The Twenty Commandments

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In these uncertain times….scrap that, all times are uncertain. In these turbulent times, when economics and the social sciences have taken a pounding due to their inability to adequately predict the future or designate risk, it is useful to remember Dani Rodrik’s Twenty Commandments from his book Economics Rules: The Rights and Wrongs of the Dismal Science:

Ten commandments for economists

  1. Economics is a collection of models; cherish their diversity.
  2. It’s a model, not the model.
  3. Make your model simple enough to isolate specific causes and how theyr work, but not so simple that it leaves out key interactions among causes.
  4. Unrealistic assumptions are OK; unrealistic critical assumptions are not OK.
  5. The world is (almost) always second best.
  6. To map a model to the real world you need explicit empirical diagnostics, which is more craft than science.
  7. Do not confuse agreement among economists for certainty about how the world works.
  8. It’s OK to say ‘I don’t know’ when asked about the economy or policy.
  9. Efficiency is not everything.
  10. Substituting your values for the public’s is an abuse of your expertise.

Ten commandments for non-economists

  1. Economics is a collection of models with no predetermined conclusions; reject any arguments otherwise.
  2. Do not criticise an economist’s model because of its assumptions; ask how the results would change if certain problematic assumptions were more realistic.
  3. Analysis requires simplicity; beware of incoherence that passes itself off as complexity.
  4.  Do not let maths scare you; economists use maths not because they’re smart, but because they’re not smart enough.
  5. When an economist makes a recommendation, ask what makes him/her sure the underlying model applies to the case at hand.
  6. When an economist uses the term ‘economic welfare’, ask what s/he means by it.
  7. Beware that an economist may speak differently in public than in the seminar room.
  8. Economists don’t (all) worship markets, but they know better how they work than you do.
  9. If you think all economists think alike, attend one of their seminars.
  10. If you think economists are especially rude to noneconomists, attend one of their seminars.
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Rodrik is likely to become much more popular as demand for understanding the tensions that come from globalization rises.

 

Practically Radical

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit Banerjee and Esther Duflo, released in 2011, heralded the emergence of a new strand of academic study that sought to combine scientific rigour with development practice. According to Duflo and Banerjee, there exists a massive deficit of knowledge of ‘what works’ in development.  A tremendous amount of “aid” has been distributed in the developing world, with no successful method to measure its effectiveness. The authors set out to overcome this knowledge deficit with data based on Randomized Controlled Trials (RCTs) and sought to explain why the poor often display seemingly irrational behaviour. The authors suggest solutions to short-term irrationality that are modest but potentially life-changing. The book points to the three I’s – ideology, ignorance and inertia – and how they often explain why policies fail and why aid does not have the effect it should.   While Duflo and Banerjee’s conclusions have helped to establish ways of measuring the successes and failures of specific development projects, these studies are localized, and not necessarily transferable throughout the developing world.  Each RCT requires financial resources that may not necessarily lead to palpable results or changes in policy.  Many of the RCTs referenced by the authors recommend small incremental changes; Duflo and Banerjee themselves admit that there is no “magic bullet” or cure for poverty.  If these RCTs lead to changes in people’s lives, they may only be felt after long-term implementation.  On the other hand, these trials can help create a template and set standards for long-term changes.  They can also inform other RCTs, and streamline the way these trials are conducted. RCTs are now part of the development landscape and how these studies are regulated needs careful consideration.  Duflo and Banerjee often reference medical and pharmaceutical trials as a basis for conducting RCTs in the developing world, but do not address the question of ethics, and there is a seemingly presumed informed consent of the trials’ subjects.  We need to remember that RCTs are not conducted in a lab and that although there is great potential for improving the lives of many of the world’s poor, this should not blind us to the possibility that a poorly implemented trial could have harmful consequences. However positive the results there is also a risk of dehumanizing those that are in poverty by treating them as one would mice in an experiment. Cost benefit analysis also needs more careful consideration. RCTs are not cheap and their proliferation could divert funding away from projects that have external validity even if they don’t provide as much internal data.  The “Poverty Lab” at the Massachusetts Institute of Technology alone has been or is presently involved with some 350 randomised trials around the world (see povertyactionlab.org). There is risk of overselling the benefits of small experiments, leading to an insensitivity to the context of poverty and the limits that small scale interventions can have.  In order for the ideas and conclusions set forth by Duflo and Banerjee to be effective, there must be an emphasis on the dissemination of data and a comprehensive methodology.  Increased accessibility of data and demonstration of results would help to inspire realistic confidence in these studies, and lead to more successful interventions.  

Esther Duflo & Abhijit Banerjee

Is Poor Economics a radical rethinking of how we fight global poverty? It is “quietly” radical in its proposals for how aid and development should be conducted so that it has the greatest impact on the lives of poor people. Duflo and Banerjee’s emphasis on how we evaluate the effect of humanitarian aid has opened many eyes to how blindly much aid has been distributed. Whilst they do not propose that their approach is a panacea for poverty, their radicalism is limited and only exists on a micro level and strikes a defeatist note on macro policy. Poor Economics is not asking the reader to radically rethink how development should be conducted on a macro level, and does not address the broader systemic failures that create poverty.  In order to have a large-scale palpable impact, there must be a degree of engagement on both the local and global policy level.  Both powerful decision-makers, and those affected by these issues need to be informed and engaged in the interpretation of data and the implementation of policy for radical change. Co-written with Lauren Jacobson

E.F Schumacher

“I suggest that the foundations of peace cannot be laid by universal prosperity, in the modern sense, because such prosperity, if attainable at all, is attainable only by cultivating such drives of human nature as greed and envy, which destroys intelligence, happiness, serenity, and thereby the peacefulness of man. It could well be that rich people treasure peace more highly than poor people, but only if they feel utterly secure – and this is a contradiction in terms. Their wealth depends on making inordinately large demands on limited world resources and thus puts them on an unavoidable collision course – not primarily with the poor (who are weak and defenceless) but with other rich people.”

– E.F Schumacher “Small is Beautiful: Economics as if People Mattered’