Good Economics For Hard Times - A comprehensive guide and analysis

Good Economics for Hard Times, by Abhijit V. Banerjee & Esther Duflo, is the perfect piece of introductory literature for any A-Level Economics student who is looking and willing to read outside the confines of the syllabus. The writing itself, which is incredibly relevant as it covers the topics of migration, trade, development and climate change, contains many little factoids which are easy to remember, thus making it the perfect read for A-Level students.

The book challenges certain generally known, status quo economic presumptions and through this analysis, it proceeds to dismantle them before giving us new Economics, a type of Economics which the authors believe, will allow for a more humane and equitable world. The first chapter is one which at first, does not seem to link to much Economics at all. Within my first reading, I found myself scratching my head as the author’s discussion relating to political discourse and polarisation felt like I accidentally picked up a book about Sociology. Before discussing this polarisation, the text makes the case relating to the fact that Economists, well, aren’t very trusted people. A citation of a 2017 study conducted by YouGov in the UK shows that 5% of correspondents believe that Politicians are trustworthy, placing them last, with Economists being one of the lowest at 25%. Banerjee and Duflo attribute this distrust to the media, constant lies and manipulation have polarised our people and as echo-chambers form, more and more extremist groups prop up. At the same time, certain individuals who claim themselves to be Economists on talk shows and other debates have soured the public opinion on whether they should trust Economists, yet, how is this relevant? Although the chapter does not make it explicitly clear, governments and people need to listen to Economists, and not just any Economists, the right Economists, as Good Economics for Hard Times goes onto the show in further chapters that the best Economists are the ones who have an incredible focus on individuals and people. However, despite this being an important point in later chapters, during my first reading, it felt like this focus on Economists being trustworthy people was dishonest, mainly because when discussing polarisation, the authors had an incredible focus on right-wing extremism, as opposed to left-wing extremism. This failure to discuss both sides of the political aisle felt like the book was somewhat pandering to its audience, through this, the text, which aims to expose the issues of polarisation, may actually subtly promote it, as readers affiliating themselves with the left-wing side of the argument may believe that they are doing no wrong. Nevertheless, it is understandable why left-wing extremism has not been covered, right-wing extremism may be more topical, especially due to the fact that it is reported in the media much more frequently, as evidenced by the coverage of British groups such as the EDL as well as rising right-wing extremism in Europe, thus making it a much more pressing issue.

Good Economics for Hard Times goes on to challenge myths around migration in its second chapter titled, “From the Mouth of the Shark,” this is where real and new Economics begins. First, the Chapter discusses the current stigma surrounding migration and the panic which this said migration has caused in Europe and in general, the Western World. Many politicians such as Donald Trump, or Marine Le Pen in France, have pushed the narrative of mass migration, how it is terrible, how refugees are taking over, yet, the data says otherwise.

“The fraction of international migrants in the world population in 2017 was roughly what it was in 1960 or in 1990: 3%. The EU on average gets 1.5 million to 2.5 million non-EU migrants every year from the rest of the world.” However, there was an influx of refugees during 2016, despite this, it is unlikely that the crisis was large enough to warrant such an outrage as out of the 638,000 EU asylum seekers, only 38% of the requests were granted, which is 1 for 2500 EU residents. Second, another presumption the text challenges is the assumption that migrants migrate for money. There are some, very ambitious migrants, who will do anything to get out of their country and leave everything behind at all costs to chase higher incomes or a better standard of living. For example, although Greece had an unemployment rate of 27% at the height of its 2014 and 2015 crisis, fewer than 350,000 Greeks, or 3% of Greece’s total population, chose to migrate, why? The reality is that we live in a sticky economy, factor inputs, especially labour, do not move from country to country, city to city, people like to stay where their homes and families are, and there are real economic reasons for this stickiness. One factor which plays into why an individual may choose to migrate is luck, or, should we say the opposite of luck, as the case study Good Economics for Hard Times uses is one from 1973 regarding the Westman Islands, an archipelago on the coast of Iceland.

In 1973, a volcanic eruption on these islands occurred and destroyed the homes and livelihoods of a third of the island population. Through this natural experiment, a dice is thrown by nature, through this, social scientists and now Economists can see one of the many reasons behind migration, as well as the benefits of doing so.

