Facts for Change
ABHIJIT V. BANERJEE AND ESTHER DUFLO, two of 2019’s Nobel Prize winners in economics, start their extraordinary book by noting that people’s core beliefs “are better predictors of their policy views than their income, their demographic groups or where they live.” Subjective identities increasingly tend to overpower more objective predictors and reflect growing polarization. In the United States, for example, “in 1960 roughly 5 percent of Republicans and Democrats reported that they would feel displeased if their son or daughter married outside their political party. In 2010 nearly 50 percent of Republicans and over 30 percent of Democrats reported such feelings.”
The authors set out to use what economists can say with some certainty to find common ground in the great debates of our time, such as those about migration, trade, economic growth, climate, and social policies. They use simple prose to demonstrate how rigorous economic thinking accompanied by careful empirical work can be brought to bear on a myriad of concrete policy problems. The authors, already very well known for their earlier work promoting the use of randomized controlled trials in empirical development economics, use this method to shed light on many controversies that often rage with little or, even worse, misleading factual support. Throughout the book they explore many examples of otherwise similar groups that differed only in their exposure to exogenous events or different policies. One example—visa lotteries in New Zealand whose applicants were from the same Pacific island of Tonga—reports that winners tripled their income within one year of receiving a visa, which supports the conclusion that differences in wages are “caused by difference in the location and nothing else.”
The many randomized controlled trial discussions are placed in a wider context, however. The chapter on trade starts with basic theory from Ricardo’s comparative advantage to the Stolper-Samuelson theorem on the effects of trade on factor income. The chapter on growth takes us from the Solow model with diminishing returns to Romer’s views on spillover effects from innovation, which can overcome diminishing returns for an economy as a whole. For trade, once it is recognized that neither capital nor labor reallocates with the ease often assumed, the predicted benefits weaken. For growth, the authors conclude that “despite the best efforts of generations of economists, the deep mechanism of persistent economic growth remains elusive” and recommend a focus on poverty reduction using the insights from randomized controlled trials.
Abhijit V. Banerjee and Esther Dufo
Good Economics for Hard Times
Hachette, New York, NY 2019, 403 pp., $25.98
The chapter on climate argues that warming will have huge costs for poor countries closer to the equator, but surprisingly says that “if the world warms by a degree centigrade or two, residents of
Subjective identities increasingly overpower more objective predictors.
North Dakota will mostly feel perfectly happy about it”—ignoring other effects of climate change, such as extreme weather events.
The book is written with both ambition and realistic modesty. The authors hope that their critical scrutiny of narratives that are too “easy” will help reduce polarization and allow improved design of specific policies based on sound evidence and rigorous analysis. FD
KEMAL DERVIȘ, senior fellow in the Global Economy and Development Program, Brookings Institution
End of History?
CAPITALISM, ALONE is an ambitious and provocative examination of the present and the future of capitalism. It is a valuable, data-rich, and thoughtful addition to several recent books examining the challenges facing this economic system.
The premise is that capitalism has beaten all alternatives. The book reviews the historical shifts leading to this Darwinian triumph. For the first time, a single economic system rules the world. “The domination of capitalism as the best, or rather the only, way to organize production and distribution seems absolute.”
This does not, however, entail the “end of history.” The triumph of liberal capitalism has not delivered the vision that had many in its thrall in the 1990s. Branko Milanovic examines the internal strains the system faces: increasing income and wealth inequality within economies, declining intergenerational mobility, mounting economic and social polarization, and rising influence of wealth in politics leading to the concentration of both economic and political power in the hands of an elite and a weakening of democratic polity. Big changes in technology may exacerbate these strains, which are reflected in the rising popular revolt across Western capitalist democracies.
The Future of the System
That Rules the World
Harvard University/Belknap Press, Cambridge, MA, 2019, 304 pp., $29.95
Capitalism itself may no longer have competitors; the competition now is between different types of capitalism, the West’s “liberal meritocratic capitalism” (with the United States as its most paradigmatic example) and “political capitalism” (with China as the exemplar). The latter system is mounting a growing challenge, on the back of China’s economic rise. But it is beset by its own problems: endemic corruption, weak rule of law, authoritarian control by a political elite whose power depends on delivering continued high economic growth, and rising inequality.
