Thursday, April 24, 2008

the relevance of economics (or not)

An interesting article by David Leonhardt in the New York Times on what he perceives as a recent increase in the relevance of economics (hat tip: Jeff Heisler)...

Of course, this claim only relates to Micro-economics, since everyone is always interested in the Macro-economy and its connection to the stock market and business conditions.

It was only a decade ago that economics seemed to be an old and tired discipline. The field no longer had intellectual giants like John Maynard Keynes or Milton Friedman who were shaping public policy by the sheer force of their ideas. Instead, it was devolving into a technical discipline that was even less comprehensible than it was relevant.

Some Wall Street firms had become hesitant to hire Ph.D. economists, and the number of undergraduates majoring in the subject was plummeting. “A good deal of modern economic theory,” John Cassidy wrote in an article titled “The Decline of Economics” that appeared in The New Yorker in 1996, “simply doesn’t matter much.”

Over the last decade, however, economics has begun to get its groove back. Armed with newly powerful tools for analyzing data, economists have dug into real-world matters and tried to understand human behavior. Economists have again become storytellers, and, again, they matter.

Economics can be one of the most interesting topics to study-- or quite boring. Likewise (and related), econ can be quite mathematical or more story-focused. The heart of economics is in story-- with the math and modeling as a crucial complement. Too often, econ is reduced to applied math (especially in grad schools and often in larger state schools where math-oriented research dominates the professors' agenda). This has been going on, increasingly, over the last 50-60 years.

One irony of this is that many professional economists are not very good economists in this broader sense of the term/vocation. They're good math jockeys and are good in their (narrow) areas. But they're not as much good as you would expect with general analysis.

They have explained why Americans don’t save enough money — and come up with clever ideas to increase savings. They have discovered that modest increases in the minimum wage don't actually destroy many jobs — and thus made possible the recent state-by-state push to raise minimum wages. Since the mid-1990s, the number of undergraduates majoring in economics has risen sharply.

Careful with that minimum wage observation! The key word is modest-- and if few jobs are being destroyed, then most jobs were already paying that wage and so the benefits are also quite modest. (It's a longer story, but there are much better ways to help the working poor than the poorly-targeted minimum wage-- for example, reducing or eliminating payroll taxes on the working poor.)

But there are more than a few economists who believe that the renaissance has come with a big downside. They argue that the new research often consists of cute findings — which inevitably get covered in the press — about trivial subjects, like game shows, violent movies or sports gambling. Economics may be popular again, but there still is no one like a modern-day Milton Friedman or John Maynard Keynes.

So when I recently set out to conduct my second annual survey of economists, I decided to try to uncover the next best thing. In its first incarnation, the survey simply asked for the names of the next generation of stars specializing in the economics of everyday life. This year, though, I went the other way — toward the big picture — and asked which economists were managing to do influential work on the crucial questions facing modern society.

Who, in other words, was using economics to make the world a better place?

I received dozens of diverse responses, but there was still a runaway winner. The small group of economists who work at the Jameel Poverty Action Lab at M.I.T., led by Esther Duflo and Abhijit Banerjee, were mentioned far more often than anyone else.

Ms. Duflo, Mr. Banerjee and their colleagues have a simple, if radical, goal. They want to overhaul development aid so that more of it is spent on programs that actually make a difference. And they are trying to do so in a way that skirts the long-running ideological debate between aid groups and their critics.

“Surely the most important societal question economics can help answer is why so many people are crushingly poor and what can be done about it,” David Romer, a professor at the University of California, Berkeley, said. The macro issues (like how to build a democracy) remain maddeningly complex, Mr. Romer noted. But thanks in part to the poverty lab, we now know much more about how to improve daily life in the world’s poorest countries.

The basic idea behind the lab is to rely on randomized trials — similar to the ones used in medical research — to study antipoverty programs. This helps avoid the classic problem with the evaluation of aid programs: it’s often impossible to separate cause and effect. If aid workers start supplying textbooks to schools in one town and the students there start doing better, it could be because of the textbooks. Or it could be that the town also happened to hire a new school administrator.

In a randomized trial, researchers would choose a set of schools and then separate into them two groups. The groups would be similar in every respect except for the fact that one would receive new textbooks and one wouldn’t. With a test like this, as Vinod Thomas, the head of independent evaluation at the World Bank, says, “You can be much more accurate and much more clear about the effect of a program.”

The approach can sound cruel, because researchers knowingly deny help to some of the people they’re studying. But what, really, is the alternative? It’s not as if someone has offered to buy new textbooks for every child in the world. With a randomized study, you at least learn whether your aid money is well spent....

Mr. Banerjee estimates, very conservatively, that $11 billion a year — out of roughly $100 billion in annual development aid worldwide — could be spent on programs that have been proved to work. Unfortunately, nowhere near $11 billion is being spent on such programs. “Right now, we don’t have a lot of things that have been taken up by the policy world,” he said. “But the policy lag is usually substantial. Now that we have a lot more results, I expect that in the next 10 years we will have a lot more impact.”

Mr. Banerjee and Ms. Duflo may not be a modern-day Keynes or Friedman. But they have still managed to do something rather profound. They have brought together the best of the new economics and the best of the old.

As has been the trend over the last decade, they have plunged into the world around them, refusing to accept the idea that economics is merely an extension of math. Yet no one can accuse them of working on some little problem that doesn’t matter.

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