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October 26, 2019; New York Times, “Opinion”

 

The invisible hand: It’s one of the most basic premises of economic theory that exists. As Esther Duflo and Abhijit Banerjee remind us in a New York Times op-ed, “At least since Adam Smith and his famous B’s (“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest,”) a fundamental premise of economics has been that financial incentives are the primary driver of human behavior.”

Yet that premise, Duflo and Banerjee explain, is deeply flawed. And since they were two of the three people awarded a Nobel Prize in economics earlier this month, we might want to pay attention.

Duflo, it’s worth noting, is only the second woman to be awarded a Nobel in economics (the late Elinor Ostrom was the first), and Banerjee is only the third non-white person to win (the other two were Arthur Lewis and Amartya Sen). All told, the world has seen 84 Nobel laureates in economics in the 51 years of the award. Yes, that’s right—82 of the 84 awardees have been men and 81 of the 84 awardees have been white.

And, while economics as a field has been heavily white and male-dominated, the awards committee has skipped over high-profile women economists, such as Joan Robinson, a British mid-century, left-Keynesian economist from Cambridge University identified by the History of Economic Thought website as “one of the most prominent economists of the century.” A 2012 list from Business Pundit that identified “10 Economists Who Deserve Nobel Prizes,” was largely populated by women and people of color. In short, these voices are prominent in the field, but they are far too often ignored.

Press attention on this year’s economic awards has concentrated on field experiments conducted by the Nobel laureates. But these accounts miss some of the significance of their work. As the New York Times op-ed, based on Duflo’s and Banerjee’s upcoming publication Good Economics for Hard Times reveals, their work forces us to reconsider some basic tenets of economic theory.

Example 1, Disincentives to work

Economic theory would say that if taxes rise, people work less, but there is very little evidence that this is true. For the wealthy, Duflo and Banerjee write, “Research shows that when top tax rates go up, tax evasion increases (and people try to move), but the rich don’t work less.” They add, “No one seriously believes that salary caps lead top athletes to work less hard in the United States than they do in Europe, where there is no cap.”

For those who are poor, Duflo and Banerjee write, “40 years of evidence shows that the poor do not stop working when welfare becomes more generous.” Nor is there evidence that a guaranteed income discourages people from working—again, contrary to what conventional economic theory would predict.

Example 2, Labor mobility

Economic theory suggests that workers, to increase their earnings, will move to where they are paid better. Yet, at least within the United States, that data show that people are largely unwilling to do this. Duflo and Banerjee observe that, “When jobs disappeared in the counties that were producing toys, clothing, or furniture, few people looked for jobs elsewhere.”

Interestingly, they note there is a great contrast between the popular belief that people are economically motivated and how people act. Take a look at these numbers from their research, and the size of the gap becomes clear.

Would you… Expect of others Expect of self
Move 200 miles for job 62 percent 32 percent
Work less if taxes rise 50 percent 28 percent
Work less if Medicaid weren’t tied to work 60 percent 13 percent
Would work less if basic income existed 49 percent 12 percent

“If it is not financial incentives, what else might people care about?” Duflo and Banerjee ask. “The answer is something we know in our guts: status, dignity, social connections.”

There are policy implications that stem from this work, of course. Duflo and Banerjee name three:

  1. Because people are reluctant to move, support for workers who are laid off is crucial. In response, Duflo and Banerjee propose a “GI Bill” for victims of economic dislocation.
  2. Social welfare is vital. Policymakers, they write, “must acknowledge that those who struggle economically are, in a sense, society’s fallen heroes, and that we need to treat them as such.”
  3. There is plenty of room to increase taxes to pay for services, since the alleged disincentive effects of tax increases largely don’t exist. “We should not be unduly scared of raising taxes…there is no evidence that it would disrupt the economy,” they write.

The point, Duflo and Banerjee emphasize, is not that economic incentives are meaningless, but they do contend, “Financial incentives are nowhere near as powerful as they are usually assumed to be.” The human condition, it turns out, is far more layered and multifaceted than the standard economics textbook account would suggest.—Steve Dubb