Those whose houses were destroyed were given a grant in form of cash which corresponded to the value of their homes before destruction. These individuals could do anything with this cash, rebuild their homes, or move to a different town or city. 42% of those who had their homes destroyed chose to move, and 27% of those who did not have their homes destroyed moved anyway, without government support. Using genetic data to track the descendants of those who moved in the 1973 explosion, it can be found that those who were under 25 at the time of the explosion, losing their house led to large economic benefits, as by 2014, those who lost their parental homes saw an average income increase of over $3,000 per year, illustrating the benefits of migration.

So, if the benefits of migration are so good, why does it take a natural disaster to have people migrate?

One factor which Good Economics for Hard Times explores is the possibility that individuals may not know the benefits of migration. It is unlikely that this may be the case in Western countries such as the EU and the US as the development of the internet makes information provision much more accessible, and everyone knows where the boomtowns and cities are. U.S residents know that there are high paying jobs in Silicon Valley and New York, the Brits know that London is a bustling financial hub. Yet, in poorer nations, this may not be the case, and a field experiment from Bangladesh may show us the truth. There are few legal migration barriers for individuals to move to Bangladesh from their rural communities, yet, during the lean season, where there are many low skill job opportunities in jobs such as construction or transportation, there is little migration from neighbouring villages.

So, to pinpoint the reasons behind this lack of migration, a local NGO randomly selected villagers from neighbouring communities surrounding Bangladesh and separated them into two groups. One group was given information on the wages within Bangladesh, and the other group was given the information plus $11.50 in cash, if they migrated, to cover the migration cost of a bus or train and food for a few days in the city. The first group, who were given the information, had no response, in other words, there was no effect on the level of migration whatsoever. However, 22% of those who were given the cash chose to migrate, and, in doing so, those who succeeded in finding employment earned around $105, which is much more than what they would have earned at home. $66 was sent back to the family in form of remittance, and this yielded a 50% increase in calorie intake of the families who had a family member migrate, a massive improvement in quality of life for families which are on the verge of starvation. This study made clear that there is no information provision constraining migration as only half of the migrants who succeeded in migrating during the first season with the assistance of the NGO decided to go back to Bangladesh in the next season. To explain this, we can look at the concept known as loss aversion, loss aversion is where an individual may not take an action to essentially avoid a potential loss. This occurs as our minds see losses as being much worse than gains, our brains are engineered to avoid trouble and this fear of loss can result in economic agents making irrational decisions, such as not migrating as, despite the clear gains of migration, the fear of leaving everything behind and potentially not succeeding is enough to keep people where they are. At the same time, the lack of connections a migrant might have when moving to a country is enough to make them not migrate. There is a difference between risk and uncertainty, the risk is calculable, and uncertainty is not, Donald Rumsfeld calls uncertainty the unknown unknowns, something which, unlike risk, is completely alien. This anonymity, a lack of safety net for migrants when moving to another country or city, combined with loss aversion, is what is preventing many from finding better opportunities even when they might be just around the corner.

Once this stigma around migrants only coming to nations for money is settled, the chapter challenges the economic presumption that when migrants come into a country, they depreciate wages. This concept is one that is incredibly textbook and easy to understand. When migrants come into a country, the supply of the labour force increases, therefore, because labour is more plentiful, wages, or incomes, shall go down.

However, this is not the case, in 1980, David Card made a study of a boatlift in Miami where 125,000 Cubans, the majority of which had little education, were migrated to Miami after Fidel Castro gave a speech allowing them to do so.

With 125,000 Cubans leaving to go to Miami, the size of the Miami labour force increased by 7%, with no real change in wages relative to other areas within the state.

This study, although very influential, was very controversial as it challenged this basic presumption in Economics, so, why did wages not go down? The easy answer is that when migrants migrate and gain employment, they too demand goods and services, hence, although the supply of labour rises, the demand for labour also increases in unison with the demand for goods and services. Yet, this only occurs if migrants spend their newly earned incomes in the host country as for a while, Czech workers who migrated to Germany for work would depreciate wages in nearby German towns as they moved back home to spend their wages. At the same time, migrants typically do back-breaking work in construction, or in fields, these are jobs which natives may stay away from, as evidenced by the current UK lorry driver shortage, therefore, because there is no supply of labour in the first place, the wages or incomes of natives do not change.

