This year’s Nobel Prize goes to economists who think like engineers
Engineers and economists use equations and mathematical models. They have that much in common. But engineers check their mathematics against reality, and modify their equations accordingly. Economists however, particularly microeconomists, don’t let themselves get mugged by reality: if they don’t have data they make stuff up, or with brash confidence they draw dimensionless lines on whiteboards demonstrating that nationalised health insurance leads to under-supply of health care, or that mandated minimum wages lead to higher unemployment.
This year’s Nobel Prize in Economics has been awarded to three economists – David Card, Joshua Angrist and Guido Imbens – who have defied this tradition of reliance on abstract models. They have relied on empirical studies to test economic assumptions.
While engineers can draw on laboratory tests to check when things start to break or burn, there are certain ethical and practical limits to using empirical studies in economics. One cannot drive a sample of people to the point of starvation to check the threshold of one’s willingness to work, for example. But the world provides plenty of natural experiments which can be analysed with the help of computing techniques to analyse data. The United States, with 50 different states with different laws on schooling, taxes and minimum wages, is a ready-made laboratory for those who want to study the effectiveness of different public policies.
The ABC’s Gareth Hutchens describes how these economists’ work blew away the myth that high minimum wages cause unemployment: Lift the minimum wage and employment still rises? How to anger the establishment and win a Nobel Prize. They used data from two adjoining states, New Jersey and Pennsylvania, as their source. John Hawkins of the University of Canberra, writing in The Conversation, describes how these same findings have helped turn around the established views on minimum wages in institutions such as the IMF: Introducing David Card, the 2021 Nobel Prize in Economics winner who made the minimum wage respectable. The Economist covers the prize winners’ same work on minimum wages and describes another natural experiment, again drawing on regulatory differences in US states, demonstrating huge economic returns from one extra year of schooling: The Nobel prize in economics celebrates an empirical revolution.
Why is there an energy crisis?
Coal shortages in China, empty gasoline pumps in the UK, a national blackout in Lebanon and soaring world gas and coal prices, will probably evoke an “I told you so” from defenders of the fossil fuel industry: it’s all evidence of the unreliability of renewables.
Lurion De Mello of Macquarie University has a concise explanation of these developments in The Conversation: Suddenly we are in the middle of a global energy crisis. What happened?
In part it’s about corporations, infected by the curse of just-in-time stock management, having been caught short by the speed of the post-pandemic recovery. In part it’s about weather events in Europe, Brexit, and the problems of a failed state. And more basically it’s about what is now a worldwide problem: an unavoidable period between fossil fuel plants closing and more renewables coming on stream. Had policymakers been less captured by fossil fuel lobbies they would have paved the way for a smoother transition to renewable energy, particularly in developing long lead-time pumped storage projects. But a smooth transition was the last thing the fossil fuel companies wanted because it would have deprived them of the opportunity to hike prices in the transition period.
That period will be short, and when it ends it could end suddenly, because these high prices will spur on renewable projects. With Australia’s dependence on coal and gas in our exports, are we ready for the inevitable fall? Has the Morrison government, with its policies crafted in terms of finding another “narrow path” to victory in 2022, even started to think about it?
Where is globalization heading?
Well before the pandemic hit the world, economic, political and technological developments have been re-shaping the nature of global trade.
In a 48-minute session with Graham L Slack, Chief Economist of Maersk, Harvard’s Dani Rodrik describes these developments: Maersk trade talk: the future of global trade. Rodrik identifies two waves of globalization: the first, the Bretton Woods consensus, was directed to the interests of member states; the second, which he identifies as hyper-globalization, saw domestic economic policies becoming subservient to the demands of global finance and commodity markets. This second order is no longer functional politically or economically, neither in “emerging markets” nor in “mature markets”.
Countries have to shape their economic policies around a more nuanced understanding of the global economy rather than reliance on simple prescriptions such as reliance on free trade, or ruling out pursuing industrial policies. The doctrine of comparative advantage is too simple a basis on which to build a trade and industry policy.
What happened to the land of the long weekend?
Last week, in Pearls and Irritations, Peter Sainsbury called for more public holidays. “Let’s have more public holidays focused on the environment and social solidarity because if we’re going to get out of the pickle we’re in these are the things we need to nurture” he wrote.
So what has been happening over the long term, and how do we compare with other countries?
Our World in Data has a marvellous set of interactive charts in its article Working Hours, and it shows Australia in a poor light. Go to the chart “Days off from work for vacations and holidays”, where it shows 130 years of data for a handful of countries. You will need to add Australia (the “+ Add country” tab), and when you do it shows a grim picture. At 32 days a year we’re a laggard: only the United States (20 days a year), notorious for its lack of decent annual leave, is doing worse out of the countries on the chart. At the other end of the scale is Germany whose workers enjoy 43 days off.
