Book review: Abhijit V. Banerjee and Esther Duflo,Good Economics for Hard Times: Better Answers to Our Biggest Problems

The book under review is written in an approachable style, stringing together many important issues and is quite dense. The reader should have some basic understanding of economic issues, but an intelligent reader can follow the content. For writing this review in a short while, one had to do random controlled reading (RCR). Fortunately, my own book on the Indian economy deals with many of the issues raised in the book under review so it eased the task.

The authors received the Nobel Prize after they wrote the book and that poses difficulties for reviewing their book. If one praises it, that is expected and if one is critical, readers may not believe it. Further, the first author studied in our Centre in Jawaharlal Nehru University and we are proud that he is our alumnus. This also disposes one favourably to the book, but even then one has to try to be objective.

The Preface spells out the focus in the book: the huge problems confronting societies today. It says, ‘Inequality is exploding, environmental catastrophes and global policy disasters loom….’ It is argued that there have been difficulties with economic explanations and failure of policies but also that ‘… good economics is useful, especially in today’s world.’ The authors believe that ‘… the pubic conversation about core economic issues—immigration, trade, growth, inequality or the environment—goes more and more off kilter.’ The authors hope that this volume will set the stage for a more informed debate on these issues.

Chapter 1 is like an introduction but not quite. It flags the big issue, ‘… civilization as we know it, based on democracy and debate, is under threat’ (p.1). Further there is, ‘rapid fraying of the social contract… With the haves facing off against the increasingly alienated have nots, with no resolution in sight’ (p. 2). This suggests a political economy approach, but the book is hardly that. It is about discovering the truth using large-scale experiments. It argues that prejudices impact economic analysis and that is why it is difficult to come to robust conclusions in economics. Actually, there was a need for an introduction in the volume which would have not only introduced the subject but also the methodology used to explain economic matters and a critique of earlier methodologies which the authors ‘almost’ characterise as prejudices and opinions.

Chapter 2 deals with migration and how it needs to be analysed. It is pointed out that there are a lot of prejudices which are not supported by facts. It looks at the reasons people move or don’t move. Many don’t move even though there maybe incentives to move. Clearly, there are non-economic reasons for this which are ignored in most economic analysis. The splitting up of social sciences into almost independent disciplines poses a methodological problem. Social situations are analysed in silos. This is a method from the sciences where it is legitimate to focus on one aspect, holding other things constant. Does this work in the social sciences where the interconnections can be so strong that when certain aspects are held constant to analyse another one, the problem itself may change. Sweezy (1970) has suggested that the method of abstraction in economics needs to be understood. It is like peeling an onion to get to the core of an issue and then putting the peels back to get to reality. Will this work if there is asymmetry in peeling and then putting the layers of the peels back?

Economic dynamics is all about the future which is unknowable and therefore uncertain. Hicks (1965) argues that economic dynamics cannot be fully captured and our analysis is likely to go wrong. It is also clear that seeds of failure of a model to capture social dynamics lie within it. What is held constant at a point of time changes over time and the model breaks down. One needs to know how all this impacts the method of Randomised Controlled Trials (RCT) favoured and used by the authors in their writings.

Chapter 3 looks at trade and its social impact. Protection and competition and their impact on firms and workers are the focus. What are the costs and advantages of trade? Again due to lack of mobility there are costs. Why has China gained while India has found things difficult? The issue of size and scale economies, whether small is beautiful and the threat of trade wars between China and the US are analysed. The conclusion is that there will be pain from trade and this needs to be taken into account. Those who lose out are not to be blamed for their losses and it is not their failing. But this has led to ‘conflict between the losers and the rest’ (p.97).

However, issues like the international environment are important for trade, like access to markets and capital flows enabled by strategic alliances with the advanced countries. Post the collapse of the Soviet bloc, again the international environment changed. Now global capital flows have a lot to do with the international financial architecture and working of tax havens of which there are ninety. They have impacted national policies by circumscribing what governments can do, especially in favour of the poor. These issues also needed to be discussed.

Chapter 4 titled, ‘Likes, Wants and Needs’ analyses the preferences people have and their attitudes. Difference between preferences and beliefs, and the distinction between what individuals need and what they want is highlighted. Using the example of the Moroccan who bought a TV rather than spending the money on food, it is argued that there may be different rationalities guiding different people. In the context of collective action, which is very important, the authors point to ‘the tension between the community that binds and the community that bullies …’ (p.105) and point to the Indian caste system which can be very regressive. It is pointed out that people form opinions and they use evidence selectively to reinforce them. Opinion formation also often depends on who one associates with. Of late, social media is playing a role in this by acting as echo chambers and increasing polarisation among political groups. The chapter ends with the plea that economists need to be more nuanced in their arguments otherwise they lose credibility and public trust.

