A Nobel prize in economics for demonstrating the hubris of economists

I had not really heard much about Esther Duflo, the first female Economist to win the Nobel prize in Economics, but I really enjoyed this Planet Money Q&A with her and learning about her work.  Basically, what she seems to have done is shown to other Economists what the rest of us social scientists have long known– there’s very much a limit to the power of financial incentives and many other factors which shape human behavior in economic realms.  From the Q&A:

One of the central themes of the book is that financial incentives are generally not as powerful as economists have traditionally assumed. You point to all sorts of empirical studies in which people don’t rationally respond to incentives like traditional economic models say they do. Does that mean we should reject models that put financial incentives front row and center?

Certainly, it means revisiting them in a big way. For example, on the effects of international trade. If people reacted very well to financial incentives, when they lose their jobs, they will pick up and move to some other place with better job opportunities. But in a world where people do not react so well to financial incentives, then they might not move. And if they don’t move, then there is not going to be a natural adjustment to all of the disruption caused by international trade. And that, in our view, explains why the places that were hit by competition with China — what economists call “the China Shock” — got hit so badly. It’s because people didn’t move. They just stayed there and waited for things to get better.

Economists completely underestimated how hard it is for people to make this kind of transition. There are economic factors, of course, like the difficulty of selling a house or getting someone to take care of your kids. Purely rational things. But some of this has to do more with the vision people have of themselves. If you’ve been making furniture for 25 years and that job goes away, it’s not going to be easy to just become a janitor. The image of yourself is completely shattered. You might rather go on disability or something like that.

About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

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