Conversation
By: The Rsa
Tags: Distrust, Economist

Conversation

“What people are mobilised by is dignity. They want status and a place in life.”

Esther Duflo talks with Matthew Taylor about how economists can regain the public’s trust

Matthew Taylor: What was the core purpose for you and Abhijit Banerjee in writing the book?

Esther Duflo: We realised that many of the core debates that people were having in western Europe and in the US were fundamentally around economic issues, or at least issues that had a lot of economics in them, such as immigration, trade, or Brexit for that matter. Yet economists seemed to have no place in these conversations, and we thought we should try and do something about it. Not to give people answers necessarily, but at least to show a different way to reason about these things rather than just going at it with emotions and ideology. We wrote this book in the hope that the conversation could improve.

Taylor: One of the arguments you make in your book is that we have a pretty deep disposition to be biased against people who are not like us. And that just seems to be a human characteristic. On the other hand, it doesn’t take much for us to be snapped out of that; it is who we are, but it isn’t our fate.

Duflo: We are very quick to define the other. There was this experiment where kids were sent to an island and divided into two groups. These developed bonds and when the two groups were put back together they competed like crazy. That’s the bad thing: we’re quick to make friends and to define an enemy. But there are two hopeful messages. One is that it’s completely arbitrary who you decide your friends are and therefore it doesn’t have to be attached to a strong label like race or religion. The second is that when the children were faced with a challenge that required them to work together they overcame this animosity.

for many years economists sold people a bill of goods in terms of how simple things were

Taylor: There’s a lot in your book about wanting to use a sophisticated, progressive understanding of economics to counter polarisation. But you look around the world and you just think, people don’t seem interested in facts. So that is quite a leap of faith.

Duflo: I still hope that it is possible. The current situation is, in large part, the result of a failure of economists and, to some extent, the rest of the social sciences and intellectual class, in trying to communicate with the broader public.

Economists are the least trusted experts about their own field of expertise. There was a YouGov poll in the UK that showed 25% of people believe economists when they talk about economics. That’s the lowest possible level of trust save for politicians, who are not the most popular figures in the UK at the moment. We repeated the same survey in the US and we found exactly the same answer. People are not willing to listen to economists but they will listen to facts in other sectors; for example, they trust doctors and nurses. They even trust weather forecasters.

It’s not that people have abandoned reason in general. It’s more that economics has gone down an ideological path, taking the assumptions that power our models as assumptions that are true in the world, even when that isn’t the case. And frankly, for many years economists sold people a bill of goods in terms of how simple things were and where their self-interest lay. They said you have to tighten your belt because eventually it will come back to you in some form of trickle-down magic; naturally, at some point people said well, where is it? Where is the trickle-down?

It’s understandable that they have no interest in listening to economists. On most issues, economists and people entirely disagree. Sometimes it’s because facts are missing in a conversation and sometimes it’s because economists have a blind spot. What we’re trying to do in the book is to lay aside all-knowing expertise and say let’s have a conversation, let’s try to see what the facts are and then try to understand why the facts are the way they are.

Taylor: This sounds like an attempt to help save economics from itself. But what struck me reading the book, as a sociologist, was academic polarisation. No psychologist would ever have subscribed to the model of human motivation that economists struggled under for decades and is still the orthodoxy in economics.

Duflo: Some disciplinary strengths and approaches are fine to maintain, but I think it’s important for the disciplines to talk to and learn from one another. I’m a voracious reader, I trained as a social scientist more broadly and as a historian before becoming an economist. All of these disciplines would benefit from doing joint projects as opposed to just reading each other.

Taylor: You’ve been studying human behaviour in fine-grain detail for years now. What has surprised you?

Duflo: One of the core tenets of our work has been that we need to beware of intuition. Economists’ intuitions are usually wrong, as are most people’s. Whenever you have an intuition that something might work or make a difference, or people may behave this way or that way, you have to test it. That’s why we developed the method of doing randomised controlled trials. It gives you a strong test of whatever you want to find out. But you cannot always do them; in the book we rely on other types of evidence as well.

