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Great economics, bad politics

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Summary:
Non-economists (and quite a few trained economists too) often claim that mainstream economics is a simple-minded defence of free markets and inequality. Abhijit Banerjee and Esther Duflo’s Good Economics for Hard Times is a superb refutation of this. They argue that: It is unreasonable to expect markets to always deliver outcomes that are just, acceptable or even efficient. A big reason for this is that the economy is “sticky” and that “resources do not always flow to their best use. Workers who are laid off because of international trade or technical change do not quickly move to decent jobs: instead, job loss has permanent adverse effects on wages. Banks are slow to lend to good new ventures and to cut credit to failing firms. Efficient companies find it hard to displace less

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Non-economists (and quite a few trained economists too) often claim that mainstream economics is a simple-minded defence of free markets and inequality. Abhijit Banerjee and Esther Duflo’s Good Economics for Hard Times is a superb refutation of this.

They argue that:

It is unreasonable to expect markets to always deliver outcomes that are just, acceptable or even efficient.

A big reason for this is that the economy is “sticky” and that “resources do not always flow to their best use. Workers who are laid off because of international trade or technical change do not quickly move to decent jobs: instead, job loss has permanent adverse effects on wages. Banks are slow to lend to good new ventures and to cut credit to failing firms. Efficient companies find it hard to displace less efficient incumbents. And so on. Duflo-Banerjee-Nobel-Econ-01_1

In this respect, much of their book is a repudiation of rightists’ belief in a flexible market economy. Though they don’t say so explicitly, all this gives ample reason to doubt that firms will be able to seamlessly adapt to take advantage of post-Brexit trading opportunities (even assuming them to emerge.)

It’s not just the far-right they challenge. They question even conventional economists’ attachment to free trade. In the US, they write:

Those zones more affected (pdf) by the China shock experienced substantially larger reductions in manufacturing employment. More strikingly, there was no reallocation of labour to new kinds of jobs. The total number of jobs lost was often larger than merely the number of jobs lost in the industries that were hit (P81).

A similar thing, they say, was true in other countries (pdf).

Because of this, they show, the gains to an economy from international trade are small:

If the US were to go back to complete autarky, not trading with anybody, it would be poorer. But not that much poorer (p86)*.

They stress, however, that this is not to endorse Trump’s trade war. This, they say, causes a new set of economic disruptions which people struggle to adapt to.

Banerjee and Duflo also flatly reject rightist arguments against redistribution. High top tax rates, they say, “are a perfectly sensible way to limit the explosion of top income inequality” as there is no evidence they deter work effort or growth. And they add, “there is no evidence” that cash transfers to the poor make then work less.

Banerjee and Duflo never use the word neoliberalism. But in all these respects, Good Economics for Hard Times is a refutation of it. And as you would expect from them, it is magnificently evidence-based. All economists, I suspect, would learn a lot from it.

But but, but. Whilst the economics is wonderful, the politics is not. They write:

Bad economics underpinned the grand giveaways of to the rich and the squeezing of welfare programs, sold the idea that the state is impotent and corrupt and the poor are lazy, and paved the way to the current stalemate of exploding inequality and angry inertia. Blinkered economics told us trade is good for everyone. (p326)

Any they plead with us to “set ideology aside”.

But Diane is right to reply to this that “good economics is about more than technical expertise.”

Brexit give us one example of this. Economics clearly says this was a bad idea. But voters chose it anyway. This wasn’t only because the corrupt media prevented economists’ voices being sufficiently heard. It was also because voters had other priorities. Banerjee and Duflo rightly champion the economic benefits of immigration, but some voters looked instead at what they perceived to be the adverse cultural impact of it.

Worse still, Banerjee and Duflo over-rate the importance of ideas and under-rate the sheer power, material and ideological, of the rich. Martin Gilens and Benjamin I. Page (pdf) and Pablo Torija Jimenez show that western democracies favour their interests over those of the median voter. It requires much more than abundant economic evidence to fight this power. Banerjee and Duflo have given us lots of bullets to fire in the class war. But are they sufficient?

* Even I’m a bit queasy about this. I’m not sure it takes sufficient account of the fact that exposure to international trade raises productivity.

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