Richard Thaler: No Regular Economist

Richard Thaler of the University of Chicago has been awarded the 2017 Nobel Prize in Economic Sciences “for his contributions to behavioural economics”. This column, written by his first behavioural collaborator, provides a personal perspective on the development of three key areas of research to which the new laureate has been a major contributor: people’s limited rationality, their perceptions about fairness, and their lack of self-control.

 

A bowl of cashew nuts inspired Thaler to a thought experiment in behavioural economics. Picture/Credit: Altayb/iStock.com

A bowl of cashew nuts gave Thaler the idea of performing a thought experiment on self-control. Picture/Credit: Altayb/iStock.com

 

Behavioural economist Richard Thaler is the 2017 recipient of the economics Nobel Prize. Yet, despite having been president of the American Economic Association (AEA) in 2016, he is no regular economist. In fact, Stanford economist and past AEA president Robert Hall once characterised Thaler as his “favourite offbeat economist”.

The award marks Thaler’s transition from the fringe to the mainstream. But it is instructive to look back at the time when his views were regarded as offbeat by mainstream economists. To be sure, Hall is a mainstream economist and an excellent one at that. As chair of the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), Hall often makes the call on when the US officially enters and exits recessions. His academic work teaches us how to establish equitable and efficient consumption taxation in a world of rational actors.

By contrast, Thaler’s academic work teaches us to beware of the limits of assuming that the world is populated by rational actors. The Royal Swedish Academy of Sciences identified the following three areas to which he has been a major contributor: limited rationality; perceptions about fairness; and lack of self-control.

In the mid-1970s, I began to work with Thaler on two of these issues and eventually applied his insights to the third. With this as context, I would like to provide a personal perspective on how these three key ideas developed.

Before getting down to details, I need to say something about what Richard Thaler does better than any other economist: he constructs simple and incisive thought experiments. Most economists, including me, are trained to think in terms of formal models. Thaler is more of a qualitative thinker. As I will explain, he is able to pierce through the formality to get right to the soft spot of where those models are unrealistic in key ways.

Lack of Self-Control

Cashew nuts are calorie-rich – and I like them a lot. I have in my office a bowl of cashews, which look very tempting, but fortunately for me, these cashews are not real, but ceramic. I got them as a souvenir at a gathering to celebrate Thaler’s 70th birthday. There is a self-control story behind the cashews.

In the 1970s, Thaler and his wife threw a dinner party for some friends. Before they served dinner, they placed a large bowl of cashews in front of their hungry guests. The guests began to devour the cashews and soon realised that continuing to do so would interfere with their ability to enjoy dinner. But they couldn’t stop. The cashews were too tempting. So they begged Thaler to take the bowl away.

What would you do if you were really hungry, the cashews were in easy reach and you knew that continuing to eat them would ruin your dinner? To a neoclassically trained economist, asking that the cashews be removed is puzzling – and Thaler was trained as a neoclassical economist.

Classical Greek philosophers taught that rational human beings choose the best means to achieve their desired ends. The neoclassical approach formalises ‘choosing the best’ as a problem in mathematical optimisation. In the neoclassical approach, people are assumed to optimise without effort. If they think that eating more cashews is not optimal, they don’t need somebody else to prevent them from doing so; they can costlessly choose to do something other than eat more cashews.

Thaler realised that his dinner guests were not acting rationally in the face of temptation, at least not rationally in the sense of being neoclassically rational. He engaged in one of his thought experiments, asking himself what would prevent him from reaching for more cashews when he didn’t want to eat more cashews. That question led him to think about an internal dialogue within his brain between the part of his brain that was ‘planning’ to stop eating cashews and the part of his brain that was actually ‘doing’ the reaching and eating.

Like Thaler, my interest in self-control also stemmed from issues about eating. But in my case, it was because I became intrigued by my wife’s research on the role of healthcare professionals in treating eating disorders – not as compelling as the cashew story!

In any event, Thaler and I managed to find each other and began to collaborate on a formal economic model that would capture how people make decisions when their internal planners and doers fail to agree (Thaler and Shefrin 1981, Shefrin and Thaler 1988).

Limited Rationality

Some credit unions offer a programme called Christmas Clubs. People who join such a club regularly deposit funds during the course of a year into a special account, with the goal of having a balance at year-end that will fund their Christmas gifts.

When Thaler and I first worked on our self-control model, Christmas Clubs were more popular, offered by many banks and, moreover, did not pay interest, even though interest rates on savings accounts were much higher than they are today. This meant that people who used the clubs to save for gifts earned less interest than they could have by just using a regular savings account.

From a neoclassical perspective, someone who joins a Christmas Club and forgoes interest is operating in the interior of his or her budget set, a clear violation of neoclassical rationality. Were these people that stupid?

