Good Economics for Hard Times: Better Answers to Our Biggest Problems

by Abhijit V. Banerjee

Today a fifth of US agricultural production is exported. And the biggest export destination is East Asia. China alone buys 16 percent of US agricultural exports.

People can have wrong beliefs but they cannot have wrong preferences

Even when our preferences do not directly depend on what other people do, the behavior of others can convey a signal that alters our beliefs and our behavior.

the source of the different behaviors in the trust game seems to be suspicion rather than animosity.

We avoid information that would force us to confront our moral ambiguities; we skip over news about the treatment of migrant children in detention centers to avoid thinking about the fact we have supported a government that treats children in this way.

But total factor productivity also increases when we discover new ways to reduce waste or shrink the time either raw materials or workers are forced to stay idle.

Innovations in production methods like chain production or lean manufacturing do that, as does, say, the creation of a good rental market for tractors.

What made the few decades before 1970 extraordinary compared to much of history is that total factor productivity...

If people are actually much happier now than they were before, who are we to pass judgment on whether it is a worthwhile use of their time and therefore whether it should be included in well-being calculations?

The biggest of these experiments, which involved more than two thousand participants paid to deactivate Facebook for a month, found that those who stopped using Facebook were happier across a range of self-reported measures of happiness and well-being and, interestingly, no more bored (perhaps

Each new machine and as a consequence each additional unit of capital will contribute less and less to GDP. Growth will slow down. Furthermore, the lower productivity of capital lowers its financial return, which in turn discourages savings. So eventually people will stop saving and growth will slow down.

In Solow’s view, as mentioned above, TFP growth just happens— policymakers don’t have very much control over it.

Lucas was, perhaps unsurprisingly, being too optimistic about the functioning of markets. We now know that we live in a sticky economy where nothing moves very fast,

In other words, poor countries are poor in substantial part because they make less good use of the resources they have, and even within poor countries some do better than others with the same resources.

The increasing returns here are at the level of the industry, the city, or even the area. Even if every firm faces diminishing returns, doubling the number of high-skilled people in the Valley makes all of them more productive.

the standard law of diminishing returns helping India in Solow’s model is compensated for by the faster flow of ideas in richer economies.

The most important question we can usefully answer in rich countries is not how to make them grow even richer, but how to improve the quality of life of their average citizen.

TFP five years after the plants were set up was on average 12 percent higher in places that received the plant than the ones that just missed out, translating into $430 million per year more in earnings for the county.

consistent with a widely held view that spillovers are more important in manufacturing than in agriculture.

Second, growth in one region is different from national growth because it can happen in part by cannibalizing growth in the rest of the economy,

Moretti estimates the two effects might actually net out, with the result that national growth will be more or less unaffected.

the more things have already been invented in the past, the harder it is to find an original idea.

The inventor just needs to tweak the previous invention, not invent something entirely novel.

sometimes the creative dominates, but at other times the destructive holds sway; novelties get created not because they are useful but because they defeat someone’s existing patent.

“there is no compelling evidence to date of real economic responses to tax rates at the top of the income distribution.”

By now, there seems to be a consensus among a large majority of economists that low taxes on high earners are not guaranteed to, on their own, bring about economic growth.

In manufacturing, the top four accounted for 38 percent of revenues in 1980 and 43 percent in 2012. In retail trade, the share more than doubled, moving from 14 percent to 30 percent.64

But the problem with the increased concentration at the national level is that to the extent it reflects a decline in the competition faced by these behemoths, it may actually lead to reduced innovation because it creates higher barriers for new entrants to disrupt an industry.

This result does suggest that the relatively low growth in TFP may in part be explained by the increase in concentration.68

Nevertheless, perhaps fooled by the fact that they only see the rich getting richer, nineteen out of twenty Americans think world poverty has increased or stayed the same over this period.

growth rates for the same country change drastically from decade to decade without much apparent change in anything else.

And the countries that had low settler mortality once upon a time and are business friendly today tend to be substantially richer.

at roughly the same level of business friendliness, none of the conventional measures of good macroeconomic policy (such as openness to trade, low inflation, etc.—the kinds of things Romer wanted countries to adhere to) seem to predict GDP per capita.

Bill Easterly, not very charitably perhaps, but quite accurately, described their conclusion: “After two years of work by the commission of 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.”

While the Acumen Fund sees itself as an entirely new type of organization, not an aid organization but a venture fund for the poor countries, in a sense its technology-oriented view of growth harks back to the 1960s, when engineers dominated the aid world and went bust trying to bridge the “infrastructure gap,” giving large loans to poor countries for building dams and train lines that would allow them to catch up with rich countries.

Despite the lack of evidence that this has helped those countries to grow, the fascination for electricity as the source of growth and development has never really gone away.

The issue is more that it is difficult to identify those supposedly life-changing new products and services, and efforts to do so often meet a frustrating lack of interest from the people whose lives are supposed to be changed.

The frugal engineering world is littered with many similar disasters, from the $100 laptop to educate the world (which actually costs $200 and has been shown to have no impact on what children actually learn),87 to cleaner cookstoves that nobody wanted,88 to various water-filter technologies89 and innovative latrines.90 A lot of the problem seems to be that these innovations take place in a void, insufficiently connected to the lives they wish to change. The core ideas are often clever, and it remains possible that one day they will click, but it is hard to place a lot of faith in this prospect.

When Abhijit asked them why they preferred to sponsor their sons rather than lend money to the more talented outsiders and live off the proceeds, the Gounders explained they could not be sure of getting their money back.

Firms that appointed family CEOs experienced large declines in performance in the subsequent three years, compared to firms that promoted unrelated CEOs: their return on assets fell by 14 percent.98

By contrast, the Indian economy is exceedingly sticky: good firms do not grow and bad firms do not die.

In contrast, if they remain small and service only the local demand, a less efficient firm can easily survive in the market next door.

In fact, in about half the districts in India, more productive firms tend to have less land and buildings than the least productive ones!

26 percent of all Indian males between the ages of twenty and thirty with at least ten years of education were not working.

There are plenty of jobs, just not jobs these young men want. They will eventually accept jobs they refused to take when they were younger, probably because the economic compulsions become stronger as they age (their parents, who feed and house them now, will retire or pass on; they will want to get married), and the job options shrink (government jobs, in particular, have an age cut-off that is often close to thirty).

He was hoping to go to college and study politics, with the aim of being a radio anchor one day, but his grades on the admission test had been too low so far. He kept retaking it. In the meantime, he was living off of his grandmother’s pension. He saw no reason to let go of his dreams yet. He probably will eventually, but as he sees it, he’s still young.

They were either taking what they called “competitive exams” (to get a government job or a job in a quasi-governmental organization, like a public-sector bank) or studying to complete their bachelor’s degree and then apply for a government job.

These young people are mostly waiting for jobs they will not get.

If the government jobs stopped being quite so desirable, the economy would gain many years of productive labor, wasted in the pursuit of the mostly unattainable.

It is more that TFP is much lower in poorer countries, to a significant extent because of market failures.