An award for certainty

Economics Nobel laureates this year have clear answers

The Nobel Prize for Economics was awarded on Monday to three economists based in the United States of America: David Card at the University of California Berkeley, Joshua Angrist at the Massachusetts Institute of Technology, and Guido Imbens of Stanford University, for their contribution to advancing the methods of economics. Professor Card’s Nobel citation noted his work in the field of labour economics in particular; with the late Alan Krueger, he had exploited differential approaches to minimum-wage legislation in two neighbouring states of the US to show that — contrary to the expectations of economic theory — raising the minimum wage did not necessarily lead to a decline in employment. The three laureates, taken together, essentially discovered the power of the “natural experiment”: An occasion when an external change to circumstances or policies could be used to clearly identify the exact effects of those policies.

It is usually said that economics is not a science. Unlike physics, or chemistry, it is hard to construct laboratories to demonstrate empirically the truth of theoretical propositions in economics. But that does not mean that the truth cannot be discerned if the correct methods are found. Profs Card, Angrist and Imbens specialised in discovering those methods. They, and the economists that followed them in various sub-domains of economics, would look for places where generally similar populations were exposed to different policies through a random series of events unrelated to the character of the population itself. This was a search for discontinuity — for sharp differences in policies applying to a generally homogeneous population. Then any effect that was observed could be said to be caused by the policy differences, and not by underlying differences in the population. This allows for economists to answer questions about the effects of policies with certainty.

A US president once joked he wanted a “one-handed” economist, because too many economists would say “on the other hand...” in order to avoid stating anything with certainty. The natural-experiment revolution in economics created an entire generation of one-handed economists. It had enormous importance for policymakers, especially in developing countries which were generally short of data. One recent natural experiment in India, conducted by Naveen Kumar of the University of Chicago, exploited the discontinuity between students in Karnataka who just made the cut-off in an entrance exam for the “model schools” set up by the Manmohan Singh-led government in 2008, and those who just missed the cut-off. There is very little difference in initial academic achievements and capabilities between a student who scores 50 in an entrance exam and one who scores 51. But if 51 sends you to a model school, and 50 does not, then differences in subsequent achievements can be ascribed to the better education received at the model school. Mr Kumar found that going to a model school increased the chances of passing tenth grade by over 5 percentage points, and of going to junior college by almost 12 percentage points. It also increased the likelihood of girls choosing the science track.

Economists, thanks to the innovations of this year’s Nobel laureates, could firmly answer an otherwise vexed question: How much would a little extra investment in education help increase outcomes? Getting policymakers to listen to the truth can be harder. The model schools programme, positive outcomes or not, had its funding delinked from central assistance in 2015 following the 14th Finance Commission’s recommendations.