Some people choose to have too much of their income withheld to pay income tax, in order to get a large tax refund. Less money withheld means more money to invest for a return. Do people not understand the time value of money? Are they that stupid? How about you? Would you withhold at the lowest rate allowable by law?

In a neoclassical world, the answer to the previous two questions is yes, people are that stupid. But hold on a minute. In a world where planners need to deal with difficult doers, which can lead to a lack of self-control, it might be perfectly sensible for people to join Christmas Clubs and for people to have too much tax withheld in order to receive large tax refunds.

Both behaviours might lead to higher savings than would otherwise occur and, if higher savings is the goal, then such behaviours might be eminently reasonable. In theory, the behaviours might not be neoclassically rational, but in practice they might well be ‘good enough’; and as the late economics Nobel Laureate Herbert Simon noted, going for what’s good enough is “satisficing behaviour” that is “boundedly rational”.

Christmas Clubs and tax over-withholding are not foolproof. People can rob their Peters to pay their Pauls. Someone with a severe self-control problem might borrow heavily during the year using her credit card, to the extent that when the year-end arrives, she finds herself compelled to use the proceeds from her Christmas Club to pay her credit card balance rather than to purchase gifts. Perverse? Yes. Boundedly rational? I don’t think so.

People need enough impulse control to prevent perverse behaviour. There are at least three ways for doing so:

  • The first way is using willpower. Of course, if willpower were easy to exert, then there would be no need for Christmas Clubs or tax over-withholding.
  • The second way is through external enforcement: no credit cards at all, which raises all kinds of issues, not the least being the consequences of not having a credit history.
  • The third way is through internal enforcement, using habits.

Planner-doer theory suggests that people segregate their wealth into separate ‘mental accounts’, such as take-home pay, liquid assets, future income and home equity. Mental accounting habits are ‘pecking order’ rules that specify the order in which different accounts are accessed.

Many people find it easiest to spend first from take-home pay. If they wish to spend more than their take-home pay, the first place they go is to their liquid assets (such as checking or savings account balances, bonds and stocks). If these are insufficient, then people can borrow or, as a last resort, dip into their home equity by borrowing or selling their property.

Mental accounts can be somewhat arbitrary. Their levels are not finely tuned. Therefore, following mental accounting rules can lead people to appear as if they are not operating at the margin. But operating at the margin is not the goal – someone can operate at the margin and overspend very easily.

Thaler pointed out that people use all kinds of mental accounts. One of his thought experiments involves a person who mows their own lawn, but would never mow any part of their neighbour’s lawn for compensation.

Thaler suggests that such behaviour is unlikely to involve operating at the margin by setting marginal benefit equal to marginal cost. By this he means that the property line is arbitrary and, in a neoclassical sense, he might be right. But people might use boundaries as rule parameters, just as much as they use boundaries to separate types of wealth (take-home pay, liquid assets, etc.).

Thaler wrote: mental accounting matters (Thaler 1980, 1985). Now mental accounting might not be neoclassically rational. But given the limits of the human mind, it might be sensible – and good enough. Moreover, striving for perfect rationality might be counterproductive, with the end result being an outcome that is not good enough.

Perceptions of Fairness

In the late summer of 2017, a series of hurricanes struck the Caribbean, the Gulf of Mexico, Houston and Florida. After Hurricane Irma, which struck Florida, local residents registered over 8,000 complaints of price gouging with the state Attorney General’s office. These complaints mostly related to excessive prices being asked for water, ice, food and fuel.

Why are Florida residents complaining about price gouging? Do they not realise that keeping a lid on prices in these circumstances means that demand will exceed supply and that, as a result, some would-be purchasers will be rationed? Do they not realise that keeping a lid on the prices of these items lowers incentives to increase supply? From a neoclassical point of view, preventing the increase of prices to perceived gouging levels, irrationally induces rationing and insufficient supply.

Thaler, together with his colleagues Daniel Kahneman and Jack Knetsch, suggest an alternative way of thinking about market clearing prices (Kahneman et al. 1986a, 1986b). The alternative stems from Thaler’s concept of ‘transaction utility’ – the psychological pleasure or pain associated with how good of a deal a person associates with a transaction.

In the fairness framework, people have notions of reference transactions that they deem to be ‘fair’. Media reports indicate that some Florida hotels doubled their hotel rates in the wake of Hurricane Irma. Paying double for the normal price of a hotel room generates the experience of loss – negative transaction utility, if you like – if there is no corresponding increase in the costs that the hotel incurs as a result of the hurricane.

According to the fairness framework, hotels that charge double but do not incur higher costs are acting unfairly. In contrast, hotels that charge double to cover higher costs and do not reap additional profits as a result are acting fairly.

