In a revealing mea culpa published in the IMF’s F&D Blog, Angus Deaton has set the cat amongst the pigeons by questioning several settled wisdom in economics.
He has sought to revise his views on labour unions, trade, and immigration.
Like most of my age cohort, I long regarded unions as a nuisance that interfered with economic (and often personal) efficiency and welcomed their slow demise. But today large corporations have too much power over working conditions, wages, and decisions in Washington, where unions currently have little say compared with corporate lobbyists. Unions once raised wages for members and nonmembers, they were an important part of social capital in many places, and they brought political power to working people in the workplace and in local, state, and federal governments. Their decline is contributing to the falling wage share, to the widening gap between executives and workers, to community destruction, and to rising populism. Daron Acemoglu and Simon Johnson have recently argued that the direction of technical change has always depended on who has the power to decide; unions need to be at the table for decisions about artificial intelligence. Economists’ enthusiasm for technical change as the instrument of universal enrichment is no longer tenable (if it ever was).
I am much more skeptical of the benefits of free trade to American workers and am even skeptical of the claim, which I and others have made in the past, that globalization was responsible for the vast reduction in global poverty over the past 30 years. I also no longer defend the idea that the harm done to working Americans by globalization was a reasonable price to pay for global poverty reduction because workers in America are so much better off than the global poor. I believe that the reduction in poverty in India had little to do with world trade. And poverty reduction in China could have happened with less damage to workers in rich countries if Chinese policies caused it to save less of its national income, allowing more of its manufacturing growth to be absorbed at home. I had also seriously underthought my ethical judgments about trade-offs between domestic and foreign workers. We certainly have a duty to aid those in distress, but we have additional obligations to our fellow citizens that we do not have to others.
I used to subscribe to the near consensus among economists that immigration to the US was a good thing, with great benefits to the migrants and little or no cost to domestic low-skilled workers. I no longer think so. Economists’ beliefs are not unanimous on this but are shaped by econometric designs that may be credible but often rest on short-term outcomes. Longer-term analysis over the past century and a half tells a different story. Inequality was high when America was open, was much lower when the borders were closed, and rose again post Hart-Celler (the Immigration and Nationality Act of 1965) as the fraction of foreign-born people rose back to its levels in the Gilded Age. It has also been plausibly argued that the Great Migration of millions of African Americans from the rural South to the factories in the North would not have happened if factory owners had been able to hire the European migrants they preferred.
His humility and a long life have made Angus Deaton a wiser man!
Some observations:
1. Deaton describes his mea culpa as part of “questioning one’s view as circumstances evolve”. I believe that a more appropriate description would be “questioning one’s view as perceptions and understanding evolve”.
I’m not sure that the circumstances on these have changed so dramatically as to merit such a paradigm shift in thinking. Instead, I’ll argue that Deaton’s understanding of the way the real world works has improved. This reinforces the point about academic economists being largely armchair commentators. Even those who claim to do field experiments are at best sanitised commentators. The disconnect with the real world is stark. To his credit, Deaton has shown the humility to revise his views, a sorely deficient feature of the field.
In this context, I’m reminded of Lant Pritchett saying that for over three decades while Dani Rodrik stood the ground with his views on issues like free trade, financial liberalisation, globalisation, and immigration, the global norms on each swung from one side to the other. So Rodrik came to be described as right or centre or left based on these shifts, even as his views broadly remained still.
2. I can think of four major blindspots with orthodox economics. One, it believes that markets are competitive and self-correcting, or efficient, which they are not in practice. It then follows that governments have no constructive role but should merely be confined to the limited area of correcting a theoretically defined set of market failures. Second, it elevates efficiency (and attendant profits and incomes) maximisation over all other considerations and has no place for ethics and human welfare. Third, it overlooks that the dynamic of exclusive efficiency maximisation invariably begets a Mathew Effect - the rich get richer, the big get bigger, the strong get stronger, and so on. Fourth, it ignores that this Mathew Effect leads to extreme concentration of power, such power in turn leads to political capture, which in turn distorts economic decisions (including the direction of technological changes).
3. These blindspots mean that there’s a fundamental disconnect between theoretical and practical economics. It is reflected in the frameworks, techniques, and tools used generally by economists in the academia with those working in practical areas like government policy units, financial markets, corporates, journalism etc.
This dissonance is natural given that academic economists have limited exposure to the experiential and immersive insights that emerge from long periods of being embedded in systems that apply economic research. As I have blogged earlier, such insights cannot be learnt from scholarship and sanitised visits. They only know who actually does things! This dissonance is brought out nicely in a recent blog by Ken Opalo in the context of examining Africa’s development issues.
This means that there’s a strong case that academic economists should confine themselves to the work of building bodies of research knowledge, and allow practising economists (and others) to figure out how to use such knowledge. Unfortunately, we have created a situation where academic economists with limited experiential knowledge (and most often based outside these developing countries) are allowed to set the agenda on development debates.
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