Furthermore, the arrival of migrants increases the supply of cheap, low skilled labour, which may slow down mechanisation and promote natives of a country to take more senior roles as migrants fill low skilled jobs, thus increasing wages for the natives.

However, this benefit may not be as prominent as first thought. It is unlikely that in Western nations especially, it will be possible to pay migrants less for low skilled jobs due to minimum wage laws. At the same time, differences in wages within a workplace can lead to demotivation of employees, further, employers tend to pay their workers what economists call the efficiency wage, meaning that an individual's pay may be higher to ensure that getting fired actually hurts. Therefore, it is likely that migrants will be paid similar wages to their peers to ensure that in the long run, productivity stays high as lower wages may reduce motivation and productivity, increasing costs for the business. Finally, migrants may also choose to do jobs in childcare services, which can increase the availability of nannies. If this were to occur, native women will be able to hire nannies at a cheaper price, thus allowing them to work full-time jobs, increasing average incomes and quality of life.

One disadvantage of this however is that a society that believes that migrants should do certain jobs may develop a prejudice against specific groups and professions. This is called a glass floor, and, can result in labour markets becoming more sticky in the long run as natives may refuse to fill certain professions, yet, this is an issue which economics is unlikely to fix as it is a problem at the roots of society, hence, this problem requires societal and educational change rather than economic, nevertheless, Good Economics for Hard Times expands on this issue in the Like Wants and Needs chapter. Overall, From the Mouth of the Shark shows that migrants and natives do not compete for jobs, instead, migrants entering a country can complement the current labour market, enhancing it with their skills and culture, the same goes for highly skilled migrants, who may be innovative and start new companies as 43% of Fortune 500 companies are founded by migrants. The Pains of Trade chapter discusses the idea that free trade, an idea so fundamental in Economics, benefits everyone. Free Trade makes sense, the concept of comparative advantage developed by David Ricardo shows us that for nations to be as economically efficient as possible, they must specialise in their own respective fields to achieve productive efficiency and to export excess production. Meanwhile, importing goods from countries that specialise in other areas at a cheaper price helps to achieve allocative efficiency, hence, achieving economic efficiency. When nations open up to trade, such as in India in 1991, growth slumps in the year of the nation opening up, but growth then bounces back. India saw growth return to its 1985 to 1990 trend of about 5.9% every year, then, growth jumped to 7.5% in the mid-2000s. Consequently, when India reduced its import and export duties from 99% to 35%, its domestic markets became flooded with competition. More productively efficient firms, which sold their goods at a lower cost saw more demand for their products as a wave of fresh demand from international sources began banging on the country's door, at the same time, firms which benefited from internal economies of scale, such as purchasing economies of scale, benefited from being able to purchase factor inputs abroad from more productively efficient, reliant suppliers, further reducing costs.