These are the rules of fairness that people follow. Fairness matters, just as mental accounting matters. Many people would rather be rationed and arrange for alternative accommodation than be gouged. If they feel pain from perceived unfair treatment, it is by no means obvious that the maintenance of fair prices that do not clear markets is necessarily irrational.

Conclusion

Psychologist Daniel Kahneman received the 2002 economics Nobel Prize for his work on ‘prospect theory’, a way of understanding how people make decisions under conditions of risk and uncertainty. The Royal Swedish Academy of Sciences noted that Kahneman had done this work together with the late Amos Tversky. Prospect theory, first published in 1979, was foundational for the development of behavioural economics and finance. That said, without Thaler, I am not sure that prospect theory would have had the traction it ultimately had.

There is much to say about Thaler’s accomplishments, beyond the three specific issues discussed above. Thaler was the first economist to reach out to Kahneman and Tversky, and he did so in the mid-1970s. It was Thaler who saw the connection between his fledgling thought experiments, such as the lawn-mowing example, and prospect theory.

 

Richard H. Thaler. Picture/Credit: By Chatham House, CC BY 2.0

Richard H. Thaler. Picture/Credit: By Chatham House, CC BY 2.0

It was Thaler’s entrepreneurial talents that found ways to bring open-minded economists together with Kahneman, Tversky and their psychology colleagues. In part, he did so through his efforts to secure support from the Sloan Foundation, the Russell Sage Foundation and eventually the NBER.

It was Thaler who wrote an ‘Anomalies’ column for the Journal of Economics Perspectives, which regularly piqued economists’ interest about the shortcomings of neoclassical thinking.

It was Thaler who, together with Shlomo Benartzi, ingeniously applied our work on self-control to help people save more, through their Save More Tomorrow (SMT) programme.

And it was Thaler who, together with Cass Sunstein, extended insights gained from SMT to develop ‘nudging’, the idea of using ‘choice architecture’ based on behavioural insights to induce people to make better decisions. This concept has had widespread influence in both US and UK public policy.

Richard Thaler’s accomplishments certainly merit his being awarded the 2017 economics Nobel Prize. For those accomplishments, we are all the better.

 

References

Kahneman, D, J L Knetsch and R H Thaler (1986a), “Fairness and the Assumptions of Economics”, Journal of Business 59(4): S285-300.

Kahneman, D, J L Knetsch and R H Thaler (1986b) “Fairness as a Constraint on Profit Seeking: Entitlements in the Market”, American Economic Review 76(4): 728-41.

Shefrin, H M and R H Thaler (1988), “The Behavioral Life-Cycle Hypothesis”, Economic Inquiry26(4): 609-43.

Thaler, R H (1980), “Toward A Positive Theory of Consumer Choice”, Journal of Economic Behavior and Organization 1(1): 39-60.

Thaler, R H (1985), “Mental Accounting and Consumer Choice”, Marketing Science 4: 1999-214.

Thaler, R H and H M Shefrin (1981), “An Economic Theory of Self-Control”, Journal of Political Economy 89(2): 392-406.

 

This article was first published by VoxEU.

Young Women Economists in Lindau: Powerful Encounters

One of the reasons I applied to attend the 6th Lindau Meeting on Economic Sciences was the expectation of coming back brimming with self-motivation. Moreover, I expected to be deeply fascinated by the commitment of the pioneers of economic sciences, by their bravery in addressing world issues and by their lives as common individuals facing successes and failures. My expectations were by far exceeded.

I have always genuinely aspired to become an active participant in economics and to make a difference. My passion for the subject started with my postgraduate studies and further developed during my work at the United Nations and my academic experiences. A special opportunity offered by this meeting is the possibility of interacting with Nobel Laureates and other young academics, while sharing passions and values, understanding different cultures and exchanging ideas and future collaborations.

But what also fascinated me and made this experience even more magic and overwhelming was the passion, the eagerness and the determination of the many young women economists I had the pleasure of meeting in Lindau.

 

Zeinab Aboutalebi (left) and Angela De Martiis during the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Lisa Vincenz-Donnelly/Lindau Nobel Laureate Meetings

Zeinab Aboutalebi (left) and Angela De Martiis during the 6th Lindau Meeting on Economic Sciences, Picture/Credit: Lisa Vincenz-Donnelly/Lindau Nobel Laureate Meetings

 

One of the ideas that particularly got my attention during the meeting is what Nobel Laureate Bengt Holmström called serendipity. Among the various questions to the laureates, many young economists were eager to know the secret of their success: how did they do it?

A common answer was indeed serendipity. An unexpected discovery that occurs by chance, a valuable finding that was not looked for by others, being in the right place at the right time, or simply luck. Nevertheless, the role of chance – or luck – in science is also driven by passion and determination. Often, such unexpected findings come from an error in the scientist’s own methodology, according to scientists Kevin Dunbar and Jonathan Fugelsang. Passion and determination were in fact the two main elements that I sensed when talking with young women economists about their research interests.

