Sunday, July 5, 2020

Protected enclaves are not going to change the world

In the last book published by Esther Duflo and Abhijit Banerjee, recent Economics Nobel laureates, entitled "Good Economics for Hard Times," they implicitly respond to some critics of their previous work. These critics had argued that it would be difficult to change the world "one experiment at a time," suggesting that their micro approach based on Randomized Control Trials could only address small scale problems, in which external validity was at least problematic. In their new book, they cannot be blamed for not thinking big, because they address most of the current big problems of humanity, such as inequalities, trade policies, migrations, climate change or automatization. To do that, for each of these topics, they survey the academic literature (not only experiments) and provide their own view. Although the arguments for every topic have lots of subtleties, the main message is that market mechanisms are not reliable to solve most of these problems, mainly because they work much less smoothly than assumed by traditional economic theory. Then societies should rely on government solutions that focus on those policies that are known to provide good solutions, and not on those about which we know little. One example they give is that we should be less obsessed about economic growth. Obsession with growth was at the root of "supply" policies that have caused a lot on inequality since the 1980s in countries such as the USA and the UK. As a result of these policies, such as lower taxation, these countries have not found the growth panacea, but they are today more unequal than in the past, and more unequal than countries that have been more reluctant to embrace the same policies.
As another example of policies targeting growth about which they are skeptical, they mention the ZEDEs policy promoted by economist Paul Romer (another Nobel laureate). ZEDEs are zones for employment and economic development, which Romer not only promoted in his academic work, but also as a consultant. These zones would be reserved for "charter cities," giant "protected enclaves" that live by what Duflo and Banerjee call Romerian rules within nations that do not. Although Honduras has so far been the only country to buy the idea, Romer wants hundreds of these charter cities around the world, each of them hosting eventually one million people. This is based on the idea that big virtuous cities generate positive externalities, and these create innovation, social capital and growth. The authors explain that, though it claimed inspiration from Romer's ideas, the Honduran vision seemed closer to the banana enclaves of the past: "They deviated form the get-go when they decided not to use the oversight of a third-party government," which was a key ingredient of Romer's project. Duflo and Banerjee conclude that this story "suggests charter cities are unlikely to hold the key to sustained growth in developing countries for the very good reason that the internal political compulsions the charter is intended to hold at bay often have a way of biting back." The idea that somehow one can escape a problematic world by building gated communities, insulated agencies or small virtuous independent countries illustrates the misleading dream that one can fix the world by injecting into it perfect laboratories.