Despite these benefits, Free Trade has its costs, although GDP growth increased in India due to the economy becoming more productively efficient, inequality increased dramatically. This is due to the fact that as productive industries win from trade, those productively inefficient industries lose heavily, either to their domestic counterparts or to international players. Decreasing barriers to trade changes how an economy allocates its resources. This means that businesses or industries which collapse due to being uncompetitive leave massive unemployment, and, in some cases, ghost towns such as Detroit. An example of this would be the U.S China shock where China’s share of global manufacturing rose from 2.3% in 1991 to 18.8% in 2013. Once this occurred, productively inefficient firms went out of business. Yet, in classical Economics, this is not an issue as assuming full factor mobility, the unemployed from these industries should just up and move to where the new industries are. However, this is clearly not the case, people do not migrate, labour is not flexible for all the reasons we have previously discussed in the review. For example, India in particular needs to invest a further $4.5 trillion between 2016 and 2040 for its infrastructure to be of a sufficient quality for individuals to migrate. In other words, people stay in these ghost towns, and as their incomes decrease, their quality of life does too, and the lack of infrastructure spending in developing or underdeveloped nations exacerbates this issue with free trade. Despite this, it is not only poor countries that suffer increased inequality, rich ones do too. As previously stated, the US-China shock resulted in towns like McKenzie, which were major pyjama producers, becoming ghost towns as they were simply not competitive. But how does this happen? Rich countries, with their massive tax revenues, should be able to redistribute the gains from trade to help those hurt by trade displacement, unfortunately, this does not occur. Programs such as the TAA, which deal with unemployment caused by trade are not sufficiently funded, it is estimated that for every $549 fall in income, the TAA is only able to cover $58 per adult, meaning that those who become unemployed due to trade find themselves seeking disability insurance, which, is terrible for the economy as it means these adults will have their opportunities of being trained in a new industry washed away. Clearly, the focus is on the individual, and it is essential that western governments put schemes and measures in place to boost mobility to make the economy much more flexible. Hence, this flexible economy is an economy with massive potential to grow, but, Good Economics for Hard Times makes the case for whether we are approaching the end of growth? The text does this by looking at two growth models, one being Solow’s Model of Economic Growth, and the other being Romer’s Model. Solow’s Model tells us that poorer countries, which are more labour intensive, can grow at a faster rate, allowing for convergence to occur. This is because when each nation develops it reaches a perfect ratio regarding the quantity of labour and capital in the economy. This is why developed nations grow at a slower pace, additional capital does not yield as high returns, thus slowing development. Yet, Solow’s Model is not perfect, for example, if we use the Solow Model to predict the capital gains in India, we see that returns on capital in India are 58 times higher than returns in the U.S, so, the question is, why doesn’t all the capital move to India? Well, the reason behind this is because, in reality, capital returns in India are not 58 times higher than in the U.S, mainly due to the lack of skills within India, poor quality institutions and infrastructure is also likely to decrease these returns. Hence, because the economy is sticky, Solow’s Model does somewhat fail to give Economists any real advice as it states that at the end of the day, growth is exogenous, it cannot be controlled. Consequently, Romer’s model illustrates the importance of innovation with respect to growth. Romer suggests that innovation and ideas can spread freely, a case study of Silicon Valley shows us how clustering many innovators in one area can increase the overall level of innovation. This means that the best way for governments to increase the growth of their nation is to invest heavily in education to increase skills, and, ultimately innovation.

Yet, despite Western countries like the UK and US housing the world's greatest university, growth in these nations is still slow, TFP growth is only at an average of 0.94% in the US, compared to previous levels of 1.89% between 1920 and 1970. There are many possible reasons for this, one could be that after WW2, many developed nations saw fast growth as their ratio of capital to labour was brought out of balance due to destruction, another reason could be that recent developments in technology could be hard to map into GDP calculations, how much real value has Facebook actually added? Nevertheless, one thing remains constant, and that is that both Solow’s and Romer’s models explain one part of growth, but fail to account for another area. Romer’s model relating to innovation is incorrect as it fails to account for the fact that ideas and innovation are not freely spread, patent protection and other policies prevent the technologies of the future from making it to other businesses. At the same time, although Romer’s and Solow models contradict, it may be possible that, because both models stem from a rational observation, they could somehow be married when looking at labour markets within a specific nation. Could it be that, because all of the skilled labour is going to companies like Google and Facebook, there is not enough for any other firms? In other words, we are applying the idea of a balanced growth path to certain sectors rather than the whole economy. Could this possibly slow down the rate of innovation within an economy, if so, is there a different way we could do things to boost innovation, and, ultimately, development in a way that fulfils Romer’s model? Alternatively, intervening in a free market, especially the labour market, may actually lead to a net welfare loss, overall, this Pandora's box gives us more questions than answers.