During my week at the meeting, I had the honour of presenting my research in front of five Nobel Laureates – an invaluable experience – and the pleasure of interviewing several young women economists from different countries, cultures and backgrounds. They came from Africa, Russia, Iran, China, the United States, Germany and Italy, and they all have one element in common: passion.

When I asked them about their motivation for doing academic research, the first answer was indeed passion, eagerness to learn, to understand and provide valuable results to inform some of today’s most debated issues – such as climate change, economic sanctions, information asymmetry, inequalities, labour markets, growth theory and monetary policy. The women economists, and women’s participation in the economy more generally, provide a diversity of economic thinking, as Janet Yellen recently emphasised in a speech at Brown University.

This diversity of thinking comes from the fact that, as one of these women economists told me, economics is not just economics. Being an economist implies knowing about mathematics, statistics, natural sciences, law, politics, psychology, history, sociology and more. Economics means dealing with issues that involve institutions and individuals. All these elements together make it a powerful tool for improving people’s welfare and lives.

On the one hand, welfare is one of the motivations driving Linda Glawe, a young German economist from the University of Hagen, to focus on prolonged growth slowdowns in emerging market economies and on the concept of the middle-income trap. In a world in which more than five billion people live in middle-income countries, representing more than 70% of the world’s poor population, a slowdown in emerging markets will have strong implications for low and high-income countries. Therefore, the danger of a middle-income trap is of great relevance for future welfare. After publishing a literature survey on the middle-income trap, Linda’s current research aims to provide a theoretical contribution to discussions of future growth in China.

On the other hand, when we talk about welfare we often refer to the fact that countries have unequal living standards that makes them grow faster or slower than others. Therefore, some countries display higher inequalities in incomes, wealth and human capital. These issues are among the main research interests of Rong Hai, a Chinese young assistant professor in economics at the University of Miami.

In one recent paper, she and laureate James Heckman investigate the determinants of inequality in human capital with an emphasis on the role of credit constraints. The results show that both cognitive and non-cognitive abilities are important determinants of human capital inequality. In addition, credit constraints are important because young people cannot borrow enough against their future human capital and thus suffer from lower consumption when they are in school.

In a second paper, Rong finds that reducing income inequality between low and median income households improves economic growth. But reducing income inequality through taxation between median and high-income households reduces economic growth.

 

Angela De Martiis and other young economists during the 6th Lindau Meeting on Economic Sciences,  Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Angela De Martiis and other young economists during the 6th Lindau Meeting on Economic Sciences, Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

 

When investigating economic inequalities, there are many reasons to explore inequality within cities or states, especially if we consider that individuals move across space. Thus, the disparity of a particular area is also a reflection of the skills of these individuals as potential workers. From a labour economist perspective, Sarah Bana, an American Ph.D. candidate at the University of California, Santa Barbara, is interested in understanding the returns to skills and the role that skills play in earnings inequality in the US labour market.

One of her current research papers looks at displaced workers, those who lose their jobs as a result of a firm or plant closing. Analysing comprehensive occupational employment data, the results of her research suggest that vulnerable displaced workers’ difficulties in the labour market are a function of their skills and less related to the goods and services they were previously producing. This is due to the fact that the same set of tasks can be applied in the production of various goods and services, but there appears to be little scope for workers from shrinking occupations to find work with similar earnings, which may help to explain the large earnings losses.

As a researcher in labour economics, Sarah thinks of an individual’s work as their contribution to their family, community and society. But this may be hard for those workers who are displaced in worse labour market conditions.

Several studies investigate the effects of the global financial crisis on the labour market. The data from the displaced workers survey from 1984 to 2014 clearly show a sharp increase in the rate of job loss. Besides the effects on the labour market, the long-lasting impacts of the financial crisis on the economy and wider society have questioned the adequacy of the traditional tools in explaining periods of financial distress as well as the adequacy of the existing policy response.

At the same time, the financial crisis has shown that complex interconnections among financial institutions represent a mechanism for the propagation of financial distress and they are nowadays recognised as one of the key elements of potential financial instability or systemic risk.

This is one of the crucial issues that the young Italian economist Chiara Perillo, Ph.D. candidate at the University of Zurich, is investigating. In particular, she is exploring the implications of the unconventional monetary policies (such as quantitative easing) in the euro area by combining financial network analysis with econometric methods. Using the time evolution of loans granted from euro area banks to different institutional sectors operating in the euro area, her results show that since the beginning of quantitative easing there has been an increase in bank lending, but mostly addressed to the banking system itself.