However you look at the data we come out poorly. The first chart “Annual working hours per worker” puts us in the second-worst place out of the 7 countries shown. We’re pipped for the last place by Americans, who work 26 more hours than we do, while the Germans, for all their talk about Arbeit, clock up 377 fewer hours a year than us.
To get some clues about what may be keeping us bound to the workplace, scroll down to the section “Working hours and prosperity”, and start with the chart “Annual working hours vs labor productivity”. There you will see a neat inverse relationship, pretty well in line with economic theory: countries with higher productivity have fewer working hours. (We can argue about the direction of causality, but the most compelling explanation is that if we’re working smart enough we can relax a little.) But Australia lies just next to Italy on that chart: most other western European countries are in the high-productivity/low working hours corner.
The following chart on the site, “Productivity per hour worked” also puts us in a poor light. We’re ahead of the UK, but that isn’t much of an achievement. We’re a long way behind most “developed” countries, but if you roll back a few decades you will see that we used to be near the front of the pack.
Working harder, not smarter.
What happened to the land of the home owner?
Perhaps some of the older and better-heeled readers of these weekend roundups have helped their children get a break into the housing market, but as Peter Martin writes in The Conversation, not many people can rely on the bank of mum and dad: As home prices soar beyond reach, we have a government inquiry almost designed not to tell us why.
He writes in the context of the present parliamentary inquiry into “housing affordability and supply”, but he points out that in fact the inquiry’s terms of reference are simply about supply, even though supply isn’t really a problem. It seems to be an inquiry ducking a hard issue (affordability) by focussing on a non-issue (supply).
On affordability the Reserve Bank, in its submission to the inquiry, points out that the cost of servicing a home loan hasn’t changed much, and rents in Sydney and Melbourne have fallen. All is OK according to the RBA. That’s because of low interest rates (but interest rates will rise some day).
Martin stresses the need to distinguish between affordability – the financial burden once one is paying off a loan – and accessibility – the cost of getting into the market with a deposit or bond. That’s the issue ducked in this inquiry.
A University of Labour
The 1970s saw a proliferation of business administration schools in the world’s universities, including in Australia. A few were (and still are) devoted to an understanding of the political economy of business, but for the most part they are training grounds for those seeking to advance to the corner office.
Partly in order to preserve some symmetry in education opportunities, and largely to help unions navigate their way through a changing world, in 1975 the Whitlam Government set up the Trade Union Training Authority, which led to the 1978 opening of Clyde Cameron College in Albury. Neither TUTA nor the Clyde Cameron College survived the 1996 change of government.
The Germans, however, are going one step further than TUTA, and have established the University of Labour in Frankfurt am Main – the heartland of German capitalism. In an article in Social Europe Tobias Söchtig describes its function and purpose: Why a new University of Labour?. Its curriculum is designed for a society where the creation of wealth is seen as a venture in which all stakeholders are engaged.
Scientists are doing it tough. That’s a cost we all bear.
Science and Technology Australia has published its 2021-22 Professional scientists employment and remuneration report. Its survey of 1275 professional scientists paints a picture of precarious employment: almost two-thirds of scientists report that staff morale has declined over the last year; 71 per cent report fatigue at work; and one in four are working only on a fixed contract, usually of around 18 months.
In its press release accompanying the report Science Australia CEO Misha Schubert said “There’s a huge risk that many more of our brilliant scientists will hit breaking point and just walk away if we don’t fix this broken system of insecure work.” In fact compared with previous surveys, this survey finds that more scientists are considering leaving the profession.
Short-term contracts and the lottery of competitive grants do not make for good science. When scientists have to give up their science and take on other employment, or retire early, there is a huge write-off of knowledge and expertise accumulated over many years of private and public investment. There is also a harder-to-measure loss associated with talented young people choosing university courses such as finance, management and marketing, leading to secure but low-value employment rather than the precarious employment offered by science and engineering.
Also related to science policy is a work by a team of IMF staff: Why basic science matters for economic growth. Much of the neoliberal agenda has been about prioritising applied research and commercialization over pure research, but the authors find that “basic scientific research affects more sectors, in more countries and for a longer time than applied research. … Easy technology transfer, cross-border scientific collaboration and policies that fund basic research can foster the kind of innovation we need for long-term growth”.
There is interdependence between basic and applied research. For example it is hard to imagine the possibility of Covid vaccines having been developed so quickly without a foundation of many years of publicly-funded basic research.
IMF outlook – is there inflation ahead?
The IMF has published its October World Economic Outlook. It expects a slightly slower world economic recovery than in its previous reports, but its main message, in carefully-hedged statements, seems to be about inflation. It expects there to be a short-term bout of inflation associated with supply disruptions and recent rises in commodity prices. But it’s having two bob each way with its statement “Inflation risks are skewed to the upside”, noting that supply shortages could be enduring, rather than short-term. And it ends by including attention to inequality as one of its prescriptions for government policy.