A ready reckoner of our world
In their book Good Economics Hard times, abhijit Banerjee and esther Duflo attempt to present a nuanced view of things, instead of the simplistic analysis that dominates the media today
One of the challenges that I constantly encounter as someone who primarily makes a living writing on economics is to explain nuance to an audience which is used to binary answers: right or wrong, yes or no, good or bad, and so on. This challenge becomes even more difficult given that the media works overtime to make economics simplistic (and not simple).
Let’s take the example of the Reserve Bank of India cutting the repo rate or the interest rate at which it lends to banks. As soon as the RBI does this, the media runs headlines which basically say that with the repo rate being cut, EMIs on bank loans will go down.
The trouble is, this is not how things always play out. Whether a bank is in a position to cut its loan interest rates (or effectively EMIs for borrowers) depends on several other factors, ranging from prevailing interest rates on bank deposits to interest rates on small savings schemes, the amount of money being borrowed by the government, and so on.
The larger point here is there is a lot of nuance in economics which somehow goes missing, even when economists write for the mass media or speak to it or write books meant for a general audience.
This is something that one cannot say about Abhijit Banerjee and Esther Duflo’s new book, Good Economics for Hard Times (Juggernaut Books, 2019). The book has a lot of nuance. The authors took a lot of effort to write in a way that ensures that people with no background in the subject also understand what they are trying to say.
As they write: “Academic economists hardly ever take the time to explain the often complex reasoning behind their more nuanced conclusions…Today’s media culture does not naturally allow a space for subtle or long-winded explanations.” Thankfully, Banerjee and Duflo, who won the Nobel Prize in Economics this year, do not make the same mistake.
Also, the book brings to the fore a lot of latest research, which would otherwise never have made it out of the specialised academic journals that economists publish in.
One of the controversial issues that Banerjee and Duflo deal with is immigration. In the world that we live in, many politicians try and project immigration and immigrants to be a bad thing. The feeling among the locals is that immigrants take away their jobs. But is that really the case?
Banerjee and Duflo don’t think so. As they write: “The newcomers [i.e. immigrants] spend money: they go to restaurants, they get haircuts, they go shopping. This creates jobs and mostly jobs for low-skilled people…This tends to increase their wages and perhaps thus compensate[s] for the [increase] in the labour supply, leaving wages and unemployment unchanged.”
In fact, Banerjee and Duflo offer a very interesting example of when something like this did not happen — that is, when immigrants actually did not create jobs. For a brief period of time, Czech workers were allowed to work across the border in Germany. “At its peak, in the border towns of Germany, up to 10 per cent of the workforce was commuting from the Czech Republic,” write the authors. But this did not lead to an increase in local demand and creation of jobs simply because the Czechs went back home to spend their money.
Further, immigrants internationally take on jobs which the locals don’t. As Banerjee and Duflo write: “Migrants complement rather than compete with native labour [as] they are willing to perform tasks which natives are unwilling to carry out.” This is a conclusion which is not very obvious in the first place.
Another interesting point that the authors make is regarding competition in the retail sector. In India at present, there is great fear that the likes of Amazon and Flipkart (now owned by Walmart) will take away business from the small mom-and-pop store. This fear comes from what has happened in the US and other parts of the world. Whenever Walmart or other big stores come to town, they end up displacing the existing retail stores. But contrary to expectations, this doesn’t make the market less competitive.
As Banerjee and Duflo write: “This does not make the market less competitive for the final customers and superstores offer more varieties, often at cheaper prices. And Amazon has actually fostered intense competition among sellers on its platform.” While the consumer does not lose out, there is a flip side to this as well. Fewer competitors may lead to a situation where there is reduced innovation in the sector.
Another interesting insight in the book is about what happens when technology destroys jobs. This is a fear that people have had at different points of time over the last few centuries. Typically, economists dismiss the fear of technology destroying jobs by saying this fear has been around for a while but jobs have not vanished, living conditions have improved, and people are making more money than they have in the past.
This is true, but there is a little more to it than just that.
Take what happened during the industrial revolution of the 19th century when many workers, particularly in Britain, lost their jobs to new machines. As Banerjee and Duflo write: “We are told in the long run everything was fine, but the long run was very long indeed. Real blue-collar wages in Britain were almost halved between 1755 and 1802…They would recover their 1755 level only in 1820, sixty-five years later.” While things have improved over the centuries, this has happened with a generation or two bearing the cost of it.
Purists may not like the fact that Banerjee and Duflo try to pack too much in the book and jump from one topic to another. But that’s what works for a general reader (at least it did for me). Also, the writing is very lucid and full of personal stories which link to the bigger economic issues that are discussed in the book. Even Satyajit Ray makes an appearance on page 14. There is never really a dull moment in the book.
To conclude, Good Economics for Hard Times is an excellent ready reckoner of the world that we live in, and in which the authors make an effort to present a reasonably-nuanced view of things, instead of the simplistic analysis that dominates the media and social media.