Abhijit Banerjee: Good Economics for Hard Times
Co-recipient of the 2019 Nobel Memorial Prize in Economic Sciences Abhijit Banerjee recently discussed his perception of the economics profession and other insights from his new book, Good Economics for Hard Times.
Banerjee, an MIT economics professor, visited the Stanford King Center on Global Development on December 3, 2019, as part of the center’s ongoing Speaker Series.
Summarizing themes from his book co-authored with Esther Duflo, his MIT colleague and co-recipient of the 2019 Nobel Prize, Banerjee stressed that the most significant issues today are core economic issues, such as Brexit, trade, and immigration. Yet myths and preconceived notions about these issues are widespread despite the efforts of economists to shed light on them.
“We wrote this book to hold onto hope,” said Banerjee. “To tell ourselves a story of what went wrong and why, but also as a reminder about what has gone right. This is a book as much about the problems as about how our world can be put back together, as long as we are honest about the diagnosis.”
“Economics is too important to be left to the economists.”
In a representative sample of ten thousand people, news weathermen had the trust of 50 percent of the population, while economists hovered around 25 percent, on par with politicians.
Banerjee explained that economists have difficulty listening to what words are being used in their name —the impact of casual statements is significant and that there could be more care and effort in explaining complex issues. This has contributed to a general lack of trust from the public towards economists and the economics profession.
“What’s often missing is the key step of why do we believe that and what makes us believe that,” Banerjee elaborated. “We don’t explain the reason why some things that people think are self-evident are not actually as self-evident as they think.”
Economists do too much predicting, continued Banerjee, which, when predictions go awry, hurt the reputation of economists. Banerjee cites research that concluded that economists routinely miss the magnitude of recessions by a wide margin in their forecasts.
“We should not blame economists for bad outcomes,” said Banerjee, “but we often overestimate what we can do and that often gives us a bad name.”
Banerjee then referenced a favorite quote by the late Harvard economist John Kenneth Galbraith, “The only function of economic forecasting is to make astrology look respectable.”
Lessons for the future
Banerjee summarized several key lessons from Good Economics for Hard Times, which he backed up by sharing evidence from a number of economic studies.
Using evidence from research on welfare recipients, Banerjee stated that impact of financial support on incentives for work are overrated. Randomized controlled trials in Honduras, Morocco, Philippines, Mexico, Indonesia, and Nicaragua, showed that giving people free money does not make them “lazy.”
In Alaska, a study published in 2018 examined the impact of the Alaska Permanent Fund’s annual dividend to Alaskan residents from 1982 to 2014. The unconditional cash transfers had no effect on employment or in overall hours worked.
Studies also show that unconditional cash transfers can actually increase productivity due to a rise in the recipient’s emotional and physical well-being.
Research by Banerjee, Duflo, and Stefanie Stantcheva of Harvard University showed that people believe their peers were more likely to stop working if given free money, but that they would not necessarily stop working themselves. Survey respondents also said their peers were more likely to move than they were if there were better jobs elsewhere.
Banerjee and Duflo attribute people not responding to financial incentives to the economy’s “stickiness.” Household mobility, particularly in the United States, has halved since 1948 due to economic factors including an unequal housing market and concentration of wealth in coastal economic centers.
“When we say that incentives are not that important,” Banerjee stated, it is because “people care more about their dignity, friendships, connections, a sense of who they are, their family, their social networks.”
Dignity matters, noted Banerjee. Economists should be putting dignity back at the center of social protection and analysis – getting a sense of who people are and what dignity means to them – what it means to be on food stamps or lose a job.
Banerjee concluded, “Dignity is something that is rarely used economics, but I think it needs to be thought about.”