Sunday, June 28, 2020

Teaching economics for a better world

(This is the English version of my article in Spanish published in Alternativas Económicas)
After the 2008 crisis and mobilizations such as those of the “Occupy Wall Street” or “Indignados” movement, or those of Chilean students, many voices around the world called for a rethinking of the teaching methods of economics at the university. The traditional ones had not been useful to understand the crisis.
The CORE Project (www.core-econ.org) is an empathic response to these voices, without giving up reasonably high standards of quality and rigour. The project consists of making a series of high-quality materials available to teachers and first-year students free of charge, which update the teaching of the introduction to economics, both for those studying a degree in economics and for those studying other degrees (but having to learn economics at the introductory level). These materials range from a free e-book to data for conducting empirical guided projects, videos, exercises, or experiments.
CORE's objectives include: to build a global community of people interested in innovating pedagogical methods for teaching economics; to develop an interactive methodology aimed at solving social problems; to bring contemporary developments in economic research into the classroom from the beginning; and to provide everyone with the tools to understand the great economic issues of the world around us, emphasizing issues such as inequalities or climate change. The on-line nature of the materials makes it easy to adapt quickly to current issues. In this sense, it was only weeks after the start of the coronavirus crisis that CORE made available to its users a series of educational materials on the pandemic and its economic implications. The fact that the material is freely available online facilitates distance learning when necessary, and also facilitates modern learning methodologies.
The project has been led by a wide group of economics scholars from different parts of the world, concerned about the need to renew methods and content in teaching economics. The leadership work carried out by Samuel Bowles, professor at the Santa Fe Institute in New Mexico, and Wendy Carlin, professor at the University of Oxford, stand out within the group. Among the Spanish economists involved, the participation of Humberto Llavador from the Pompeu Fabra University, and Antonio Cabrales, until now at the University College of London (UCL), and soon at the Carlos III University, stands out. CORE materials are already being used in various universities around the world, such as UCL in England or the Toulouse School of Economics in France.
The CORE e-book is being translated into Spanish, and 8 chapters of the translated version of the 22 of the complete e-book are now available. The translation will be fully available for the next academic year 2020-21. At the Universitat Autònoma de Barcelona (UAB) we are gradually introducing it in the teaching of economics for non-economists.
One of the characteristics of the selection of content in CORE is its inter-disciplinary nature. At the UAB we will use it as the main material in Introduction to Economics of the new degree of History, Politics and Economics that will begin in 2021-22. It is accepted naturally and as a positive thing that the economy must dialogue humbly with other branches of knowledge, such as history, political science, psychology, natural sciences or computer science.
The organization of the contents in CORE contains significant differences with the traditional textbook of introductory economics. Specifically, issues of income and wealth inequalities are addressed from the beginning, and the traditional separation between microeconomics and macroeconomics is blurred. The market as a resource allocation mechanism is approached as an institution along with other possible ones that act on the really existing social interactions. The typical supply and demand graph does not appear until well into the e-book, once students have been introduced to Game Theory as a toolbox to analyze social interactions in general, which allow us to address real questions such as negotiations on climate change, the provision of public goods such as peace and security, or the existence (or not) of potential conflicts between efficiency and equity.
The market is a powerful institution based on individual interests that has advantages and disadvantages (these are especially visible when there are external effects such as climate change, or when free agreements leave uncovered contingencies and give rise to power relations). Another important institution is the State, with its coercive power ideally legitimized by democracy, and it also has advantages and disadvantages. There is a third block of resource allocation mechanisms, traditionally left aside by traditional economics, which are communities, that is, organized human groups without the need for external coercive power, which are based on social norms as the foundation of cooperation. This set of mechanisms also has advantages and disadvantages: it allows the development of collective projects without the need for a coercive apparatus, but part of the cooperation can be translated into intra-group cooperation to go aggressively against another group. The CORE project itself, constituted as a non-profit organization financed mainly by foundations, is an example of the work carried out by a community of altruistic professionals interested in renewing the teaching of economics. The great challenges of the present and the future of human societies will require combining the best of markets, state and communities, trying to mitigate their disadvantages.
This is not the only attempt to renew the teaching methods of economics. The freely available video courses of Raj Chetty based on his classes at Harvard, where he progressively introduces the most modern methods of economics and econometrics with real empirical work, or the mobile phone experiment platform that Humberto Llavador and a group of collaborators have launched, are complementary efforts.
All of this is extremely useful for students and teachers. And it is also useful for journalists and policy makers, and for anyone who wants to better understand the economic reality (the economy) and the branch of knowledge that tries to approach it (economics). Not to disseminate slogans, but to better understand the complex social reality in which their activity and life take place.

Sunday, June 21, 2020

In defence of (good) politicians

Foxes know many little things and hedgehogs know one big thing. Hedgehogs are more famous but foxes are more effective at making predictions and solving complex problems. Politicians, in general, are the ultimate foxes.
Their task is covered by a very incomplete contract. The objective is not very well defined, the effort is multidimesnional, and there are quality issues that are very difficult to measure. Their intrinsic motivation is key when explicit incentives play basically no role beyond (perhaps and not in all cases) reelection.
As I have spent most of my young and adult life between politics and academia (although being a professional politician only for 4 years between 1991 and 1995), I have learned that politics is a difficult and badly paid job.
Some academics and business people become very bad politicians, and very few of those who try become good ones. But politicians are absolutely necessary given the well-known limits of voter and expert wisdom. Of course, politicians need controls, checks and balances, and scrutiny, but the provision of high quality politicians is a public good that has no substitute.
I should probably write a companion post "in defence of academics", but these are very good at defending and promoting themselves (especially economists).
Of course, as we can see these days very well, especially watching what happens in the US, there is a big difference between good and bad politicians. What a difference it makes to have one president or another. But the president that today is embarrassing many Americans promoted himself on the basis of not being a traditional politician, but an outsider. Hopefully next time voters will think twice before believing that outsiders can do a better job than traditional politicians with judgment, patience and personality.
Politics is tough, and if we keep conveying the idea that politics is hopeless, talented kids will not want to run for office and one day become politicians, as they should.
A good politician is not an academic with a good PhD becoming a politician. It is very easy to give examples, throughout history until today, of politicians that are very qualified academics but that embrace fanatic movements or worse. When I was doing my PhD in Florence, in my second or third year I gave a seminar paper and was assigned as a discussant another student that gave the most masochistic of discussions. He was a very brilliant student. Today he seems (as I have been told and after doing some Internet research) to be as masochistic and as brilliant, and has become famous being a controversial parlamentarian in one of the so-called "frugal" European countries, earning his "reputation" among other things by leading the campaign against the perception of European funds by the countries that have been worst hit by the Covid-19 pandemic.
Imperfect knowledge and radical uncertainty (likelihoods unknown, outcomes difficult to define) are pervasive in political life. Those that keep calm and wise in these circumstances are good politicians.

