Intellectual bankruptcy in a new avatar: Economics Nobel 2019

Abhijit Banerjee, winner of the 2019 Nobel Prize in Economics. He shares the Economics Nobel with Esther Duflo and Michael Kremer. (Photo: PTI)
Abhijit Banerjee, winner of the 2019 Nobel Prize in Economics. He shares the Economics Nobel with Esther Duflo and Michael Kremer. (Photo: PTI)

Deployment of charitable funds to poor as efficiency management tool is an outdated prescription to fight poverty. Economics Nobel 2019 limits itself to wealth distribution, instead of recognizing and empowering poor with wealth creation.

As an Indian, it is a matter of great pride to see someone
(Abhijit Banerjee) with Indian origins being honoured by a Nobel Prize, along with two other eminent economists (Esther Duflo and Michael Kremer). Poverty becoming mainstream discussion issue, is a matter of greater happiness.

However, an objective analysis is equally necessary, whether such awards are truly genuine or they are being used to divert direction of research away from investigating root causes of poverty; and ensuring that talents remain fully dependent on grants to merely study poverty or cause incremental gains. It is amazing to see how these western economists (whose ideas define and drive global economy) stay blind to their own masses slipping into unprecedented poverty, while study of ‘aid to poor in developing countries’ remains their chief concern. Imagine, what they would be doing in a prosperous world.

After declaration of the Economics Nobel for the trio, I read the much talked about book “Poor Economics: rethinking poverty & the ways to end it” by Abijit Banerjee & Esther Duflo, and also other related literature.

The book “Poor Economics: rethinking poverty & the ways to end it” written by Nobel Laureates Abhijit Banerjee and Esther Duflo

Truly, this book is full of narratives based on field experiences from real lives of poor from a few countries. It summarises status of an individual, family, village or a situation. These stories are largely anecdotal in nature and occasionally there are some contrasting views of other economists, social reformers etc. While interesting to read, these stories do not lead to clear conclusions.

For instance, one of their major “findings” is —

What is striking is that even people who are that poor are just like the rest of us in almost every way. We have the same desires and weaknesses; the poor are no less rational than anyone else—quite the contrary. Precisely because they have so little, we often find them putting much careful thought into their choices: They have to be sophisticated economists just to survive. Yet our lives are as different as liquor and liquorice. And this has a lot to do with aspects of our own lives that we take for granted and hardly think about.”

This conclusion, while stating that those who are poor, are no different from those who are not (hardly a new insight), does not address the real issue. In fact, what goes wrong in economy that makes certain people remain trapped in poverty? At best, one can define this book as a marvelous compilation of exhaustive case studies of status of people living in poverty, from several countries. In authors’ own words, “This book…represents our attempt to knit together a coherent story of how poor people live their lives.”

Here is another piece from Dr Abhijit Banerjee’s talks:

We were in a village in Morocco talking to a guy who was standing in front of his house. He was telling us about his life and to get the conversation going we asked him, suppose you had some small amount of money what would you do with it? And he said, “I am going to buy some food.” And then we asked him what would he do if he had some more money? He said, “I will buy more food.” So we were very persuaded that this was a hungry man. We walk into his house and see that he had a television, a parabolic antenna and a DVD player. So we asked him what is this? He said, entirely without missing a step, “television is more important than food.”  

Dr Abhijit Banerjee continues:  “One advantage of being a development economist is that you get to spend a lot of evenings in random villages. One thing uniform across the world is that an evening in a village is very boring. There are no movie theatres. No music halls. No place to go. There is one tea shop. You can go there. You have been there before. All the other people have been there for years. They have talked to each other for years and they say the same things more or less. Somebody says something, other says, oh yeah, and then they are silent.”

So what does this tell us?

Here is another one from Dr Banerjee: “We asked a migrant construction worker from Orissa, on a visit back home, why he didn’t stay longer in the city. He explained that he could not take his family there: The housing conditions were too insalubrious. On the other hand, he did not want to stay away from them for too long. Most cities in the developing world have very little planned housing for the very poor. The result is that the poor have had to squeeze themselves into every piece of land they can somehow grab from the city, often in a swamp or even a garbage dump. By comparison, the places where even the poorest live in villages are greener, airier, quieter; the houses are bigger; there is space for children to play. Life may be unexciting, but for those who grew up in the village, that is where their friends live. Moreover, a single male, going to the city for a few weeks or even a few months, does not need to actually find housing; he can sleep under a bridge or under some awning somewhere, or in the shop or construction site where he works. He can save the money he would have paid as rent and just go home more often. But he doesn’t want this life for his family.”