Chapter 5 focusess on economic growth––the link between GDP and welfare of people, measurement of GDP and fast productivity growth. It is argued that ‘… it may be time to abandon our profession’s obsession with growth’ (p. 166). The authors discuss differences between regional and national growth, spillovers, creative destruction, how new ideas are generated, whether governments stifle it, do tax cuts spur growth and so on. After a survey of ideas on growth, the conclusion is ‘… there are no general principles, and no two growth episodes seem alike’ (p.186). At the end, the conclusion seems to be that macro-growth theories do not help but elimination of waste, improvements of welfare of citizens through better education and health, are important.

But what about global factors such as aid and capital flows to countries, terms of trade and access to markets? These political economy aspects have not been factored in the discussion and the fallacy of composition is given short shrift. While no one can dispute that the poor need to be taken care of, why has it not happened in India over a long period of time? Is it not the case that politics is not right and can mobilisation of the poor be ignored?

Chapter 6 discusses the environmental consequences of growth and economic policies pursued to spur growth. It is argued that a warmer climate not only impacts incomes but also health, especially of the vulnerable. The authors flag the issue of mitigation through better technology but argue that that would not be enough and consumption has to fall. In this context, they point to the difference between advanced countries and a developing country like India. In the former what has to be given up is not all that essential, but for the latter energy consumption is essential and has to increase. The economists’ notion that the pie has to be enlarged for redistribution is rejected as false.

Chapter 7 titled, ‘Player Piano’ analyses the problem of employment in relation to technological advances. Artificial Intelligence is posing a threat to employment. But it is argued that possibly new jobs may open up as has happened in earlier periods of rapid technological change. But there is no guarantee that what happened earlier would be replicated now. It is pointed out that inequalities have been rising since the late 1970s with the advent of Thatcherism and Reaganism. Taxes on high incomes have been substantially reduced. The authors are in favour of high tax rates for high incomes and suggest using wealth tax and estate duties to reduce disparities in society. Lack of jobs and rising inequality can lead to anger and erosion of faith in the government and the elite, and this is already visible in many countries. The role of increasing mobility of capital post-1991 is important and needs to be flagged.

Chapter 8 analyses the role of government in the economy. Markets cannot always deliver just and equitable outcomes. The authors discount the Laffer curve argument that more tax will lead to less work by people. They point out that a climate has been created that many believe that government is the problem and therefore there should be less of it. There is an obsession that it will be corrupt and inefficient. However, they argue that the government is indispensable in many social situations.

In the context of taxation it is essential to take into account the black economy which leads to both a lower tax GDP ratio and higher inequality since such incomes are concentrated in the hands of a few. That is why a lot more of direct taxes can be collected in India and it is incorrect to argue that more income tax cannot be collected in poor countries because of poverty. One needs to point out certain lacunae. The data in the book on the percentage of income tax collected in India (0.1 per cent) is incorrect. Also why GST in India is a problem and the political economy aspect of taxation have been missed out in the chapter.

Chapter 9 titled, ‘Cash and Care’ argues that ‘tension between cash and care should be one of the central concerns in the design of social policy’ (p.277). The authors argue for non-conditional transfers to help families. They argue against the Victorian idea that the poor are ‘good for nothings’ or that if they are given cash, they will drink it up or that the poor are poor because they lack the will to achieve. They quote evidence that cash transfers generally increase food expenditures as much as food rations. They feel that moral turpitude of the poor is not due to the welfare support they get in the West. The authors suggest that poor countries can afford an ultra-basic income and call it UUBI. They argue for the creation of work for all since that brings with it a ‘sense of purpose, belonging and dignity’ (p.299). In the end, they argue that goal of ‘social policy should be to help people absorb the shocks that affect them … ’ (p. 322). In their opinion, this would involve a mix of policies for different sections of people and for the advanced and the poor countries.

The Conclusion is titled, ‘Good and Bad Economics’. It is argued that bad ideas abound and we have to be vigilant and patient, and question the evidence. It is argued ‘Ideas are powerful. Ideas drive change. Good economics alone cannot save us’ (p. 326).They suggest that there is need to be vigilant against bad ideas and the seduction of the ‘obvious’ which the politicians seem to get from thin air.

Conclusion

So, it is clear why the authors chose this title. Times are difficult because societies face many conundrums. And the authors feel that good economics will help us to deal with them or at least understand what is going on. But understanding must also incorporate other relevant economic trends, such as the dominance of markets, international capital architecture, black economy, trade, growth, environmental deterioration––all leading to greater inequality and social strife. All these factors force us to analyse problems in the context of the political economy. Further, these factors result in shortage of demand, lack of adequate employment generation and lack of incomes for those at the bottom of the income ladder and this brings out the importance of macroeconomics. In the short-run, UBI or UUBI may appear to be solutions but are they also long-term solutions? Should society do something about technology which makes individuals and society short-termist? All important problems are long-run but society is turning short-termist (Kumar, 2013).

Further, can we build the macro from micro-foundations? Can we explain governance problems without reference to the political economy? There is a need to ask how things are explained in economics and over what time frame? What assumptions do we make in doing so? Why are their different schools of thought and how do they choose the data they analyse? In spite of the limitations, the book is eminently readable, thought provoking and wide-ranging. Hopefully its next edition will clarify some of the methodological issues flagged here.