“Good Economics for Hard Times” by Duflo and Banerjee

Economics, Quick Reads
Reading Time: 3 minutes

Good Economics for Hard Times is the second general readership publication of the husband and wife, Nobel-prize winning pair of Duflo and Banerjee. Their first book, Poor Economics, published in 2011 (and already reviewed on Etonomics), catapulted them into global fame and their second instalment continues in the same rigorous, empirical style as the first. They aim to transfer their methods of studying poor countries to analysing rich countries. Fundamentally, they wager that economies are dominated by the behaviour of irrational and imperfect individuals, thus rendering economies in permanent classical disequilibrium and, in the most Keynesian sense, sticky. They challenge some fundamental assumptions of orthodox economics, not least Becker and Stigler’s stable preference theory and the theory of comparative advantage. They do this through their trademark evidence-based reasoning, drawing on research into what is really going on within these sticky, imperfect economies.

On the whole, they are successful and insightful. The first half of the book, focussing on behavioural economics, is effective and well-researched. This is likely since, as Duflo and Banerjee point out, rich people and poor people both think and react in the same way to economic occurrences, whether that be shifts in taxation or an expansion of free trade. As such, their research into behavioural economics within developing economies can be usefully transferred. Indeed, their eloquent use and analysis of relevant studies, such as that of Topalova’s into the economic outcomes of Indian villages which had had different exposures to trade liberalisation during the early ’90s, does force one to reconsider some of the assumptions, such as comparative advantage, that are otherwise commonly blindly bandied around in economics. Instead, they propose that the benefits from free trade are much more ambiguous, and significant government intervention into the labour market is required to ensure the benefits outweigh the negatives of concentrated job losses. Their challenge of broad, sweeping theories of growth is similarly thought-provoking.

There are, however, some aspects of the book which are less compelling, in particular sections in the second half of the book, when they talk about issues, like healthcare and fiscal policy, that are more specific to rich countries, like the USA. On a macro level, poor economies are different to rich economies. Where taxation should be set, how growth should be achieved, what services the government is expected to provide – these are all very different in developed economies. Thus, Duflo and Banerjee’s relative lack of expertise and research into rich countries occasionally becomes apparent in the second half of this book, where their careful empiricism makes way for more broad-brush, politically charged conclusions. This occurs, for example, in their discussion of monopolies. Monopolies are a highly controversial and intensely studied area of microeconomics. However, Duflo and Banerjee conclude that America’s corporate titans must be broken up, having only briefly alluded to one study, and without fully developed argument. Similarly, Duflo and Banerjee are often quick to point out problems and inequalities, but, at times, they do not present solutions that are as thorough as their analysis of the problems. Their solutions often involve recommending more government intervention, and more oversight of markets, rarely recognising that governments, too, can fail and get things wrong, especially in the bipartisan climate Duflo and Banerjee admit exists.

In all, this book is probably a little overambitious. Its remit is, essentially, fixing economics. It’s a valiant effort, and there are no two better people to take on the task. For a 300-page book written for laymen, it is remarkably detailed and addresses multiple significant issues successfully. At times, though, they fail to maintain a full argument and explanation of each issue and fail to provide detailed and convincing solutions to the problems they identify. Nevertheless, this book raises many interesting ideas and, as far as a book written for the general public is concerned, it is outstandingly detailed and considered.

Leave a Reply