Sunday, April 26, 2020

Economics after COVID-19

During and after the last global financial crisis, there was a lot of soul searching among economists, and although the reaction was slow and far from universal, some fruits have emerged from that. A higher concern for inequality, a turn to more empirical methods (facilitated by technology), new pedagogical projects such as CORE, and more dialogue with other disciplines.
I do not remember well what happened in the early days of the crisis in 2008, but now perhaps because there is even a more intense use of social networks (because of technology supply but also because of technology demand in lockdown), many economists are hurrying to provide very early analysis of what is happening, predictions of what will happen, and prescriptions about what should be done. The dangers of research in a hurry are well-known. That is precisely why the production process of research is slow. Researchers need to work parsimoniously, and their work must be assessed by qualified peers. When work is screened and published, debate continues and others elaborate on previous work, or forget it, or demolish it because there were unspotted mistakes or unlooked at factors.
Three months ago, economists did not know anything about COVID-19, but some of them are now telling anyone who listens why some countries are more affected by the pandemic than others. Besides cross-country regressions being quite a thing of the past (among other things because countries are rarely a good unit of analysis, except for the fact that data is collected at the national level), it is quite likely that if one still wants to run a regression with the most talked about variables on the right hand side of the eqation, these variables would only explain a small part of the variation, and most of the variation would be random.
That is not to say that we should not do empirical work. I am sure that many people are doing very good empirical work, the results of which will not be known in months, perhaps years. Some people are learning from past pandemics, and that is a good idea. It would not be wrong if we correct a little bit the unbalance of the last years and we also have a look at good theoretical work. Jean Tirole and his co-authors have very good recent theoretical work on social norms and narratives, which may be useful in the difficult years to come.
We should not rush to completely change what we were doing, but instead keep working on the new things that emerged from the previous crisis. Perhaps then we will not only help society stop the crisis (what happened the last time), but we will also learn to build societies with more solid foundations (stronger and more cooperative governments that fight inequality, climate change and health hazards).
The recent article by Bowles and Carlin in VOX-CEPR suggests that the study of mechanisms of resource allocation beyond markets and governments (such as communities or civil society) deserve attention. A paradoxical result will perhaps be that the scientific method has taught us that values, social norms and narratives are a key ingredient to build a more sustainable society, although the use of the scientific method in economics was based on the idea that value judgements should be avoided.

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