By Darim Al Bassam
Economists are not innocent people. The 2008 financial crisis that almost sent the world economy into a great depression was, to a large extent, a consequence of the designs dreamt up by leading economists. This raises three concerns about the prevailing economics profession. The first is a basic moral failure resulting from a lack of integrity in some of its prominent representatives; the second is the idiotic collective fascination with the technicalities of the discipline, reinforced by an inclination for group-thinking; the third is a deeper, intellectual challenge that questions the very role economics ought to play in society.
The global crisis 10 years ago challenged much conventional wisdom and academic orthodoxy with respect both to theory and policy. The failure to predict or explain the financial collapse and recession has put neoclassical economic thinking in the dock. In the real world, economies are not static and geared towards equilibrium; they are dynamic and in constant flux. New economic thinking was needed and that need has been extended and amplified through the succeeding years.
But, what constitutes “new economic thinking?”
I closely follow up and benefit from the work of the Institute of New Economic Thinking that was established after the financial crisis at Cambridge University. They identify four pillars of “new economic thinking” that are ready to hand as markers:(a) Recognition that economic and financial decisions are necessarily made under varying degrees of uncertainty with respect both to their direct consequences and, more broadly, to the future environment in which those consequences will be realised. (b) Explicit effort to (re)integrate economic and financial studies – both theoretical and empirical – all the way up and down the structural hierarchy of society. (c) Reinstatement of the distribution of income and wealth as core subjects of economic and financial analysis, and (d) Taking history seriously: “thick” history that reaches beyond quantitative data to take account of the evolution of the social and political and cultural contexts which condition economic and financial experience.
In fact, three schools of thought are emerging in the new economic thinking: (a) complexity, (b) evolutionary and (c) behavioural economics.
Complexity, evolutionary and behavioural thinking in economics, puts strong emphasis on dynamics, adaptation, psychology, disequilibrium and innovation. In all of them the agency of microeconomics come to the fore, ie the level that influences the structural macroeconomic modelling and encompasses a range of creative approaches to capturing the way human beings actually make decisions.
This year the Swedish Academy of Sciences awarded the “Nobel Prize” in economics to three micro economists from MIT and Harvard for “their experimental approach to alleviating global poverty. The trio, Abhijit Banerjee, Esther Duflo and Michael Kremer, have been at the forefront of empirical economics, pushing the use of research technique named the Randomised Control Trials (RCTs) to test aid effectiveness. The three are labelled as the leaders of the Randomista movement in development economics.
For those who are not indulged in empirical research, I would like to elaborate that RCT is a method used usually as comparative testing technique that divide the sample into experimental and control groups to observe what works and doesn’t work in development projects as the testing’s findings show. But the question that it is widely raised now: can we consider this simple technical functional method a major weapon to fight global poverty as was declared in the Noble prize statement? For those the experimental economists in the academia and for those practitioners who work in the development field, the answer is a strong NO.
Seemingly the narrow focus of the Prize selection committee is on (methods) in the field of development economics, rather than on (insights) in theory and policy alternatives. With no external validity asset, the RCT wide scale application in impact evaluation, has developed into a tool-driven profession, where the tools determine the types of questions that are possible to ask as well as the type of analysis possible to carry out.
Looking inside the black box of an impact evaluation can throw useful light on its external validity. This will often require information external to the original evaluation design of the RCT or similar tools.
The prize award to the trio was disappointing to many quarters. A broad section of commentary, particularly from the Global South, has puzzled over the Noble Committee’s decision to not only reward an approach that many consider as suffering from serious ethical and methodological problems, but also extol its virtues and supposed benefits for poor people.
More loudly, an open letter addressed to the noble prize committee after the announcement and signed by prominent economists headed by the renowned economist Richard Jolly at the Institute of Development Studies at Sussex argued that the 2019 economics prize reveal the poverty of the modern mainstream economics discipline.
The chosen RCT micro economic technique, in their opinion, remains poor in terms of methodology and epistemology, having only one of each, because quantitative analysis always trumps qualitative or mixed methods, and debates outside the narrow orthodox frame are relegated to ‘heterodox’ economics. And the method remains poor in terms of compassion and insight.
For them, a progressive economics for the 21st century would ditch the behaviourist way of thinking and methodology, and open itself up to the political, social and cultural questions about what causes poverty and inequality. Real discoveries await the ‘poor’ economists who reject the narrow frame.
