Nobel Prize for Daron Acemoglu, Simon Johnson, and James Robinson

Many economists had been picking this prize for a few years. Daron Acemoglu (MIT), Simon Johnson (MIT), and James Robinson (University of Chicago) were awarded the 2024 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (aka the Nobel Prize in Economics) yesterday, "for studies of how institutions are formed and affect prosperity".

While many, if not most, Nobel Prize winners in economics are largely unknown outside the discipline, having toiled away publishing papers only read by other economists, this award recognises three academics whose key contributions on which the award are based are contained within several best-selling books, including Why Nations Fail (by Acemoglu and Robinson, which I reviewed here), The Narrow Corridor (by Acemoglu and Robinson, which I reviewed here), and Power and Progress (by Acemoglu and Johnson, which I haven't read yet, but it is close to the top of my pile of books to-be-read). The Nobel Prize Committee's citation noted:

The laureates have shown that one explanation for differences in countries’ prosperity is the societal institutions that were introduced during colonisation. Inclusive institutions were often introduced in countries that were poor when they were colonised, over time resulting in a generally prosperous population. This is an important reason for why former colonies that were once rich are now poor, and vice versa.

Some countries become trapped in a situation with extractive institutions and low economic growth. The introduction of inclusive institutions would create long-term benefits for everyone, but extractive institutions provide short-term gains for the people in power. As long as the political system guarantees they will remain in control, no one will trust their promises of future economic reforms. According to the laureates, this is why no improvement occurs.

However, this inability to make credible promises of positive change can also explain why democratisation sometimes occurs. When there is a threat of revolution, the people in power face a dilemma. They would prefer to remain in power and try to placate the masses by promising economic reforms, but the population are unlikely to believe that they will not return to the old system as soon as the situation settles down. In the end, the only option may be to transfer power and establish democracy.

Notice that citation really is the theme across their three books. Of course, there is an academic base that those books are founded on as well, and which no doubt contributed to their prize. Alex Tabarrok at Marginal Revolution gives a good summary of their work, as does John Hawkins at The Conversation. As those two posts make clear, all three prize winners have made contributions beyond those in the citation.

However, Acemoglu is clearly a standout performer, and has been for a long time. He is one of the most cited economists in the world, with contributions across a number of areas. Tabarrok points to joint work between Acemoglu and pascual Restrepo on technological change. I have on my list of interesting ideas to go back and look at a different paper by Acemoglu and Restrepo, on the impacts of population ageing on economic growth, but using different measures of population ageing (as in my article here). I also pointed to Acemoglu's views on the impact of generative AI on inequality yesterday, which he has also researched recently.

In my ECONS102 class, I've been including more of a focus on economic and political institutions over time, and this prize may prompt me to even include a bit more (or at least, to point more explicitly to the work of Acemoglu, Johnson, and Robinson). And hopefully it will encourage even more people to read their books.

Generative AI and expectations about inequality

In the last week of my ECONS102 class, we covered inequality. In discussing the structural causes of inequality, I go through a whole bunch of causes grouped together under a heading of 'structural changes in the labour market', one of which is skills-biased technological change. The basic idea is that over time, some technology (like computers) has made people in professional, managerial, technical, and creative occupations more productive or allowed them to reach larger audiences at low cost. However, other technology (like robots) has tended to replace routine jobs in sectors like manufacturing. This has increased the premium for skilled labour, increasing the ‘gap’ between skilled and unskilled wages.

In discussing this idea of skills-biased technological change this year, I mused about the potential impact of generative artificial intelligence, and whether skills-biased technological change was about to reverse, leading to job losses in professional, managerial, technical, and creative occupations, while jobs in activities that might broadly be grouped into manual and dexterous labour (like plumbers, electricians, or baristas) would remain. A change like that would likely reduce inequality (but not necessarily in a good way!).

The truth is, I don't think that economists have a good handle on what the impacts of generative AI will be on the labour market. On the one hand, you have some economists like Stanford's Nick Bloom, claiming that a lot of jobs (in particular tasks or occupations or sectors) are at risk. The loss of low-productivity, low-wage jobs that Bloom considers at risk, like call centre workers, will likely increase inequality further. On the other hand, you have other economists like MIT's Daron Acemoglu, claiming that the impact of generative AI on inequality will be small.

Given that economists can't agree on this, it is interesting to know what the general public thinks. That's the question that this post on Liberty Street Economics by Natalia Emanuel and Emma Harrington addresses. Using data from the February 2024 Survey of Consumer Expectations, they report that:

In general, a substantial share of respondents did not anticipate that genAI tools would affect wages: 47 percent expected no wage changes. These beliefs did not differ significantly based on prior exposure to genAI tools.

