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Mandatory reading: Good Economics for Hard Times

EducationWorld August 2020 | Books

Good Economics for Hard Times: Better Answers to Our Biggest Problems
Abhijit Banerjee & Esther Duflo; Juggernaut; Rs.393; Pages 320

This extraordinary volume, even though it’s authored by Abhijit Banerjee and Esther Duflo, distinguished professors at the globally top-ranked Massachusetts Institute of Technology and winners of the 2019 Nobel Prize for Economics, has not received due attention in the Indian media. Although an avid reader of book reviews, your correspondent can’t recall even one memorable critique of this insightful volume praised to the skies by a host of renowned economists including French economist Thomas Piketty (“wonderfully refreshing”), Raghuram Rajan (“teachers you always wished for, but never had”) and American Nobel laureate Robert Solow (“balances neat generalities of theory against the enormous variety of deviations of standard assumptions”).

This work (Good Economics for Hard Times) should be compulsory reading for all Indian academics, media pundits and formulators of public policy. For the simple reason that it addresses the important hot-button issues of the new millennium. “The gogo years of global growth, fed by trade expansion and China’s amazing economic success, may be over what with China’s growth slowing and trade wars igniting everywhere. Countries that prospered from the rising tide — in Asia, Africa and Latin America — are beginning to wonder what is next for them. Of course in most countries in the affluent West, slowing growth is nothing new at this point, but what makes it particularly worrying is the rapid fraying of the social contract that we see across these countries. We seem to be back in the Dickensian world of Hard Times, with the haves facing off against alienated have-nots, with no resolution in sight,” write the authors in the introductory chapter titled ‘MEGA: Make Economics Great Again.’

It’s noteworthy that these words were written last year before the global outbreak of the Covid-19 pandemic and lockdown of national economies around the world. One can safely assume that these contemporary hard times are twice as hard as they were last year. Nevertheless, the issues addressed and debated in this thought-provoking, intellectually stimulating compendium are as important now as they were a year ago

The virtue of this volume — and the prime reason why the authors were jointly awarded the Economics Nobel — is that they believe in testing all assumptions, opinions and policy prescriptions through RCTs (randomised control trials) to ascertain public and expert opinion on issues of public import. RCTs provide readers a broader perspective of the pressing challenges of our time and a better understanding of their complexity than 800 word essays and talking heads on television can ever do. The USP (unique sales proposition) of Good Economics for Hard Times (GEHT) is that the most debated challenges of our time — immigration, free trade, income inequality, limits of economic growth, environment despoliation, artificial intelligence, robotics and unemployment, free markets and universal basic income — are thoroughly subjected to RCTs.

For instance, the popular belief in the US endorsed by President Trump, is that America would be flooded if it were to liberalise its immigration laws. However, the authors provide impressive evidence that the vast majority in every country, except people in extraordinary peril (“in the mouth of the shark”) and only a small percentage willing to bear extremely hard work and emotional alienation, are willing migrants. According to evidence and polls conducted by the authors, most people are reluctant migrants even within national borders, as the mass return of migrants to their villages during the current national lockdown in India has proved.

Likewise on foreign trade, although the overwhelming majority of economists polled by the authors are in favour of free trade because of Ricardo’s famous theory of comparative advantage, popular antipathy in large diversified economies such as the US — where imports account for 2.5 percent of GDP — is based upon the citizenry willing to pay modestly higher prices for manufactures and services to protect American jobs.

Free trade works in favour of small countries where narrow domestic markets don’t allow manufacturing companies to attain economies of scale. This explains the exports led growth and prosperity of less populous countries such as South Korea, Taiwan and latterly Vietnam. And Indians should bear in mind that Mahatma Gandhi was in favour of self-sufficient village republics which require minimal domestic trade.

This model ridiculed by professional economists may well make a comeback in the post-Covid age. However, it’s a model based on the premise of people limiting their wants to essential needs, a philosophical construct which flies in the face of the modern consensus that continuous economic growth and improvement in standards of living is the natural human condition.

Natural human condition. This philosophical construct is also addressed incisively in the context of climate change and environment destruction. Are people in the US, which enjoys higher per capita GDP, happier than in Italy which has a huge public debt and fiscal deficits? Why do so few young men of Greece which has gone bankrupt, leave the country to work in other European countries to which they have free access?

What about rising anger against income inequalities in high GDP countries? Are the incomes and wealth of the rich insufficiently taxed in rich and poor countries? And how valid is the universally accepted Reagan-Thatcher nostrum that higher taxes result in lesser work effort by successful businessmen? These and other important conundrums of our troubled times are addressed, even if not quite resolved, in this stimulating compendium.

Yet perhaps the most impactful chapter is saved for the end. Against the incremental rise of artificial intelligence, robots and machines which are threatening jobs and livelihoods worldwide, the authors advance the new idea of universal basic income (UBI) defined as “the government paying everyone a substantial guaranteed income (the amount of $1,000 per month has been floated in the US) irrespective of their needs”. Proponents argue that if this is implemented, much of the fear of the tech revolution and AI would melt away.

Regular readers of EducationWorld are perhaps aware that your editor advocates a variant of UBI, as an antidote to the mass loss of jobs and incomes following the outbreak of the on-going Covid-19 crisis and national economic lockdown. It involves payment of Rs.9,000 per month to 150 million poorest households (out of a national total of 260 million) until end March 2021 — an amount aggregating Rs.8.09 lakh crore, a mere 3.5 percent of GDP. But alas, this qualified UBI proposal received no support or traction. Nevertheless, the pros and cons of UBI are satisfyingly debated in this volume.

Raghuram Rajan and Thomas Piketty are right. GEHT is an essential guide and a must-read.

Dilip Thakore

Also read: Lost opportunity: The Lost Decade

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