Good Economics for Hard Times

"It very much reflects the positive direction of economics over the past decade or two. It’s focused on data and randomized control tests. It’s about developing policy improvements that will make life better for people and working out which kinds of policy interventions actually work and which don’t—without an excessively dogmatic starting point. So the general spirit is to say, ‘Let’s look at interventions by making sophisticated use of data,’ rather than rely either on theory or on the fairly sloppy testing that was done in the past. This approach has produced some striking results. Firstly, that in all sorts of ways, people are surprisingly rational, but also that people characteristically fall short of rationality in various ways. What it implies is that a lot of time (but not always) the best way to help poor people is to give them cash. That is something that runs totally against a lot of common sense—that you shouldn’t give money to poor people because they’ll just waste it—but also against the trends of the past 20 or 30 years in public policy. Nearly all economists—from people you class as being on the far left in general political terms (like myself) to the right—have an appreciation of prices and how they work which is quite counterintuitive. In the absence of some kind of economics training, you get either this natural, medieval view of the ‘just price’— the idea that there’s a fair price for something and that’s what the price should be. Trade is really a matter—as Donald Trump would certainly see it—of the buyer trying to get more than the fair price and the seller trying to pay less. The idea that both parties can benefit is pretty much foreign to that way of thinking. The polar opposite of that is viewing the market as red in tooth and claw. It’s a Darwinian struggle and let the strongest win without any real concern for whether the prices bear any relationship to opportunity costs, my central theme. That appreciation of the power of prices in markets is uniform among economists, even those who would qualify it quite a lot. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . Another area of disagreement is that the general public might think that if the government wanted to, it could intervene and protect every industry. But opportunity cost tells you that anything you do for one industry is going to come at the expense of another. Yes, I believe it does. I’m heavily focused on climate change and the human activities that contribute to climate change are so complicated that trying to figure out what people should do and telling them to do it is an incredibly inefficient way of setting about things. The European approach of having an emissions trading scheme , it was confidently predicted, would deliver a big reduction in emissions at low cost. Of course, if we’d thought about things, we could have predicted that there would be lots of rip offs and general problems as well, but in the end that really is what happened. That’s because once you have these prices they give people lots of incentives to seek out the best ways of reducing emissions. So that’s one area where economists have pointed us in the right direction and it’s also an area where the popular impression of economists is almost a 100 per cent wrong. I’ve recently been working with natural scientists, preparing statements about climate change and the bush fire disaster. A lot of them still imagine that economists are all about economic growth and GDP when, in fact, the vast majority of the economics profession is on side with quite extensive and radical interventions to reduce carbon dioxide emissions, to decarbonize the economy and so forth. You can criticize this or that aspect of economics, but this is an area where there is a high degree of consensus within the economics profession."