What does the future hold? Milanovic says that while capitalism cannot be replaced—at least in the foreseeable future—it can be improved. He sketches areas for reform to address the economic and political dysfunction of liberal capitalism. And his list includes deconcentrating capital and wealth ownership through tax advantages that give the middle class a bigger stake in financial capital and a corresponding increase in the taxation of the rich, coupled with higher taxes on inheritance. He also calls for a significant boost in public investment to broaden access to high-quality education and enhance equality of opportunity. Strictly limited and exclusively public funding of political campaigns to reduce the ability of the rich to control the political process is another necessary reform, he says.
Such major reforms face heavy odds in a system where wealthy elites wield strong political influence and will resist change. Higher taxes on capital and wealth may be difficult in globalized capital markets without significant international coordination. Absent reform, liberal capitalism may lurch further toward plutocracy, with technocratic structures overshadowing those that are democratic as discontent with elected governments grows. Political capitalism, on the other hand, faces existential risks from the inevitable slowing of growth as economies mature.
So the evolution of humankind’s socioeconomic system may not have reached its terminus. The march of history continues. FD
ZIA QURESHI, visiting fellow, Global Economy and Development Program, Brookings Institution
“FACTS DON’T CARE ABOUT YOUR FEELINGS” is a popular phrase on social media, ironically often used by those with at best a rudimentary grasp of history. Robert Shiller’s mission in this book is to convince us of the opposite—that economic facts are indeed driven by our feelings. Those feelings are in turn driven by what he describes as economic narratives—contagious stories with the potential to change how people make economic decisions.
Recently, an extensive economic literature has looked at how perceptions can drive outcomes and vice versa.
But Shiller argues that the power of narratives is both broader and deeper than contemporary economics is prepared to accept. We cannot understand or, regarding the future, predict episodes like the Great Depression—or the 1980s move toward personal tax cuts—without understanding the narratives that underpin them. In some ways his thesis could be seen as pushback against the most recent Nobelists. These “randomistas” argue (to oversimplify, no doubt unfairly) that the discipline of science can strip away the need to “tell stories” and cleanly identify the reduced-form causal impact of particular policy interventions, without fear about expectations or beliefs.
But—and it is a big but—it is Shiller’s approach to causality that trips him up. His description of the cult of frugality during the Great Depression, and how it led to the mass adoption of blue jeans and jigsaw puzzles, is entertaining. But the claim that “the crazed nature of the phenomena...helps to explain the length and severity of the Depression” is a stretch, to say the least. Similar examples dot the book. Art Lafer’s napkin and Ronald Reagan’s jokes (not to mention a short story by Astrid Lindgren) “touched of an intense public mandate for tax-cutting”; George W. Bush’s post– 9/11 narrative ended the 2001 recession.
The power of narratives is both broader and deeper than contemporary economics is prepared to accept.
Robert J. Shiller
Narrative Economics: How Stories Go Viral & Drive Major Economic Events
Princeton University Press, Princeton, NJ, 2019, 377 pp., $27.95
But why should we believe that these stories genuinely caused their related economic events rather than being driven by them, or perhaps being usefully and interestingly illustrative of them? There’s remarkably little reference to empirical evidence, and none to the recent literature on, for example, political uncertainty.
Instead, Shiller’s views of the importance of narrative seem themselves to be based on his belief in a specific story about how and why people make economic decisions. “Ultimately, the mass of people whose decisions cause economic fuctuations aren’t very well-informed… and yet their decisions drive aggregate economic activity. It must be the case that attention-getting narratives drive those decisions.”
The “must” is assertion, not analysis. Not surprisingly, given this lack of analysis, the book does little to set out a convincing research agenda. The call for economists to draw from other disciplines, not just epidemiology but qualitative social research, among others, is welcome. But I struggle to see how Shiller’s thesis can be turned into testable hypotheses and especially, as he hopes, into mechanisms for predicting and avoiding economic downturns or crises. FD
JONATHAN PORTES, professor of economics and public policy, King’s College London