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Thought leadership

June 17, 2020

30-second reviews

We review insights from behavioural economics books to reconnect you with useful things you might have already read – and help connect those ideas to investor behaviour.

Good Economics for Hard Times by Abhijit V. Banerjee and Esther Duflo

For some reason, reading Good Economics for Hard Times feels like taking a vacation. One definition of “vacation” is leaving something one has previously occupied. Consider where we have been in the past three decades with our attempts to be informed. The pre-internet news model once delivered packages of stories to everyone based on an accepted formula: novelty, politics, celebrity, controversy and tragedy. With media concentration and specialization, news has given way to opinion (news with extra seasoning). At the same time, with media democratization, expertise has given way to “influence.” Each stage in this changing of the guard has represented a decline in the role of critical analysis. And the latest stage, made-up nonsense calculated to misinform, is the cynical outcome.

Good Economics for Hard Times is a refreshing trip in the opposite direction of this info trend. Banerjee and Duflo, a married couple from MIT who won the Nobel Prize in Economics in 2019, explore difficult subjects in a nuanced fashion. They cover migration, global trade, GDP growth, climate change and displacement of human employees by machines. They also look at wealth taxes and universal basic income. In sum, they write about what were considered the biggest economic issues prior to COVID-19.

As was the case with Duflo’s Nobel acceptance speech, the book begins by acknowledging the low level of trust people have in economists. In fact, according to a UK poll in 2017, economists were the second-least trusted professionals, only ahead of politicians. The authors offer a number of reasons for this lack of trust: economists are social scientists, so strong conclusions are hard to come by. In addition, economists in the media often attempt to forecast growth, which has a spotty record in terms of accuracy.

They counter this negative perception with humility. In their chapter “Make Economics Great Again,” they write that economists should not be compared with engineers. “Economists are more like plumbers; we solve problems with a combination of intuition grounded in science, some guesswork aided by experience, and a bunch of pure trial and error.”

Drs. Banerjee and Duflo use both natural and controlled experiments to inform their views throughout the book. For example, they look at the impact of migrants on the wages local workers in Denmark. From 1994 to 1998, Denmark had a unique policy of settling migrants according to areas in the country that had public housing available and administrative capacity. This created a random sample of areas that received migrants to compare with ones that had not. After 1998, new migrants generally settled where their co-ethnics were already living. Comparing the evolution of wages and employment of natives in cities that received more migration to those that received very little, there was no evidence of negative impacts.

One of the most interesting chapters for investor-readers is titled “The End of Growth.” The authors explore what makes GDP growth elusive in mature economies. They look at the balance between capital and labour in countries; investment in infrastructure; total factor productivity; and the drivers of innovation. They also look at developing economies, to try parse out the growth predictors.

In the end, the discussion is short on easy answers. Theories are presented and their limitations exposed. At the chapter’s close, Banerjee and Duflo warn readers to be wary of “any policy sold in the name of growth, because it is likely to be bogus.” Their chapter title, “The End of Growth” is a play on words, as they advocate for a broader approach to a society’s well-being beyond GDP growth. This warning about over-reliance on a single measure is reminiscent of the statistics lesson about a billionaire joining a party. Immediately, everyone at the party becomes, on average, a billionaire. However, the median hardly budges.

Do you have questions or comments about the books we review? Send us a note to keep the conversation going.

This document is published by Sun Life Global Investments (Canada) Inc. and contains information in summary form. This document is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Sun Life Global Investments (Canada) Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

© Sun Life Global Investments (Canada) Inc., 2019.

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