Nobel Prize in Economics Breaks New Ground

Popular Economics Weekly

STOCKHOLM (AP) — The 2019 Nobel Prize in Economic Sciences has been awarded Monday to Abhijit Banerjee, Esther Duflo and Michael Kremer “for their experimental approach to alleviating global poverty.”

It was ground-breaking for several reasons. Firstly, the Nobel committee is recognizing that the field of economics is finally becoming more science than social science by championing empirical field research, rather than purely academic research that was conducted mostly in ivory towers with mathematical formulas.

For instance, Prof George Akerlof, one of three that won the 2001 Nobel Prize, was the first of several so-called behavioral economists to win for his research on how individuals actually make financial decisions. He proved that humans don’t always act rationally in their best interests without institutional safeguards, such as Lemon Laws that prevent faulty used car sellers from putting new car dealers out of business.

Though the proof was done with mathematical formulas, it began the ongoing divorce from what was originally called Political Economics. What else to call it when one major branch of microeconomics was under the assumption that investors and wage earners actually acted in their own best interests in a level playing field without government oversight, yet never was validated with actual results?

The lines had been drawn between conservatives that advocated Adam Smith’s pronouncement that free, mostly unregulated markets with low taxation would remain healthy of their own accord and were the best way to maximize prosperity for all; with the Keynesian, New Deal economics of progressives that wanted governments to discipline capital markets for their excesses.

These opposing viewpoints on how human beings made financial decisions were based more on political choices than actual scientific research on financial behavior until research in other fields, such as psychology were brought into economics.

Hence this new approach is called ‘experimental’, because it prioritized actual field work using scientific methods to improve the lives of the poorest in developing countries. What did they discover?

“The Laureates’ research findings,” said the Nobel Prize announcement, “– and those of the researchers following in their footsteps – have dramatically improved our ability to fight poverty in practice. As a direct result of one of their studies, more than five million Indian children have benefitted from effective programmes of remedial tutoring in schools. Another example is the heavy subsidies for preventive healthcare that have been introduced in many countries,” (that made preventative healthcare accessible to the poor).

It looks like this is becoming a worldwide movement to alleviate poverty and income inequality in developed countries as well, such as the U.S. of A. that has been lagging other developed (and underdeveloped) countries in improving the lives of our poorest citizens—thanks in large part to Big Business’s proclivity to maximize profits over every other corporate goal.

One example of this trend: JP Morgan Chase CEO Jamie Dimond announced in August a Statement on the Purpose of a Corporation by the Business Roundtable, a group of almost 200 large businesses, in which they “share a fundamental commitment to all of our Stakeholders”.
“While each of our individual companies serves its own corporate purpose,” said Dimond, “we share a fundamental commitment to all of our stakeholders. We commit to:

• · Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
• · Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
• · Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
• · Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
• · Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

It remains to be seen if corporate behavior--that is in large part responsible for the record income inequality we see with the globalization of market forces--actually changes. But this award shines a light on what can happen when the Economic Sciences begin to follow the rules of scientific discovery, rather than the Political Economic verities of old.

Harlan Green © 2019

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