This year’s Nobel economics laureates have made the world a better place

This year’s Nobel Prize in economics, announced on Monday, was a ray of sunshine amid the prevailing media gloom.

The Prize was awarded for the work the new laureates had done on the alleviation of global poverty. This is one reason to be cheerful about it. Another is that Esther Duflo became only the second ever woman to win the prize, along with her close collaborators Abhijit Banerjee and Michael Kremer.

In addition, the winners have made important developments in how economists go about solving problems. These individuals are a key part of the drive to move economics on from an obsession with pure theory towards making it much more empirically-based.

At first sight, the award is very conventional. The laureates retain the basic view of economists: poor people are essentially rational agents, trying to take decisions which are in their own interests.

They may have much more difficulty in accessing relevant information than others, and face many more constraints on their ability to make the best decision. But they are just as rational as everyone else.

The similarity with tradition ends there. For the laureates’ main innovation is to introduce the use of randomised controlled trials (RCTs) into economics.

One hundred years ago, the British statistician Ronald Fisher was revolutionising the principles of statistical analysis. The maths that he developed enabled the testing of new medicines to become much more scientific.

The basic idea is to have a group of people who take the new drug and a group who do not.  The key thing is to assign them into the groups purely at random. This way, any difference in the outcomes of the group which was treated and the group which was not can reasonably be thought to be due to the impact of the drug.

Duflo and her colleagues, along with others they have inspired, have addressed a wide range of real-life policy problems in the developing world using the same approach, with hugely successful results.

Examples include discovering how best to get farmers to use more effective fertilisers, how to increase the uptake of safe water filters, how to improve patient safety in hospitals, how to spread advice most effectively about tuberculosis using community-based counsellors, and how to improve safety in public service vehicles.

The technique of RCT has even been applied in developed world settings. For example, experiments have been carried out with job applications, sending them out with names which strongly imply the ethnic background of the applicant and seeing if the response differs across groups. (It does.)

The approach of RCT is not without critics in economics, even now.  An important issue, for example, is that experiments are typically on a small scale, and there may be issues when they are scaled up.

But Duflo and colleagues, unlike some past economics laureates, have definitely helped to make the world a better place.

Paul Ormerod
As published in City AM Wednesday 16th October 2019
Image: Nobel Prize by Florian Pircher via Pixabay

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ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.