deconstructing their false assumptions. In their words, the book’s noble and urgent task is “…to emphasise that there are no iron laws of economics keeping us from building a more humane world”.
Serendipity would have it that, as this book was in the pipeline, Banerjee and Duflo, who are also partners in life, were awarded (jointly with Michael Kremer) this year’s Nobel Memorial Prize in Economic Sciences. Even if only for the good wind it will blow into this important book’s sails, the Prize Committee’s choice must be considered an inspired one.
Banerjee and Duflo are a new breed of economists. Unlike previous Nobel winners who were mostly older white males producing grand theories built upon mathematics of dizzying complexity, this year’s Nobelists are young and have made a name for themselves by studying poor brown people’s circumstances up close and personally. Most interestingly, they have specialised in borrowing the methods of randomised trials from medicine and deployed them in developing countries to ascertain what policies can alleviate suffering with given resources.
Their own conception of what economists should be doing is disarmingly down to earth. They see themselves as society’s “… plumbers: we solve problems with a combination of intuition grounded in science, some guesswork aided by experience and a bunch of pure trial and error.” A comparison with John Maynard Keynes’s conception of the study of economics is telling. Keynes thought that good economics required of us that we aim to be, at once, “mathematician, historian, statesman, philosopher”. That we must “…contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought.” That we must remain “…as aloof and incorruptible as an artist, yet some-times as near the earth as a politician.”
While such lofty ambition implanted a dangerous delusion of grandeur amongst many of the economists whose theories have caused many people great hardship (for example, grand theorisers of the financial market’s supposed self-correcting capacities), there are passages in this book when this reader would have liked a little more of Keynes’ ambition. For without it the plentiful useful facts do not go far enough to expose the deeper causes of our current predicament. Similarly, while it is refreshing to encounter a genuine admission of ignorance (e.g. when the authors admit that economists are damned if they know what causes economic growth spurts in some places while other places remain stagnant), the umpteenth time I encountered the usual transition from “on the one hand” to “on the other hand”, I found myself yearning, like President Truman once did, for the… one-handed economist.
The book’s greatest contribution is the methodical deconstruction of prominent fake facts on the day’s critical issues: Migration, the reader finds out, is not on the rise – indeed, at 3% of global population it is exactly at the level it was in 1960. Natural experiments (involving Finns expelled from the USSR in 1945, Cubans flocking to Miami in 1980, Jews settling in Israel in the 1990s) prove that migrants do not steal the natives’ jobs, but only help expose the holes in public services and social housing left by austerity. As for trade liberalisation that economists treat as super-important, Banerjee and Duflo dare suggest it brings relatively small benefits while doing a lot of damage to the poorer and the weaker in countries like the United States and India. The resulting discontent in developed countries turbocharges racism: The moment white blue-collar men lose hope and apply for disability welfare benefits it is no longer enough to denigrate blacks and Latinos as “welfare queens”. They must now be depicted as gang members or rapists.
In the chapters on growth, inequality and climate change the reader comes closer to encountering the authors’ politics. While firmly on the side of progressives, and fully sympathetic with figures like Bernie Sanders, Elizabeth Warren and Alexandria Ocasio-Cortez, their own policy stance is much more mainstream. They support schemes to help the victims of globalisation, e.g. by paying firms in declining areas to keep older workers employed. They want government in developing countries to help people move to areas with better jobs but also to help those who want to stay to look after their elderly or their village. In keeping with their academic work’s focus on things that work on the ground, they favour the smaller picture where they can be sure that public investment can make a difference. But what about the larger stage on which humanity’s drama unfolds?
Banerjee and Duflo consider Sanders’ Job Guarantee scheme but reject it because they do not believe worthy jobs can be produced by the state in such big numbers. Correctly, they point out that Warren’s wealth tax, while good and proper, cannot raise more than 1% of US national income, even less Ocasio-Cortez’s 70% marginal tax rate for the super-rich (which will simply motivate firms not to distribute profits but place them in trust funds). Alas, the fact remains that any serious tackling of climate change, or attempt to give social justice a chance, require spending in the vicinity of at least 5% of total income. So, where will the money needed for the International Green New Deal and the redistribution (both global and local) of wealth that humanity needs so desperately come from? Banerjee and Duflo do not say.
At some point they welcome a change of heart amongst IMF staffers: “The IMF now requires its country teams to include inequality in factors to take into consideration when providing policy guidance to countries and outlining conditions under which they can receive IMF assistance.” When I read this, I laughed thinking that someone must have forgotten to send this email to the IMF’s Greek mission! The reason I mention this titbit here is that it points to an explanation of their silence on how the Green New Deal will be paid for: A reluctance to break cleanly from the gravitational pull that the established institutions exert on successful academic economists, preventing them from countenancing public finance innovations that require an ambition closer to that of bigger picture thinkers (e.g. Franklin Roosevelt and John Maynard Keynes)
Every book as important as this one must include a theory of change: By what means shall we use the book’s insights to bring about a more humane world? The authors’ offering is enlightened selfishness by the rich (“The rich may eventually see that it is in their self-interest to argue for a radical shift toward the real sharing of prosperity”) and razor-sharp analysis that is disseminated to the public (“The only course we have against bad ideas is to be vigilant”).
This is unconvincing. But it could not be otherwise. To provide a persuasive internationalist progressive policy agenda at a time when the usual fixes (e.g. quantitative easing, taxation) no longer work, the deeper causes of capitalism’s economic stagnation and flirtation with climate catastrophe must come to the surface. To do this we have to reconsider that which polite society bans respectable economists from interrogating: property rights over the means of production, especially robots, AI etc.
It is a remarkable sign of the times that, as my friend Slavoj Zizek once said, even the brightest minds would rather fathom the end of the world than plan for the end of capitalism. Perhaps the greatest contribution of Banerjee and Duflo’s excellent new book is precisely this: It demonstrates both the brilliant insights that mainstream economics can make available to us and its limits – which a progressive internationalism has a duty to transcend.