The Economist: look around you
Three Americans received the Nobel Prize in economics this year. One half went to David Card (University of California, Berkeley) “for his empirical contributions to labor economics”, and the other half was awarded jointly to Joshua D. Angrist (Massachusetts Institute of Technology) and Guido W Imbens (Stanford University) “for their methodological contributions to the analysis of causal relationships.
Put simply, these economists have demonstrated the value of observing the world around us and in doing so have really changed the way we think about solving social problems, with profound implications. Each year, the Royal Swedish Academy of Sciences awards the Prize (formerly the Sveriges Riksbank Prize in Economics in Memory of Alfred Nobel) in recognition of ideas and research that enhance our understanding of important issues in economics and in related fields.
I’ve often said that a problem with economics is that unlike traditional science, you can’t put economics in a lab and test the results under varying conditions. However, the work of these researchers has improved our understanding of the best available alternative – “natural experiments”.
Natural experiences occur when one part of the economy or society (such as a specific country or state) is, for some external reason, treated differently from others. By studying the results under various conditions, it is possible to make valid inferences. For example, a country may pass stricter immigration laws than its neighbors. If we carefully analyze the situation using appropriate methods, we can decipher the knowledge regarding the effects of such policies.
David Card has studied the effects of minimum wages, immigration and education. His analysis during the 1990s challenged accepted thinking of the time through findings such that increasing the minimum wage does not necessarily lead to fewer jobs and that the incomes of people born in a country can benefit from further immigration (although those who arrived earlier could be negatively affected).
Joshua Angrist and Guido Imbens worked to solve methodological problems with natural experiments, helping to develop ways to use them to more precisely isolate cause and effect. This better understanding makes it easier to use such an experience to answer questions such as the optimal school years for future success. I should mention that another great thinker and former Assistant Treasury Secretary Alan Krueger worked with these three on their foundational efforts and likely would have shared the honor had he not suffered a tragic death in 2019.
Looking around us at what is going on in the economy can teach us a lot. I have often used this approach. While we cannot put the economy or society in a laboratory, we can observe situations where the world offers us the next best thing and draw conclusions with implications for policies aimed at improving prosperity for all. Be careful!!
Dr. M. Ray Perryman is President and CEO of The Perryman Group (www.perrymangroup.com), which has served the needs of more than 2,500 clients over the past four decades.