Good Economics for Hard Times :: Abhijit V. Banerjee and Esther Duflo
As an undergraduate studying economics, economics felt led by theory and ideas, with little observation of how the world works. Economics would wear it’s social science underpinning like a Sunday suit, only making an appearance for special occasions. Nobel prize winner David Card, attending a conference, heard another economist saying “Once again, the theory has tested the data and the data has been found lacking” which sums up how some interpret the role of data.
The book is filled with observational economics, from topics ranging from migration, regional development, clustering, inequality to the effect of neighbourhoods and more. It’s not theory without evidence, it’s theory tested and backed up with multiple studies from multiple authors often from multiple places across the world.
Had this book existing 20 years ago my life could have taken a different path. I might not have taken a detour through social into data sciences, in a quest to find research skills I felt were lacking in the economics I knew. The book has helped to reignite my interest in the subject. Through its multiple sources, there are avenues for further reading and exploration.
The most useful thing the authors suggest economists can do is share their deductions to reach a conclusion. Economic research is more like developing medicine, we don’t reach ‘truth’, we just have enough observations and faith in the decision to take action, knowing that that action may need to change later.
“Economists are more like 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 .This means economists often get things wrong.”” Page 7
Reading the book feels like unravelling a handmade rug. Tug at the cords, see where threads unravel, uncover new, connected, threads then fashion your own rug from the recycled materials. In the end I had 18 pages of typed notes of around 9,000 words, but with more to research and expand.
A policy which has been persuaded in economic development circles for decades is the goal of clustering similar businesses together, also referred to as agglomeration. The idea is that doing so will make it easier for businesses in the same or similar industries to recruit and workers gain skills more quickly. Productivity improves with and more firms want to move to the area. These positives result in more value to businesses as skills and ideas spill over.
Policy organisations sometimes only highlight the negatives associated with the ‘success’ of clusters - higher demand means higher land and house prices, congestion and resulting impacts on air quality. But the inevitable decline of many geographically concentrated industries has a lot more negatives.
“People who lost their jobs tightened their belts, further reducing the economic activity in the area. [employment in other industries] did not pick up the slack. If it had, we would have seen an increase in nonmanufacturing employment in the most affected regions… Despite the fact that there were neighbouring commuting zones essentially unaffected by the shock (and zones that actually benefitted, …), workers did not move. The working-age population did not decline in the adversely affected commuting zones. They had no work” page 81
This then becomes a spiral - people are out of work, they spend less, house values go down as. Homes are not maintained and shops close (82-83). Business don’t want to move in as it’s not a place they want their families to grow up. The impact of such negative impacts can last for generations - car making in Detroit, pottery making in Stoke on Trent, coal mining in various parts of England, but also globally, see Deindustrialization in cities of the Global South. Clustering deepens the impact of such negative shocks. Despite this, the authors conclude it still has benefits, just there’s potentially more need for the public sector to step in and support if such impacts arise (83), which is arguably more difficult like now when the public sector is strained.
Another policy has been for local and regional governments to attract firms into an area known as inward investment. There is often fierce competition to attract a large employer into area, with the associated jobs and kudos. But this isn’t a panacea and often comes at a cost to others.
“growth in one region is different from national growth because it can happen in part by cannibalizing growth in the rest of the economy, drawing capital, skills, and labor away from other areas. The cities where Amazon eventually locates will grow, but partly that will be at a cost to other American cities. Moretti estimates the two effects might actually net out, with the result that national growth will be more or less unaffected. Moretti concludes from his reading of this entire literature that regional development is unlikely to be the lever that will help us avoid the end of growth” Page 169 see also The Urban Imperative: Towards Competitive Cities
If you’re interested in Economics or how they think, Good Economics for Hard Times is definitely worth a look.
ISBN: 0-415-05501-6