One core thing that runs counter to many people’s intuition, both economists and non-economists, is that people are much less sensitive to financial incentives than we think they are. A lot of economists say if there is a better job people will move to take it, or if taxes go up people will stop working because work will not pay as much. You name it, look at any economic policy and usually some economist is asking what the financial incentives are. One thing we discovered in our work in the developing world, but you also find empirical evidence in western societies, is that people are much less sensitive to financial incentive than is commonly thought. Often what makes them tick is something different.

Taylor: The way in which we think about the poor is critical. You talk about a Victorian mindset, which is that the poor are squalid and dirty and immoral and their problem is a moral problem, and that is then overlaid with a neoclassical Homo economicus view telling us that everything people do is a reflection of their preferences in a world of rational utility maximisation.

Duflo: The Victorian mindset gets a booster shot in the Reagan/Thatcher era, which was very much fuelled by neoclassical economics in its most bearable version, which again was about incentive. The welfare queen of Reagan is in a sense the neoclassical version of the Victorian dirty poor. And that has stayed with us in a very persistent way, because after all who reformed welfare in the US? It wasn’t Reagan, although he had the rhetoric, it was Clinton. This means that it was under a Democratic administration in the US that we ended welfare as we know it.

Paradoxically, we’ve known in the US for years that people are not that sensitive to financial incentives. In the early 1970s, they ran a series of experiments that gave people a guaranteed income. They had a fixed transfer that was taxed away as they earned more. You would imagine that therefore the poor faced a strong disincentive to work, but it had almost no impact on the labour supply. This is what all the reports at the time concluded. But it’s something that economists have managed to keep to themselves somehow; the little dirty secret of economics.

People don’t act like economists think they act and they don’t think like economists think. But to some extent they have drunk some of the magic Kool-Aid; they think that other people are sensitive to incentives. We did an interesting experiment for the book. We interviewed 10,000 people and we asked 5,000 of them, randomly selected, the following question. If there was a fixed guaranteed universal basic income (UBI) of US$13,000 a year would you stop working or would you work less? To the other half we asked, if there was a UBI of US$13,000 a year would others stop working, or would they work less? When you ask people about themselves they say no, of course not, I would continue to work. But when you ask them about other people, they think others will stop working. That has made the politics very complicated.

You cannot really trust the economy to go with the flow and adjust itself when there’s a shock. People are not just going to move elsewhere; they need help. We should try to change the image of welfare so it is not seen as something that is there to punish you for being poor but instead is there to thank you for being the victim of the disruption on behalf of the rest of us. The problem is that even though that’s the rational thing to do, the politics of it are hard.

Taylor: Are you completely rejecting that story of conditionality and structure?

Duflo: Let me separate the economics and the political. I’m not naïve; I understand the need to keep the politics on board. On the pure economics, the conditional cash transfer options have been repeated in many countries and they’ve been very successful in increasing children’s education and health. In many cases, people need more than money; they need structured help to achieve their goals. My view on pure UBI in a country like the US, or the UK, or in France, is that it’s probably not what people need or want. What people are mobilised by is dignity. They want status and a place in life. For a lot of people, this sense of self-respect comes from doing a meaningful job.

Taylor: A challenge is that your work requires years and years to be able to test whether things work, but politicians have a very short time frame. Does policy work in the modern world? What do we have to do differently to make policy have a better hit rate?

Duflo: You’re right to point out there’s a crisis of legitimacy of government in general. Again, I would blame economists. You’ve got Milton Friedman saying I’ve never seen a tax cut I don’t like, or government is not the solution, government is a problem. Many economists have absorbed this as a mantra.

We need to rebuild the legitimacy of government in the eyes of the public. Our approach of doing experiments takes a long time but the advantage is we’re not starting from scratch. We have a whole pot of experiments that one could draw on to get started. But there is always a bit of an effort in encouraging innovation and new ways of thinking, and that’s why we set up Poverty Action Lab as an institution, or J-PAL, which is the name of our network. We realised we can do the research and talk about it until we’re blue in the face, but to get by in policymaking and on the ground it takes a lot of actual groundwork. It’s patient work, it’s not going to happen overnight, but I see no reason to be discouraged.

This article first appeared in the RSA Journal Issue 4 2020