Another element that drew my attention while getting to know the young women economists was their diverse backgrounds, another powerful tool for academic research in the diversity of thinking. Being Russian by origin and doing research based in Germany, Maria Kristalova, Ph.D. candidate at the University of Bremen, investigates the impact of the mutual sanctions between the EU and Russia, followed by the escalation of the Ukraine conflict in 2014. Her results show a division pattern of all EU-27 countries in two groups: the West European countries that recovered from the sanctions shock, and the East European and Baltic countries, which are still suffering with negative consequences.

Angela De Martiis (right) and Maria Kristalova during the 6th Lindau Meeting on Economic Sciences

Angela De Martiis with Maria Kristalova, Picture: Courtesy of Angela De Martiis

According to Maria, this topic is of crucial importance for gaining a better understanding of the costs of political decisions that might affect the aspired convergence of Europe. In a second research topic, Maria also looks at long-run co-evolution of innovation activities and public funding in German regions. The results show strong empirical evidence of its existence.

Another issue of crucial importance, one of the most controversial, is climate change. According to Jennifer Uju Okonkwo, a young Nigerian economist based at the University of Kiel, regardless of what sceptics think, research shows evidence that the climatic system is changing and this change has several negative consequences, such as rising sea levels, coastal flooding, droughts, global warming and changes in precipitation. Hence, there is a dire need to understand optimal ways to adapt to the changing climate. Her research thus aims at finding cost-effective strategies to manage climate change that could be beneficial to developing countries with limited adaptation funds.

When investigating the issue of climate change, we immediately come across divergent views and an asymmetry in information, thus generating inefficiencies in addressing and solving such a phenomenon. As a young Iranian economist working on applied microeconomic theory at Warwick University, Zeinab Aboutalebi is investigating the role of information asymmetry.

Her research is dedicated to tracing inefficiencies created through the strategic interaction among economic actors. The role of information asymmetry is crucial in shaping the resulting consequences and in reducing the inefficiencies using, for example, different incentive schemes, designing incentive mechanisms, delegation or persuasion techniques.

Zeinab is currently working on feedback in experimentation and how the goodwill of a principal to not discourage an agent, while providing him/her feedback about the result of the experiment, could cause large inefficiencies and uninformative communication between the principal and the agent. Information asymmetry and the lack of informative communication are thus the building blocks of most of today’s big phenomena.

From climate change, to inequality, displaced workers, sanctions, growth, monetary policy and information asymmetry, it was a pleasure to make this journey into the lives and research interests of seven young women economists – to discuss new research ideas, exchange views and laugh while talking about science and about a world that is a fascinating place still to be discovered with a pinch of serendipity and a lot of determination. Thank you for sharing your passion!

Only as Strong as the Weakest Link: Global Food Supply Chains

This article appeared in a shorter form in the German newspaper Handelsblatt on August 24, 2017.

A ‘Marshall Plan for Africa’ – 300 million Euro in total. This is Angela Merkel’s bold development promise ahead of the Federal election. Germany has also placed Africa at the heart of its G20 presidency. So the future chancellor, whoever it is, needs a solid development strategy. This strategy should put farmers’ needs first and leverage the scientific expertise of companies, like Mars, that are networked throughout Africa through their supply chains.

As Bill Gates has said, “if you care about the poorest, you care about agriculture.” This is why I am joining the best economists in the world at the Lindau Nobel Laureate Meetings in Germany 22—26 August. We are convening an event to discuss economic inequality, agriculture and the role of businesses.

 

I was discussing economic inequality at the 6th Lindau Meeting on Economic Sciences with economists Romesh Vaitilingam, Eric Maskin (Nobel Laureate) and Devaki Ghose.

I was discussing economic inequality at the 6th Lindau Meeting on Economic Sciences with economists Romesh Vaitilingam, Eric Maskin (Nobel Laureate) and Devaki Ghose.

 

Why is this such an important issue? Over 475 million of the world’s 570 million farms are smaller than two hectares. Even though these smallholder farms produce over 80% of the world’s food, 80% of the global population deemed “chronically hungry” are farmers. This is the 80-80 paradox.

Agricultural supply chains in food-insecure regions like Africa need an upgrade — but this won’t happen without a concerted and long-term effort. Look at China, where they managed the ‘structural transformation’ from a mostly farming to a mostly industrial economy well. From 1952 to 2004, the structure of China’s economy shifted, from agriculture providing half the country’s GDP to providing only 14% in 2004. During this transition, the non-farm rural sector boomed – services, transport, processing, etc. The rural non-farm sector went from providing almost none of the GDP to more than one-third. Importantly, the Chinese government sent engineers and scientists into the countryside to transfer knowledge and technology to farmers and encourage non-farm business growth. Knowledge sharing combined with better infrastructure linkages between small farmers, processing facilities and retailing companies lies at the core of China’s success.  