Sunday, June 14, 2020

Re-organizing production in a new model of public-private partnerships

In his latest column, Dani Rodrik goes beyond the emerging consensus that post_COVID reforms must incorporate a more progressive taxation, education and protection policies, stronger anti-trust enforcement for technological multinationals and more determination against climate change. Although all these efforts would be welcome, Rodrik misses an additional key component to reforms, namely changes in the way production is organized.
The organization of production creates positive and negative externalities. For example, good and stable jobs have an impact on more cohesive communities. Rodrik's objectives would be directly met by a substantial expansion of cooperatives and other worker-owned firms, but also by conventional corporations that embrace a broader mission than maximizing shareholder value.
Rodrik's words are the introduction of an ambitious program of a new model of public-private partnerships, with implications for industrial policy, the fight against inequality and the mitigation of climate change. Perhaps the Next Generation reconstruction program of the European Union could incorporate these ideas in the mechanisms that it will promote. In Rodrik's words:
Economic insecurity and inequality today are structural problems. Secular trends in technology and globalization are hollowing out the middle of the employment distribution. The result is more bad jobs that do not offer stability, sufficient pay, and career progression, and permanently depressed labor markets outside major metropolitan centers.
Addressing these problems requires a different strategy that tackles the creation of good jobs directly. The onus should be on firms to internalize the economic and social spillovers they cause. Hence, the productive sector must be at the heart of the new strategy.
Put bluntly, we must change what we produce, how we produce it, and who gets a say in these decisions. This requires not just new policies, but also the reconfiguration of existing ones.
Active labor-market policies designed to increase skills and employability should be broadened into partnerships with firms and explicitly target the creation of good jobs. Industrial and regional policies that currently center on tax incentives and investment subsidies must be replaced by customized business services and amenities to facilitate maximum employment creation.

Monday, June 8, 2020

Radical, but imperfect, markets

In the last issue of the Journal of Economic Literature there is a very critical review of the book “Radical Markets”. The review is written by David K. Levine and the book was written by Eric Posner and E. Glenn Weyl. The latter made a number of suggestions, with the flavor of a “progressive” Chicago School, that claim that would solve some of our biggest problems by expanding markets in property, the use of data, democracy, immigration and investment.
Last year I also wrote a book review, in Spanish, of the same book, which I found interesting to read. I strongly recommend to read both the book and the review. Next I translate part of the review that I wrote, because it basically agrees with Levine while adding a few more comments.
All of the proposals in "Radical Markets" face such practical challenges that the probability of their massive use to alleviate the problems they are intended to address is very low. Some objections that could be raised include the following:
-The authors do not take into account the cognitive limitations of individuals, and generally forget the contributions of behavioral economics (also related branches such as the contributions of Bowles or Ostrom on cooperative capacity or social norms to solve collective problems). For example, the quadratic voting mechanism takes as given the preferences of voters and the mechanisms established to set the political agenda, when precisely much of the political competition takes place to shape these preferences and this agenda.
-It omits the difficulties that can be posed to the recipes offered from the point of view of the political process that could lead to them, due for example to the opposition of those who benefit from the current status quo. A challenge for the implementation of one of the proposals is how to make the big information multinationals pay for our data without global regulation, and how to get there from the current fragmented institutional configuration.
-The authors' analysis, based on mechanism design, omits any reflection on complexity / evolution. The great advances or setbacks of humanity have taken place less by the action of academic designs and more by the complex evolution of mechanisms of social mobilization. Although the authors admit, with a small mouth, enormous difficulties in adopting their proposals, the truth is that they somewhat underestimate the more than probable difficulties, unintended consequences, role of uncertainty, etc.
-In the book some fanciful claims are made, such as that inequality within developed countries is the “most significant problem of humanity”. For a book that tries to present radical proposals that address the great problems of the present ("our solution to the current crisis is to radically expand markets," say the authors), avoiding the problem of climate change is somewhat curious.
An interesting aspect of the book is the importance that the authors give to the role that technology can play in the application of these recipes, especially by putting in immediate contact the different parts that operate in a market. However, while the idea that we do not take full advantage of new technologies is convincing, it is no less true that not all people at the moment have access to innovations that would allow an expansion of markets like the one they envision.
The “stagnequality” (high inequality compatible with low economic growth) that the authors denounce is undoubtedly partly due to a deficit of ideas (rather than physical or technological difficulties). The exploration of institutional niches is necessary, but existing institutions have been the result of complex evolutions rather than academic designs. Although undoubtedly the contributions of good economists (dead, Keynes said, but perhaps also alive) can also help to shake the world.