However, respondents believed that genAI tools would reduce the number of jobs available. Forty-three percent of survey respondents overall thought that the tools would diminish jobs. This expectation was slightly more pronounced among those who had used genAI tools, a statistically significant difference.

And specifically in terms of inequality:

We find that those who have used genAI tools tend to be more pessimistic about future inequality. Specifically, we asked people whether they thought there would be more, less, or about the same amount of inequality as there is today for the next generation... while 33 percent of those who have not used genAI tools think there will be more inequality in the next generation, 53 percent of those who have used genAI tools think there will be more inequality. This gap persists and is statistically significant, even after controlling for other observable traits. 

So, a large minority of the general public seems to be concerned about generative AI's impact on inequality, and that concern is greater among those with experience (where a small majority believe inequality will increase). Now, it could be that those with greater experience are better able to accurately assess the risks to their own (and others') jobs from generative AI. Or maybe people who use generative AI are simply more likely to have read the AI doomers' predictions of an AI apocalypse (or equally, they could be more likely to read the bullish views of AI proponents). The general public may not know that they fear skills-biased technological change, but they may intuitively understand the potential risks. The real question, which we still cannot answer, is whether those risks are real or not.

This week in research #44

Here's what caught my eye in research over the past week:

• Hirschberg and Lye (open access) provide suggested guidelines for economists for writing computer code
• Allen (open access) investigates the causes and the consequences of the emergence of agriculture in the Middle East (and if you're into big questions, those are really big questions)
• Ferguson et al. (with ungated version here) provide a new meta-analysis of 46 studies on the correlation between time spent on social media and adolescent mental health, finding that there is little support for claims of harmful effects

How income inequality in New Zealand compares with other OECD countries

Colin Campbell-Hunt (University of Otago) wrote an interesting article on The Conversation last week on inequality in New Zealand. It was well-timed, given that I've been covering poverty and inequality with my ECONS102 class this week. Campbell-Hunt compares income inequality in New Zealand with inequality in other OECD countries.

However, what Campbell-Hunt does here is interesting. First, he looks at income inequality (measured using the Gini coefficient) before accounting for taxes and transfers. Then, he looks at income inequality after accounting for taxes and transfers. The difference in ranking gives us a sense of how redistributive the tax and transfer system is, relative to other countries. Campbell is most interested in the difference between those two measures:

The Gini before taxes and transfers is a measure of the inequality produced by the structures of a country’s economy: the way value chains operate, the markets for products and services, the scarcity of certain skills, rates of unionisation, and so on.

This gives us a measure of structural inequalities in a country. Governments, however, use taxes and transfers to shift income between households. They take taxes from some and boost incomes of the more disadvantaged.

Ginis of incomes after taxes and transfers give us a measure of how well members of a society can support similar standards of living... These give us a measure of social inequalities.

So, how does New Zealand compare? Before taxes and transfers, New Zealand is quite middling, ranked 16th-lowest for inequality (Iceland is first, Japan is 37th and last). After taxes and transfers, New Zealand's ranking looks far worse, being ranked 24th (Slovakia is first, Costa Rica is 37th). Campbell-Hunt interprets this as:

As we can see, New Zealand’s structural inequality, shaped by the economic reforms of the mid-1980s, is middling by comparison to other OECD countries.

But New Zealand’s social inequality lies near the bottom third of OECD measures. A halving of top income tax rates in the mid-1980s and the rollback of the welfare state in the 1990s (after then finance minister Ruth Richardson’s 1991 “mother of all budgets”) significantly contributed to this.

Now, I'm sure we can argue about why New Zealand's tax and transfer system does a poor job (compared with other OECD countries) of reducing income inequality. In my view, laying the blame on governments in the 1980s and 1990s (as Campbell-Hunt does) absolves thirty years of subsequent governments from their role in perpetuating the inequality. Regardless of which government/s may be to blame here, we find ourselves with a tax and transfer system that is nowhere near as redistributive as other countries that we might compare ourselves to. Zeroing in just on the effect of taxes and transfers on inequality, Campbell-Hunt's data shows that New Zealand's system is the 11th-least redistributive (Finland's is most redistributive, Mexico's is least), behind the US, the UK, and Canada, but slightly ahead of Australia.

Given that our closest peer countries have more redistributive tax and transfer systems than New Zealand does, that suggests that we can do more to reduce inequality. As Campbell-Hunt notes:

New Zealand can aspire to goals for social equality matching those in the upper half of OECD countries. Beyond revisions to taxation and transfers, inequalities in health and education would also need to come down to reduce the social and economic costs of poverty and disadvantage that should bring shame to us all.