Yet, while we can take inspiration from China, replicating the transformation process of a highly regulated, state-managed economy is not feasible elsewhere. Many governments do not have the capacity to effect these changes. I believe multinational corporations can fill this void. Companies need to be part of the international development strategy and leverage their unique position at the apex of global supply chains to share technical skills and cutting-edge innovation.

Indeed, this is already starting to happen. For example, the staple food crops grown by African smallholder farmers are finally getting attention. Traditionally, crops suited to Western climatic conditions, like potato, wheat and corn, have received all the scientific investment. Their yield, for example, has increased by a factor of five or six since the 1930s. The yield of traditionally African crops, on the other hand, is much the same as it was 100 years ago.

 

The average yield of maize and wheat has tripled since 1961 whereas the yield of millet, a crop traditionally grown in areas of Africa and India, has only increased by 50 percent

The average yield of maize and wheat has tripled since 1961 whereas the yield of millet, a crop traditionally grown in areas of Africa and India, has only increased by 50 percent.

 

Through a lack of R&D, finger millet, Bambara groundnut, teff and other staple African crops are still vulnerable to disease, pests and drought. The resulting low yields mean that African farmers have too little food to feed their families. It is no wonder that 80% of the global population deemed “chronically hungry” are farmers.

When we saw that this was happening, a group of uncommon collaborators came together for one of the most ambitious projects in the history of plant science. Mars, NEPAD, Illumina, BGI, WWF, the UN Food and Agriculture Organization, the World Agroforestry Centre and others partnered to sequence 101 African orphan crop genomes to accelerate breeding programs and improve food security for the farmers who depend on these crops. The genomes are being made available to the public so that plant breeders everywhere can breed new cultivars of the African crops with higher yields and more resistance to disease, pests and climate change. Better crops create jobs and can stimulate the rural non-farm sector in Africa. African seed companies will spring up to distribute the new cultivars to farmers; transport companies will bring surplus to markets; processors will take on the role of making food ready for the consumer, and so on.

 

Taro is a traditional crop in areas of Africa and one of the 101 crops whose genomes we are sequencing to improve nutrition, yield and resistance to drought, diseases and pests. Picture/Credit: karimitsu/iStock.com

Taro is a traditional crop in areas of Africa and one of the 101 crops whose genomes we are sequencing to improve nutrition, yield and resistance to drought, diseases and pests. Picture/Credit: karimitsu/iStock.com

 

We welcome the German government’s initiative to boost development aid to Africa, but to maximize the impact of taxpayers’ money, we need more inclusive private-public partnerships to play their role and bring the Marshall Plan for Africa to life. An inclusive approach is the only way to address one of the travesties of our age: people who grow food that don’t have enough to eat.

Looking Ahead to Economics in 2020

Young economists and laureate Oliver Hart during the 6th Lindau Meeting on Economic Sciences.

Nobel Laureate Oliver Hart and young economists during the 6th Lindau Meeting on Economic Sciences. Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

 

The last four triennial Lindau Meetings on Economic Sciences have managed to come at significant moments for the global economy and the debate over how it should be run.

In 2008, there were emerging signs that the ‘Great Moderation’ of the previous decade had come to an end. But most people expected that the turbulence would be confined to the subprime mortgages of the United States.

 

Joseph Stiglitz in 2011 during the 4th Lindau Meeting on Economic Sciences. Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Joseph Stiglitz in 2011 during the 4th Lindau Meeting on Economic Sciences, Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Three years later and the economics profession was in the dock for failing to give any warning of what had turned out to be a global financial crisis and subsequently, a ‘Great Recession’ that cast millions into unemployment and left the major western economic powers reeling. Lindau 2011 was a focus of media attention as laureates such as Joseph Stiglitz lambasted his colleagues.

At this year’s meetings, the atmosphere was calmer with few signs of an imminent external crisis. Yet given the tenth anniversary of the onset of the global financial crisis, much of the media attention was on the defence of the European Central Bank’s quantitative easing programme by its president Mario Draghi, who gave the opening keynote speech.

Participating journalists were also intrigued by comments by German Federal Minister Peter Altmaier on Brexit and by laureate Chris Pissarides demanding that Germany reduce her current account surplus to bring a better balance to the eurozone and relief to countries such as Greece.

 

Christopher Pissarides during his lecture at the 6th Lindau Meeting on Economic Sciences, Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Christopher Pissarides during his lecture at the 6th Lindau Meeting on Economic Sciences, Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

But at the same time, the Nobel Laureates and young economists at the Lindau Meeting were engaged in discussing a huge amount of new economic research that is going on at universities around the world that may well lead to new theories on how to make people wealthier, healthier and happier.