Shouldn’t real questions for a development economist be to find ways to create growth opportunities for these people in villages, instead?

Economics Nobel 2019 winners’ high point of work is in their designing a test-tool that can help fight poverty, as they put it. Their learning are empowered by hundreds of researchers using their methodology, of asking right questions to determine (in their own words) “we obtain a fuller picture of how the poor really live their lives, where they need help, and where they don’t.”

The tool is known as, Randomized Control Trials (RCTs), which give researchers, working with a local partner, a chance to implement large-scale experiments designed to test their theories.

When we think of the term ‘theory regarding poverty’, especially of the Nobel Prize winning order, one would naturally expect ‘profound understanding’ that would clearly point out root-causes of why and how people remain or become poor in any economy. As a consequence, it would offer solutions to ensure prosperity for people, not merely fighting against poverty. Actually, the work of this Economics Nobel citation is narrowly limited to how best to distribute aid to poor that in other words is wealth-distribution; instead of how to facilitate people in poverty with access and empowerment to create wealth. At best, it qualifies as a tool for managing aids, efficiently, to be used by social-reformers and social-activists. Management graduates are meant to do that all the time.

Lant Pritchett, an eminent economist at Harvard University, has this to say of the RCT (Randomized Control Trials): “It mostly seems a tool to guide that small part of the development process that is “charity” or “philanthropic” that is (a) going to give relative small amounts of money, (b) will not or cannot work though national (or state or local) governments, (c) has relatively “kinky” valuations (perhaps in part because they are rationing tiny resources) and (d) care about the ability of being able to attribute the gain in well-being causally to their specific intervention (rather than about indirect effects). Charity work is a good thing and if charity work can be done better guided by evidence from RCTs that is a good thing…. However, to confuse this tiny little segment of the world with the broader process of development is madness.”

The intellectual travesty with discipline of economics is eloquently expressed by Steve Forbes, the chairman of Forbes group, in his article “The Bankruptcy of Modern Economics”, published in Dec 2013 issue of Economist: “Nevertheless, central bankers like Ben Bernanke and his putative successor, Janet Yellen, claim we need more inflation, preferably an annual rate of 2% to 2.5%. That level would cost a family making $40,000 annually an extra $800 to $1,000 a year in higher prices. If you ever run across a central banker or an economist who shares this weird view, ask that person which elected body gave the Fed–or any other central bank–the authority to impose such a tax. Treasury assumes that a merchandise trade surplus is equivalent to a company making money and that a deficit is equivalent to sustaining a loss. If that were true, how did the U.S. become the mightiest economy in the history of the world while running trade deficits for 350 of the past 400 years? The final example of the intellectual illness of economics today is a proposal floated by the IMF that countries quickly introduce a one-time wealth tax of 10%. Put aside the fantasy of “one-time.” Where in the world did the supposedly bright lights of the IMF get the idea that destroying capital on a scale like that would aid economic growth? Sorry, IMF pooh-bahs, without capital creation and investment, we don’t expand.”

Triviality of the Economics Nobel Prize in 2019 becomes more pronounced in the backdrop of big unsolved paradoxes facing the discipline of economics, such as:

  1. What is the rationale behind negative interest rate prevailing in Japan, Germany and other countries for over two decades? How these negative rates are justifiable while other currencies have positive interest rates?
  2. Why one’s savings in a bank in India, remain totally unsecured, beyond Rs 1 lakh; meaning one can lose all deposit for no fault of own, in case a bank collapses? Where else can one keep one’s earnings, safely?
  3. Famous French economist Thomas Piketty (author of best seller Capital in the 21st Century), based on the data of the past two centuries, has convincingly established that capital of every country is increasingly concentrated in fewer hands, with every passing year. Referring to 2018 World Inequality Report, he said, ‘that the “most striking finding” regarding America is that, since 1980, the rise of the top 1% mirrors the fall of bottom 50%”!’ So, the larger question for economists is this: Is this systemic and consistent transfer of wealth from masses to a few due to breaching the fundamentals of free-market principles, legally? Is this not the cause of perpetually increasing poverty, world over, including erstwhile developed economies?
  4. These and many more, such as whether speculative currency-trade is an act of “intellectual-theft”, from undervalued currencies; or hijacking of stock-market through anomalies from original entrepreneurs and tech-innovators etc.

While at it, it’s worth adding that the other work of Michael Kremer (third recipient of Economics Nobel 2019), on “O-ring model of economic development’, deserves greater attention by theoreticians and practitioners. As one possible basis of why the world needs to move towards decentralized-economy, in place of currently dominant complex centralised structures.

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