Home ›› 24 Oct 2021 ›› Editorial
It appears that the Economic Sciences Prize committee may have grown accustomed to “trio” in awarding the bonanza on professional achievements in the field of economics. Although the Nobel prize in economics is not from the bonanza of the endowment of Alfred Nobel, yet in spirit, it aligns with its first cousin in distinction. The year 1969 marked the first Nobel in economics, entitled the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to commemorate the 100th anniversary of Sweden’s Central Bank. Records show the trio won the Nobel in economics in 2019, 2010, 2007, 1994, and in 1990. The Nobel Laureate committee however meticulously dovetails the contribution of each of the Nobel laureates in a neat mass with interactions and endorsements among those contributions thus establishing a holy link.
Peter A. Diamond, Dale T. Mortensen, and Christopher A. Pissarides won the Nobel in 2010 “for their analysis of markets with search frictions.” Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson won the Nobel in 2007 “for having laid the foundation of mechanism design theory. John C. Harsanyi, John F. Nash Jr., and Reinhard Selten won the Nobel in 1994 “for their pioneering analysis of equilibria in the theory of non-cooperative games.” Harry M. Markowitz, Merton H. Miller, and William F. Sharpe won the Nobel in 1990 “for their pioneering work in the theory of financial economics.” Abhijit Banerjee, Esther Duflo, and Michael Kremer won the 2019 Nobel Prize for their contribution to fighting poverty through practical steps that have helped millions of children. The micro approach in dealing with the poverty syndrome through “randomized controlled trials' ' [RCTs] such as deworming children on education attainment or making the renewal of teacher contracts dependent on pupil grades produced better scores while reducing the pupil-teacher ratio had little impact.
This diversity of contributions spanning from political economy to scientific exploration, mathematical modelling, international trade, and international capital movements, problems of developing countries in economic development and transaction costs, property rights in the institutional structure and functioning of the economy indeed enriched the content of economics as a social science over these fifty years.
The trio in the Nobel Prize in Economics in 2021 David Card, Joshua Angrist, and Guido Imbens showed through "natural experiments" real-world economic impacts in areas from minimum wage increases in the U.S. fast-food sector to migration from Castro-era Cuba. Natural experiments different from controlled clinical trials or RCTs are now in vogue in many social sciences. As economic decision-making is influenced by many factors outside a specific ambit, natural experiments can provide a clue in many causal questions posited through standard theoretical discourse. Conventional wisdom dictates that minimum wage legislation leads to job losses but an experiment by David Card with Alan Krueger [ died in 2019] on the fast-food sector in the U.S. State of New Jersey in the early 1990s demonstrated that raising minimum wages from USD 4.25 to USD 5.05 an hour “upended conventional wisdom in economics.”
Theory dictates that minimum wage should always be above the equilibrium wage; market rigidities may be a cause for lower equilibrium wage or a shift in demand curve for labour may raise the wage level with more jobs. The current U.S. administration’s policy to raise the minimum wage to USD 15 may be a policy guide in this context. The minimum wage of garment workers is a much-talked issue in Bangladesh and raising the minimum wage may not result in job losses, rather ensuring an environment that helps shift in the demand curve for labour could lead to more jobs with a respectable wage. Natural experiments in another instance invalidated the golden rule of migration that inflow of labour specifically with low levels of education or unskilled labour reduces the general wage level. Fidel Castro in 1980 allowed Cubans to migrate to Miami but Card found no negative wage or labour effects for Miami residents.
Years of schooling has a perceptible impact on life time earnings. Angrist and Kruger worked together to establish a causal link between them by eliminating variables that could influence the earnings stream; that an individual with 12 years of schooling earns 12 percent more than an individual with 11 years of schooling. Guido Imbens and Joshua Angrist share 50 per cent of the bonanza equally for their contribution in causal relationships in economic and social variables that explain our attitude or values of working life. Guido Imbens who is the editor of the most prestigious economics journal Economterica, Journal of the Econometric Society is a distinguished professor of applied econometrics at the Stanford University. “The committee specifically recognized Imbens for his work with Massachusetts Institute of Technology economist Joshua Angrist on inferring real-world outcomes of possible economic policies. The team worked with policymakers to examine the impact economic policies have on the education and labour sectors.”
This year's Nobel prize elevated economics to its more prestigious social science status through the concept of natural experiments. “Economic policies cannot be tested like a chemistry lab experiment — their implementations have real-life repercussions, which make them difficult to study. We can’t do that in the real world in the sense that we don’t want to create a famine, and then test it against a non-famine. So we have to look for other methods.” To cite a real world example of the impact of guaranteed income on the labour force supply or willingness to work; a real example of Massachusetts lottery revealed that when winners were paid in a series of disbursements over a number of years [ guaranteed income] in comparison to those who did not win the lottery; “ it did not significantly change how much people worked.” However, when Imbens explained,“But implementing an actual guaranteed income as part of an experiment in the real world would be expensive,'' we observe that an actual guaranteed income as part of an experiment is possible and inevitable on many occasions. Our expectation is that Imbens will be very generous with his time to his students and colleagues as one of his students writes, “He is always very generous with his time, advice and comedic stories — he has a fantastic sense of humor. He deeply cares about every single one of his students, always checking in on our lives outside of work and encouraging us to keep a healthy balance between work and life.”
The writer is the Treasurer and a Professor of Economics at the School of Business and Economics, United International University. He can be contacted at mirobaidurr7@gmail.com