A total of 85 young economists made presentations on their research to a panel of laureates. These included: an experiment to achieving a collective agreement on which transactions using the cryptocurrency Bitcoin are valid and which are invalid by Demelza Hays of the University of Lichtenstein; the potential for education investment in China to combat child labour by Tang Can of Renmin University; and the work by Cindy Lopez-Bento of Maastricht University on knowledge spillovers from subsidised R&D – to name just three.

Assuming that the world economy continues on its path of consistent – albeit weak – growth, then the next Lindau Meeting on Economic Sciences in 2020 may be the first for 12 years where the focus will be far more on looking forwards than backwards.

How can economics tackle the growing problem of inequality? What can be done to boost levels of productivity that are essential for growth in per capita income and wealth? What does economics have to say about high levels of poverty and ill health in developing countries? All these issues were discussed at Lindau with two science breakfasts on productivity and inequality.

But hopefully in three years time these issues will be the ones grabbing the media limelight.

#LiNoEcon Daily Recap – Saturday, 26 August

The 6th Lindau Meeting on Economic Sciences ended with the boat trip to Mainau Island. It was a day full of science, discussions, joy, genuine delight and even some tears. It is hard for us to say goodbye now but we will surely stay in touch. Enjoy the highlights of the last day of #LiNoEcon.

 

Video of the day:

 

Last glimpse of #LiNoEcon – we hope you enjoyed your time with us.

 

 

Picture of the day:

 

#LiNoEcon participants boarding the “Sonnenkönigin” on their way to Mainau Island.

6th Lindau Meeting on Economic Sciences 23.08.2017 - 26.08.2017, Lindau, Germany, Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog post of the day:

 

Panel Slider

At #LiNoEcon, three Nobel Laureates explored economists’ understanding of how policies on taxes, public spending and interest rates work together in a time of crisis.

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

This is the last daily recap of the 6th Lindau Meeting on Economic Sciences. The idea behind it was to bring to you the day’s highlights in a blink of an eye. We hope you enjoyed the meeting and wish you all safe travels home.

Is Economic Policy Ready for the Next Crisis?

The economics profession took a big hit in the wake of the global financial crisis. Why did macroeconomists with their fancy models not see it coming? Should governments inject money into the economy to boost demand or cut spending to reduce record public deficits? And why have zero interest rates and ‘quantitative easing’ not done more to improve anaemic rates of growth?

These questions and many more were up for debate at a panel of three Nobel Laureates and a young economist at the 6th Lindau Meeting on Economic Sciences on Friday 25 August. The participants considered the new conditions for monetary policy – cutting interest rates and rescuing banks – and fiscal policy – changing taxes and spending public money.

They also asked why, before the crisis, policy-makers seemed to have paid insufficient attention to financial markets in their models. Mario Draghi, the President of the European Central Bank, used his keynote speech [link to video on LindauNobel site that I can’t access] that launched the Lindau meeting on 22 August to admit that there was a ‘notable absence’ of a role for banking and finance in these models.

 

Panel discussion during the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Panel discussion during the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

 

Martin Hellwig, the panel chair and director of the Max Planck Institute for Research on Collective Goods, started the discussion by highlighting that a debate over the effectiveness of fiscal stimulus policies in the US had been matched by one over austerity policies in Europe that involved doing the exact opposite.

Peter Diamond, co-recipient of the Nobel Prize in 2010, said that the decision by the US government to pursue an active fiscal policy, which lessened the depth of the recession, helped to explain the gap between growth rates in North America and Europe since the crisis.

But he acknowledged that the time lag involved in passing the legislation to push through fiscal measures, as well as concerns over what the money was spent on, had undermined people’s faith in the policies.

‘The depth and length of the Great Recession put both tax cuts and spending back on the US agenda although they were insufficiently used’, he said. ‘As the recession went on, the political will to do more was gone. The failure to follow up reflected a lack of appreciation by politicians and the general public of the value of suitable stimulus policies.’

Edward Prescott, co-recipient of the Nobel Prize in 2004, took a different view in a presentation with the title ‘The Unimportance of Monetary Policy and Financial Crises on Output and Unemployment’. He cited financial crises that saw countries experiencing contrasting outcomes at the same time: the US and Asia in the 2008 crisis; Chile and Mexico in 1980; and Scandinavia and Japan in 1992.

‘Financial crises do not impede development,’ he claimed. While the 2008 financial crisis was localised in North America and the euro area, there was a short recession and quick recovery in Japan, Taiwan and South Korea and no recession in Scandinavia and Australia. ‘Countries where fiscal policy was irresponsible had problems’, he maintained. ‘Fiscal responsibility is crucial: to spend is to tax and to tax is to depress. That’s what happens every time.’