However, perhaps growth should not be our primary objective, Good Economics for Hard Times states that sustainability and focusing on the current climate crisis is more important. The chapter, In Hot Water, shows how developed countries pollute more on average than developing ones. For example, the average North American consumes 22.5 tons of CO2 a year, with Western Europeans consuming 13.1. Yet, the Chinese only consume 6 tons, South Asians are just at 2.2. With CO2 consumption also increasing by 9% for every 10% rise in income, it could be logical to assume that the problem is not one of our energy production but rather what goods and services society consumes as a whole. Perhaps consumers should be more vigilant in trying to go green, or, government information provision, or education, could help us bring certain demerit goods to light to nudge consumer behaviours into a more sustainable direction. These are policies that could work, yet, Economists dislike influencing how consumers should behave, perhaps changing production should still be our primary focus. If we make our production processes more renewable then surely carbon consumption will go down as each consumer is now consuming more environmentally friendly products. But what incentive is there for firms to actually change, perhaps changing consumer habits could be the core solution as environmentally conscious consumers can boycott unethical firms, this would truly be a free market solution, changing habits mean that the government doesn’t have to step in and regulate, which, in free-market economies, is usually seen as a last resort.

Nevertheless, improving air quality and reducing air pollution is incredibly important for all nations especially developed ones. Although climate change hurts developing countries the most, developed countries must be the ones to lead the change. For example, temperatures of over 38 degrees Celsius are predicted to decrease the labour supply of outdoor jobs by 1 hour per day. At the same time, 36,000 people died of poor air quality in the UK, with 30 million people dying in China due to poor air quality between the years 2000 and 2016. Hence, due to the severe human cost of pollution, developed countries must lead the change as they are the ones who have the government funding to incentivise firms through subsidies to fundamentally push change. Firms like Siemens setting up in the Humber-Estuary to develop wind turbine technology in the UK are pushing this said change, and, through the developments which Siemens make, green technology can become more available, and, more productive as innovations are made. Consequently, developing countries, which may not have the resources to go green yet, can benefit from external economies of scale as the development of green technologies in nations like France, UK and America can lead to cost savings for countries like China to enable their green transition, showing how in essence, solving climate change will require the cooperation of not just one party.

This cooperation also applies to more areas of our society than just climate change. The chapter, Player Piano, shows us how although previous technological change brought about great increases in productivity, it also increased misery for certain professions which were put out of business. This scare is no different than the current speculation which we have surrounding technologies such as AI, which could be great, or, terrible for humanity. Nevertheless, individuals are becoming more isolated despite these so-called improvements, 33% of Americans part of the bottom income quintile are likely to remain stuck within it. This lack of social mobility is creating despair, life expectancy for Americans has been decreasing between 2015 and 2017, with deaths from alcohol abuse, drug abuse and depression drastically increasing.

The chapter shows that the government and society have abandoned its people, technological improvements and the riches from these improvements have mainly benefited the upper classes, a problem which the chapters, and Cash & Care, attempt to dismantle through advocating for government welfare schemes such as a standardised UBI. Such a scheme could drastically improve the quality of life for many individuals, poorer households will have enough cash to buy their children new clothes, which, in our modern world, are essential for a child to be properly socialised. At the same time, families with older children will be able to send their kids to University to increase social mobility. Young adults will be able to use this income on side projects and ventures they truly care about.

Yet there are supposed downsides to a UBI, for one, it is said that universal cash transfers could make people lazy, after all, why would you work if you already have money? Well, the truth is that people don’t just work for money, people find meaning in their work, it provides the structure with their lives, to evidence that UBI has little to no effect on unemployment, we can look at the US’ Alaska Permanent Fund, which, since 1982, has been given each Alaskan citizen $2000 per year and seems to have no effect on employment. However, the big issue with UBI is the fiscal cost. A UBI in America which would pay each American $1000 each month would approximately cost $3.9 trillion a year, which is the entire Federal Budget. Yet, a different UBI which gives more cash to poorer individuals could cost a more affordable $1.95 trillion dollars, but that would still require some severe changes in the American budget, especially when it comes to cutting spending for other welfare measures, the armed forces and maybe education.

Overall, Good Economics For Hard Times is truly a great read for anybody interested in Economics, the previously mentioned chapters flow brilliantly and Esther Duflo’s, as well as Abhijit V.Banjerjee’s willingness to challenge established economic presumptions, allows us to further delve into Economics as a science. Through asking more questions, we can find new answers to big problems, and in the process, we can potentially fix previous, so-called, Bad Economics and in its place, establish a new type of Economics, one which makes room for a much more humane and sustainable world.


Written by Hubert Kucharski


Top Stories