Campbell-Hunt's data doesn't have anything to say about inequality in health and education, but certainly a more generous and less restrictive benefit system, and more progressivity in taxation, would go some way towards ensuring that New Zealand's inequality looked more like the countries that we compare ourselves to.

Read more:

• Is inequality increasing?
• Inequality in New Zealand over the long run

Book review: How to Be a Successful Economist

There seems to have been a succession of books on how to be an economist in recent years. First, there was Michael Weisbach's 2021 book The Economist's Craft (which I reviewed here). And then Marc Bellamare's 2022 book Doing Economics (which I reviewed here). In 2022, the book How to Be a Successful Economist was published, written by Vicky Pryce, Andy Ross, Alvin Birdi, and Ian Harwood.

Unlike the former two books, How to Be a Successful Economist isn't pitched at explaining how to succeed as an academic economist. Instead, it aims to explain how to craft a career in economics outside of academia. That aim is much more difficult, given the variety of career paths that economists may choose. However, the book takes a unique approach. Instead of the authors' take alone, the book is built on a foundation of interviews undertaken with nearly 30 economics graduates, ranging from new graduates who have only been in the workforce for a few years, to top businesspeople and government economists, to luminaries such as Professor Lord Nicholas Stern. Quotes from those interviews suffuse the text, giving it both depth and credibility. Even better, the interviews themselves are available online at https://learninglink.oup.com/access/pryce-ross1e (and click on the 'student resources' link from there - unfortunately, the videos and other resources are only available to those who have purchased the book).

The focus of the book on becoming a private sector or public sector, and not an academic, economist is refreshing and welcome. Obviously, the skillset required of economists is very different between academia. In that respect, the book summarised the results of a survey of employers undertaken by the Economics Network in the UK:

The most highly valued of the skills reported by employers who took part in the 2019 Economics Network survey were, in order of importance: the ability to apply theories to the real world; communication skills; and data analysis. Also highly regarded were collaborative skills and more general transferable skills such as time keeping and critical thinking.

The book provides a lot of excellent advice, as well as pointing to some excellent online resources. Unfortunately, as might be the case for many books that point to resources online, some of those resources are no longer accessible. For example, a website www.communicatingeconomics.com sounded excellent to me, but the website appears to no longer exist. Given that the book is only two years old, this was extra disappointing. Nevertheless, other resources are available (albeit at different web addresses than those in the book), such as the ONS Guide to data visualisation (now available here) and the Government Statistical Service's guide to data visualisation (now available here). I also especially liked this advice to economics students, about mathematics and statistics:

Although mathematical skills always complement economics, the level of mathematics you will need depends on your economist career path, but you will need good data skills wherever you go as an economist.

There is also good advice on what an economist does, in terms of providing advice to others, especially that:

...to be useful to decision makers you must not only be interesting but also provide agency... "Agency" means helping others to prepare for and/or to decide what to do next.

Good practical advice for graduating students is very welcome. Where the book falls a bit short is a section where it advocates for eclecticism in economics (as part of a broader and more diverse approach to economics), and a section that explains the basics of, and importance of, cost-benefit analysis. These two sections felt a bit 'forced' in this book, and didn't really gel with the rest of the narrative. While both things are no doubt important, I'm not convinced that they are important in a book giving advice to new economists, since more detailed treatments are available elsewhere. Similarly, while the book also provides some good advice on how to approach the job application and interviewing process, I feel that there are better more general guides available. There simply isn't enough that is 'unique' about the process of applying for jobs within economics to justify a section devoted to it. Nevertheless, some students might find it helpful.

For an international reader, the book also suffers from a strong focus on the UK. Many of the specific examples will not be helpful for students outside of the UK context. The authors are attuned to this though, and note in a footnote that future editions of the book may broaden the scope.

I enjoyed reading the book for the range of resources that were provided. I liked the initial sections attempting to sell economics to a casual student, and I will definitely use some of their approach in my Open Day presentation to students next year. I also liked Figure 10.2 in the concluding section, which summarised "mainstream economic reasons for intervention by the state", which read very much like the syllabus of my ECONS102 class! However, while the resources that the book highlights are useful, and there is lots of good advice, I'm not sure that I would recommend the whole book to students to read. Instead, reading some sections, and accessing the other resources directly, would probably serve them better.