Christopher Sims, co-recipient of the Nobel Prize in 2011, agreed that responsible fiscal policies were always required. But he went on to say that a responsible fiscal policy in the face of a major recession, in which inflation is falling below target, is ‘to expand and convince people that the expansion, via either additional spending or tax cuts, does not imply future taxes or spending cuts.’

‘You are doing this because you want inflation to go up,’ he added, referring to the struggle that central banks have had to drive inflation up from current levels of close to zero.

Sims urged young economists to fill in the ‘gaps’ in the major directions of monetary and fiscal policy research. But he also warned that many current research projects that simply seek to add extra elements to the standard ‘dynamic stochastic general equilibrium’ (DGSE) models, which were seen as having failed to spot the 2008 crisis, were just ‘fighting the last war’.

‘Right now, the biggest confusion that policy-makers have is that we have had low inflation below target for years despite the drastic measures that independent central banks have taken,’ he said. ‘We don’t have models that explain how we got stuck at this point for so long.’

Sims acknowledged that this was a new area where the paths have not been laid out and that empirical work that connected fiscal policies with the paradoxes of inflation was a ‘risky project’ for a PhD. But he concluded: ‘Precisely because of that, it might earn you the Nobel Prize.’

#LiNoEcon Daily Recap – Friday, 25 August

Friday was the last day in Lindau but not the last day of the meeting. Saturday is going to take the #LiNoEcon participants to Mainau Island, so while you are enjoying your last day on the picturesque island, let’s take a look at what happened yesterday. Here are our highlights from Friday:

 

Video of the day:

 

At #LiNoEcon, Laureate Jean Tirole comments on corporate social responsibility: “We need citizens and corporations to step in for the government and the market and try to do the common good.”

 

 

Picture of the day:

 

Laureate Myron Scholes conversing with young economists during a coffee break.

Myron Scholes in talk with young economists 6th Lindau Meeting on Economic Sciences 23.08.2017 - 26.08.2017, Lindau, Germany, Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

 

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog post of the day:

 

Sims

 

The myth of the independent central bank: economics writer Frances Coppola on Christopher Sims #LiNoEcon lecture.

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.

#LiNoEcon Daily Recap – Thursday, 24 August

Thursday was packed with lectures, seminars and the first panel discussion of #LiNoEcon. In our mediatheque, you may find many great pictures, videos of exceptional lectures and thought-provoking blog contributions. There is so much more worth checking out than what we present to you in our daily recap, so do have a look. Enjoy the following highlights of Thursday!

 

Video of the day:

 

For #LiNoEcon young economist Eric Schaanning, the big policy challenges facing economists today include inequality, pension design, artificial intelligence and climate change. 

 

 

Picture of the day:

 

Laureate Daniel L. McFadden with “his” knowledge pylon that is part of the Lindau Science Trail.

Daniel McFadden standing next to

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog post of the day:

 

Blog of the day

‘Homo Economicus’ Reconsidered: Ben Chu on how Nobel economists rebel against simplistic conceptions of rationality at #LiNoEcon

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.

#LiNoEcon Daily Recap – Wednesday, 23 August

On Wednesday, #LiNoEcon was inaugurated with a keynote by ECB President Mario Draghi, followed by the first full day of the meeting programme with lectures and seminars. In the evening, young economists and laureates mingled at the Get-Together in Friedrichshafen, where Federal Minister Peter Altmaier welcomed the participants on behalf of the German government, stressing that the young economists were the ‘hope of the universe’.

 

Video of the day:

The Keynote by ECB President Mario Draghi during the opening ceremony

 

Picture of the day:

ECB President Mario Draghi talking to young economists after the opening ceremony

6th Lindau Meeting on Economic Sciences

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog of the day:

 

Euro area

On the Future of the Euro Area: #LiNoEcon young economist Benjamin Schäfer suggests ways to overcome the weaknesses in Europe’s monetary union.

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.

#LiNoEcon Daily Recap – Tuesday, 22 August

On Tuesday, #LiNoEcon kicked off with first meet and greets, registrations, guided tours through the Lindau Science Trail and the Paul Klee exhibition and various dinners for laureates, young economists and guests. Even though the grand opening of the 6th Lindau Meeting on Economic Sciences takes place on Wednesday, we already have some highlights:

 

Video of the day:

Enjoy the first glimpse of #LiNoEcon! Many more to follow.

 

Picture of the day:

Tuesday afternoon we showed the young economists our new Science Trail. More than 40 participants gathered at the pylon outside of the city theatre and followed the guided tour over sunny Lindau island.

OLYMPUS DIGITAL CAMERA

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog of the day:

A refugee success story from rural Australia: #LiNoEcon young economist David Smerdon on the remarkable transformation of the small town of Nhill

Refugees Slider

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.