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Good Economics for Hard Times: Better Answers to Our Biggest Problems
Abhijit V Banerjee and Esther Duflo
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Arecent YouGov survey confirmed that economists are among the least trusted professionals in the UK. Brexit is only the latest factor in the public's rejection of an occupation that has either failed to raise the alarm over impending crises or provided justification for the inexcusable practices of bankers and the wild claims of politicians.
Who can forget the Queen's devastating question, after 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 helped concoct the structured derivatives that Warren Buffett would later describe as 'weapons of mass financial destruction'?
Good Economics for Hard Times is the latest attempt by economists to defend their profession. It is, happily, an excellent antidote to the most dangerous forms of economics bashing: the efforts of opportunistic politicians to weaponise discontent with mainstream 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 economists Abhijit Banerjee and Esther Duflo, write beautifully and are in full command of their subject. They examine 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. On every page, they seek to shed much-needed light upon the distortions that bad economics bring to public debates while methodically deconstructing their false assumptions. In their words, the book's noble, 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 even as Good Economics... was still in the pipeline Banerjee and Duflo, who are also partners in life, were awarded (with Michael Kremer) this year's Nobel prize in economics. It was an inspired choice. Unlike previous winners, mostly older white males whose grand theories are built upon mathematics of dizzying complexity, they have made a name for themselves by studying the circumstances of the world's poorest people. Most interestingly, they have specialised in borrowing the methods of randomised trials in medicine and deployed them in developing countries to ascertain which 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 economics is telling. He thought that it required us 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 sometimes as near the earth as a politician".
While such lofty ambition implanted a dangerous delusion of grandeur among 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 Good Economics ... when this reader would have liked a little more of Keynes's ambition. For without it, the plentiful facts do not go far enough in exposing the deeper causes of our current predicament.
The book's greatest contribution is its methodical deconstruction of fake facts: migration, we learn, is not on the rise - indeed, at 3% of global population, it is at the level it was in 1960. Natural experiments (involving Finns expelled from the USSR in 1945, Cubans flocking to Miami in 1980 and Jews settling in Israel in the 90s) prove that migrants do not steal natives' jobs; they just help expose the holes in public services and social housing left by austerity. As for trade liberalisation, which economists treat as super-important, Banerjee and Duflo suggest it brings relatively small benefits while doing a lot of damage to the poor in countries such as the US and India. The resulting discontent turbo-charges racism: the moment white blue-collar men lose hope and apply for disability welfare benefits, it is no longer enough for them to denigrate black people 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 on the side of progressives such as Bernie Sanders, Elizabeth Warren and Alexandria Ocasio-Cortez, their own stance is more mainstream. They support schemes to help the victims of globalisation (by paying firms in declining areas to keep older workers employed, for instance). They want governments in developing countries to help people move to areas with better jobs, but also to assist those who want to stay to look after their elderly or their village. They favour the smaller picture, where they can be sure that public investment will make a difference. But what about the larger stage on which humanity's drama unfolds?
Banerjee and Duflo consider Sanders's job guarantee scheme but reject it, because they do not believe worthy jobs can be produced by the state in such big numbers. They point out that Warren's wealth tax, though good and proper, cannot raise more than 1% of US national income, while Ocasio-Cortez's 70% marginal tax rate for the super-rich 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 requires 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.
They would welcome a change of heart among 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.
Every book as important as this one must include a theory of change: how shall we use its insights to bring about a more humane world? Banerjee and Duflo's 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 progressive policy agenda at a time when the usual fixes (quantitative easing, taxation) no longer work, the roots of capitalism's stagnation and flirtation with climate catastrophe must come to the surface.
It is a remarkable sign of the times that, as my friend the philosopher Slavoj Žižek once said, even the brightest minds would rather fathom the end of the world than plan for the demise of capitalism. Perhaps the greatest contribution of Good Economics… 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.
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