Via Financial Times

By awarding the Nobel memorial prize for economics to three pre-eminent researchers on the causes and remedies for poverty, the Royal Swedish Academy of Sciences has not just honoured a particular body of academic work but given a shot in the arm for the broader standing of the economics profession itself.

The failure to foresee the financial crisis as well as the neglect of growing inequalities for a long time has reinforced an image of the academic economists as so many Panglosses too caught up in their own otherworldly models to see the world as it is.

There is little in economics that is more immune to that charge than the poverty research of Abhijit Banerjee, Esther Duflo and Michael Kremer, this year’s laureates.

The very fact that the research being honoured is on the nature and causes of poverty demonstrates that economists have not forgotten about humanity’s fundamental economic problem — how to feed, clothe, and shelter itself and acquire other basic necessities of life. The problem has mostly (but not entirely) been solved in the advanced economies, but the existence of development economics, to put it tritely, shows that economists care.

Good economists also care what works. Mr Banerjee, Ms Duflo and Mr Kremer are being honoured for a long series of field experiments, or studies carried out in real but carefully controlled conditions to measure credibly what sort of policies can make a difference to poverty and related outcomes.

They have taught us, for example, that education in poor countries is not always held back by lack of resources but rather by the failure to adapt teaching to individual learners’ needs; they also showed that temporary fertiliser subsidies did more to encourage poor farmers to improve their productivity than permanent ones.

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Their work reflects two very healthy tendencies in economics over the last few decades. The first is a strong empirical turn: the cutting edge of research has shifted from ever more sophisticated theoretical modelling to — also sophisticated but ultimately more useful — measurement of what happens in the real world.

At the same time, the laureates’ experiments are deeply anchored in theory, seeing the poor as autonomous decision-makers who are nevertheless constrained by institutional, informational, monetary and even cognitive limitations from doing what best could improve their condition. Their research seeks to learn how policy might relieve those constraints.

The second is a methodological openness, including to learning from other fields, which stands in constructive contrast to the more imperious attitude theoretical economists have at times displayed. The use of randomised controlled trials to simulate laboratory experiments in real-life settings draws on practice from medicine, agronomics and some of the “softer” social sciences.

These methodologies are not without critics within economics, of course. For example, Angus Deaton, as good an economist as any and himself a Nobel laureate, has criticised randomised controlled trials. But that economics is having this methodological debate is a sign of health.

A well-deserved cloud of doubt still hangs over the public’s confidence in economists’ ability to help us understand the biggest problems we face, let alone find ways to remedy them. The message of this Nobel is that economics has the wherewithal to dispel the clouds.