Monday, June 1, 2020

Will the friendliest survive?

Some days ago, Stephen Sackur interviewed Rutger Bregman in the BBC program "Hard Talk," about his new book "Humankind: A Hopeful History." I would have liked to rush to buy it online from my favorite local book store, but some weeks ago it disappointed me being totally unable to process an on-line transaction. So I have to confess that I went to Amazon, and in a few seconds I had the book in my Kindle.
The book is a sequence of examples of evidence that in human nature, the friendly cooperative side dominates our violent instincts. It is precisely our cooperative, friendly nature, that has provided our species an evolutionary advantage over some competitors. According to Bregman, the Neanderthals were probably more intelligent, but they were less friendly, and therefore less able to socialize and cooperate, at a moment in time where doing things together was crucial. Some well-known stories that were well established in the history of science as proof that humans are prone to conflict and collapse, are challenged by the author with more recent evidence. For example, it is most probably not true that the Easter Island society collapsed due to an ecological and social conflict endogenously self-inflicted by humans, as explained by the polymath  Jareed Diamond in his book "Collapse." Apparently, Easter Island never had a very large population, so there was not much to collapse from, and probably its ecological crisis was due to natural phenomena. The Robbers Cave experiment, an experiment directed by a social psychologist in the 1950s in the US where summer camp children showed the dangers of tribalism (and that I explain to my students in my course on Soccer and Economics), was probably manipulated by its author. In wars, soldiers in the field show much less aggressive behavior than expected.
Other things mentioned in the book we already knew, like for example that the "tragedy of the Commons" suggested by Hardin is not inevitable, as shown by the field research of Nobel prize winner Elinor Ostrom. Or that intrinsic incentives are very important, and sometimes may be crowded out by extrinsic incentives. These two things I do teach them to my students.
Of course, where Bregman has more difficulties is in explaining why humans, in spite of our friendliness, have incurred in phenomena like ethnic cleansing or the Holocaust. His explaination is that friendliness is more easily shown to our group members. But then he provides no clue about what defines the group, and why if the group extended from the family, to the tribe, and then the nation of strangers, why it cannot be expanded to the whole human group or beyond.
There is no doubt that our cooperative side has been overlooked, and that institutions should be designed to extract the best from humans. That's the main message of the book, although there is little detail on how to do it. And when there is detail, it is unconvincing. For example, the participatory politics of some Venezuelan or Brazilian municipalities, clearly must have had a difficult time scaling up, if we look at the dismal condition of the two countries at the moment. Between our cooperative genes and our selfish genes there is most probably a polycentric equilibrium (several types coexisting), and the difficult but key challenge is to create the conditions for our cooperative side to dominate and become dominant in the overall population of types. The next crucial stage of this battle will be the November presidential election in the US.

Sunday, May 31, 2020

National-Populism (and much worse) is this

In the middle of a revolt and civil unrest after the assassination of another African-American citizen by the police, after failing to provide leadership and national management in the worst pandemic in decades, Donald Trump called a press conference two days ago where he only talked about China... It is one of the best illustrations of national-populism that one could find. For a national-populist leader, it is imperative to find a scapegoat, especially when problems escalate and one does not have a solution, nor the will to look for one.
Of course, Trump is much worse than a national-populist, but the nationalist and populist components are key dimensions of the catastrophe that is unfolding in front of everybody. These components are the foundation on which he can build worse things such as the contempt for institutions, conventions, the media or democratic rivals, or the potential refusal to admit defeat if he loses the November presidential election, as suggested by New York Times columnist Roger Cohen.
National-populists have no passion for honest government. In fact, they do not govern at all. As Robert Reich has argued in an article in The Guardian, Donald Trump is not governing: his divisive tweets are no substitute for government.
Riots do not develop out of thin air, everybody knows this in general, and in the US in particular in the context of racial discrimination. But in these days of discord, the US president fans the flames, instead of providing leadership and calm. Trump even threatened White House protesters with "vicious dogs and ominous weapons." All this is very disturbing, and all decent people in the world should desire that it ends in November. For it to end, I believe it is also better that any kind of violence ends, even if violence is understandable from those that suffer violence and that see for ages no response to their non-violent protest. But violent protest will make it easier to resort to a "law and order" rhetoric, which is probably the only hope that Trump has to have any chance of winning the November election. When the other party cheats in a contract, it is wrong and counter-productive to do the same, the only hope comes from restoring the institutions of a decent social contract and make them work in favor of deep reforms.