Good Economics for Hard Times, Abhijit V. Banerjee and Esther Duflo

• Author: Kemal Dervis
• Position: Senior fellow in the Global Economy and Development Program, Brookings Institution.
• Pages: 63-63

BOOK REVIEWS

March 2020 | FINANCE & DEVELOPMENT 61

Facts for Change

ABHIJIT V. BANERJEE AND ESTHER DUFLO, two of

2019’s Nobel Prize winners in economics, start

their extraordina ry book by noting that people’s

core beliefs “are better predictors of their polic y

views than t heir income, their demographic

groups or where they live.” Subjective identities

increasingly tend to overpower more objective

predictors and ref‌lect growing polariz ation. In

the United States, for example, “in 1960 roughly

5 percent of Republicans and Democrats report-

ed that they would feel di spleased if their son or

daughter married outside their politic al party. In

2010 nearly 50 percent of Republicans and over

30 percent of Democrats reported such feelings .”

e authors set out to use what economists can

say with some certaint y to f‌ind common ground in

the great debates of our time, such as t hose about

migration, trade, economic growth, climate, and

social policies. ey use si mple prose to demonstrate

how rigorous economic thinking accompanied by

careful empirica l work can be brought to bear on

a myriad of concrete policy problems. e authors,

already very well k nown for their earlier work pro-

moting the use of randomized controlled trials in

empirical development economics, use thi s method

to shed light on many controversies that often rag e

with little or, even worse, misleading fac tual support.

roughout t he book they explor e many example s of

otherwise simi lar groups that dif‌fered only in their

exposure to exogenous events or dif‌ferent policies.

One example—visa lotteries i n New Zealand whose

applicants were from the same Pacif‌ic isla nd of

Tonga—reports that winners tripled their income

within one year of receiving a v isa, which supports

the conclusion that dif‌ferences in w ages are “caused

by dif‌ference in the location and noth ing else.”

e many randomized controlled t rial discussions

are placed in a wider context, however. e chapter

on trade starts w ith basic theory from R icardo’s

comparative advantage to the Stolper-Samuelson

theorem on the ef‌fects of trade on factor income.

e chapter on growth take s us from the Solow

model with diminish ing returns to Romer’s views

on spillover ef‌fects from innovation, which can

overcome diminishing ret urns for an economy as a

whole. For trade, once it is recognized that neither

capital nor labor reallocate s with the ease often

assumed, the predicted b enef‌its weaken. For growth,

the authors conclude that “despite the best ef‌fort s

of generations of economists, the deep mechan ism

of persistent economic growth remains e lusive” and

recommend a focus on poverty reduction using t he

insights from randomize d controlled tria ls.

e chapter on climate argues t hat warming

will have huge costs for poor countries closer to

the equator, but surprisingly says that “if t he world

warms by a degree centigr ade or two, residents of

North Dakota will mostly feel perfectly happy

about it”—ignoring other ef‌fects of climate cha nge,

such as extreme weather events.

e book is written with both ambition and rea l-

istic modesty. e authors hope that their critica l

scrutiny of narratives t hat are too “easy” will help

reduce polarization and a llow improved design

of specif‌ic policies based on sound evidence a nd

rigorous analysis.

KEMAL DERVIȘ, senior fellow in the Global Economy and

Development Program, Brookings Institution

Abhijit V. Banerjee and Esther Duf‌lo

Good Economics for

Hard Times

Hachette, New York, NY

2019, 403 pp., $25.98

Subjective identities increasingly

overpower more objective predictors.