More importantly, in an open letter to the Guardian Online in August 2018, fifteen leading economists from all around the world, including Noble Prize winners Joseph Stieglitz and Angus Deaton argued that relying on randomised control trials (RCTs) to guide aid spending on poverty will lead to short-term, superficial and misplaced policies.
At first glance, they say, this approach might seem reasonable and even beguiling. But it is a reductionist technique that tends to ignore the broader macroeconomic, political and institutional drivers of impoverishment and underdevelopment.
Aid projects, for them, might yield satisfying micro-results, but they generally do little to change the systems that produce the problems in the first place. What we need instead is to tackle the real root causes of poverty and inequality. Global poverty remains intractable: more than 4bn people live on less than the equivalent of $5 a day, and the number of people going hungry has been rising. Important gains have been made in some areas, but many of the objectives set by the year 2000 millennium development goals – to be reached by 2015 – remain unfulfilled. All this is happening despite hundreds of billions of dollars of aid.
People of the south deserve better, the open letter says. The sustainable development goals that world leaders agreed upon in 2015 hold both northern and southern countries accountable in achieving the 2030 Agenda .They acknowledge that our crisis is a collective one: that fighting against poverty, inequality, biodiversity loss and climate change requires changing the rules of the international economic system to make it more ecological and fairer for the world’s majority. It’s time that we devise interventions – and accountability tools – appropriate to this new frontier.
RCT as a method can only even pretend to any importance if either (a) one interprets the development in a narrow way as achieving specific, low-bar, targets or (b) one takes the view that “national development” is completely beyond the influence of ideas or evidence.
As a UN international career expert and as a practitioner in the field of development planning for almost four decades, I am aware of the short falls of empirical methods like the RCT and similar ones for Impact Evaluation. The impact of such methods (RCT or otherwise) on national development (or sector wide reforms) is vanishingly small.
National development that usually include a national poverty eradication policy framework, is a four-fold transformation of an intrinsically social grouping to higher levels of capabilities in such dimensions as follows: (a) an economic transformation from lower productivity to higher productivity and equitable development; (b) an inclusive political transformation to governments more participatory, accountable, and responsive to the broad needs and wishes of different social groups, mainly the poor and the impoverished, (c) an administrative transformation to organisations (including those of the state) with higher levels of functional capability for implementation, and (d) a legal transformation to a just social contract based on human rights and entitlements and on more equal treatment of the citizens of the country (usually with a sense of common identity and, to some extent, shared purpose).
But I never one day ruled out the importance of bottom-up micro economic research work required for the formulation of evidence-based macro level national development policies and plans. I am a believer that insights from behavioural economics offer important policy tools that can be used to make macroeconomic modelling more accurate in their forecasting and in scenario building.
Put differently in national development policy formulation, these behavioural insights (like behaviour of consumers from various ranks of society) provide better predictions of the conditions under which policy interventions could work, and of the mechanisms leading to behavioural change or to unintended ‘behavioural spillover’ effects.
Based on my field experience again, I argue that Agent-Based Modelling (ABM) techniques can be one of the ways to go. ABM techniques, derived from the new generation of sociological and economic theories, simulate the social dynamics in the given societal context. It can make models more context-specific and allow the modeller to take into account the anomalies found in experiments. The core idea of the ABM modelling approach is a bottom-up modelling of the economic system to understand the system’s behaviour. It starts at the level of the units, characterises the behaviour of each and how they are interrelated. The aggregation of these individual behaviours simulated in software produces macro-level outcomes that can be referred to as emergent or bottom-up. An ABM can capture quantitative as well as qualitative factors and can also capture the complex interactions between the factors in an intuitive way (at agent level).
Poverty, which the RCT method is claiming to investigate and solve, is the result of multiple rather than single sets of factors. It is a complex, dynamic phenomenon subject to both specific contextual factors and multiple interacting causes. Poverty is due to the interaction of complex social processes over time and include: poor nutrition and healthcare, low levels of education, insecure livelihoods, insufficiency of assets, cultural norms and social practices, risk and uncertainty, power imbalances and abuses, etc.
Creating an ABM of national poverty eradication plan not only helps to develop a deep understanding of the causes, effects and dynamics of poverty. Since the model is computer-based, it is also useful for simulating a wide range of scenarios and policies in view of determining robust policies that are effective over a wide a range of scenarios.
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