This couldn't backfire, could it?... Dead possums edition

The New Zealand Herald reported earlier this week:

A conservationist keen to do his bit for the country’s Predator Free 2050 goal is urging gardeners to purchase dead possums from him instead of buying blood and bone for fertiliser this spring.

Wayne Parsonson lives beside the Maungataniwha Forest and is a member of its guardianship project group Honeymoon Valley Landcare. However, he says the possum initiative is his independent venture, which he hopes will inspire others nationwide to follow suit...

Parsonson had caught 1250 possums in the past year.

The fur was plucked and sold to be blended with merino wool for warm, natural clothing.

The ungutted carcasses were rich with nutrients to enliven soil ecology, he said.

For fertilising purposes, he was offering 11 frozen possum carcasses for $35.

Sales were “ticking over” nicely, Parsonson said.

First, good on Wayne Parsonson for doing something about pest possums. And I hope he continues in his efforts. The only good possum is a dead one in my view, except in Australia where, for some reason, they are beloved by many locals. However, I would not like to see a thriving market in possum carcasses.

To see why, we first need to talk a little bit about cobras. As I wrote back in 2015:

One of the most famous (possibly apocryphal) stories of unintended consequences took place in British colonial India. The government was concerned about the number of snakes running wild (er... slithering wild) in the streets of Delhi. So, they struck on a plan to rid the city of snakes. By paying a bounty for every cobra killed, the ordinary people would kill the cobras and the rampant snakes would be less of a problem. And so it proved. Except, some enterprising locals realised that it was pretty dangerous to catch and kill wild cobras, and a lot safer and more profitable to simply breed their own cobras and kill their more docile ones to claim the bounty. Naturally, the government eventually became aware of this practice, and stopped paying the bounty. The local cobra breeders, now without a reason to keep their cobras, released them. Which made the problem of wild cobras even worse.

Now, think about the case of possums. The government isn't providing a bounty for killing possums (which I've already written about). However, if a thriving market in possum carcasses develops, then possum hunters will have a strong incentive to kill possums for profit. That sounds like a great thing. However, killing wild possums takes a lot of effort. It would be much less effort for 'hunters' to raise their own possums, and then kill them in cages. So, some entrepreneurial folks will effectively start 'farming' possums. It is entirely possible that there would be more possums overall as a result.

So, while I admire Parsonson's backyard efforts in killing possums, and I'm happy for him to profit a little from the activity, I wouldn't like to see this market grow too much.

Read more:

• This couldn't backfire, could it?... Ragweed edition
• This couldn't backfire, could it?... Possum bounty edition
• This couldn't backfire, could it?... Cane toad edition

This week in research #43

Here's what caught my eye in research over the past week:

• Müller and Watson (with ungated earlier version here) investigate the consequences of strong spatial dependence in economic variables, applying what are effectively time series methods to accounting for spatial autocorrelation (quite a technical paper, but of interest to those doing spatial econometrics)
• Joshanloo (with ungated version here) shows that zodiac birth signs are unrelated to subjective wellbeing (a result that shouldn't need to be investigated, surely?)
• Kampanelis and Elizalde (open access) find that the number of lynchings between 1882 and 1929 (at the county level) is associated with intergenerational upward economic mobility among African American men (measured in the late 20th and early 21st Centuries)
• Lee, Liu, and Yu (with ungated earlier version here) find that Facebook usage significantly increased the frequency with which users experienced negative emotions, including envy, feelings of inferiority, and depression, using data from Taiwan in 2017

The Foodstuffs merger is rejected, so the wholesale market remains an oligopsony

Yesterday we learned the Commerce Commission's decision on the merger application by Foodstuffs North Island and Foodstuffs South Island (which I posted about last month). As NBR reported yesterday (paywalled, but you can read this briefer New Zealand Herald story instead, or the Commerce Commission's decision here):

Foodstuffs wanted to see the co-ops merged within and under the management of a single national grocery entity, which it claimed would be better able to compete with the national Woolworths NZ chain.

It argued the proposed merger would lead to cost reductions (including overhead and product costs), efficiency gains, increased agility and innovation, and a more cohesive national offering, which would ultimately deliver better value for retail consumers at the checkout.

But ComCom chair John Small said today the proposed merger would reduce the number of major buyers of grocery products in New Zealand from three to two, reducing the number of buyers to which many suppliers can supply their products, and creating the largest acquirer of grocery products in the country.

“This would result in the merged entity having greater buyer power than Foodstuffs North Island and Foodstuffs South Island each do individually, which would harm the competitive process, and we consider is likely to substantially lessen competition in many acquisition markets.

“As a consequence of the substantial lessening of competition and the associated increase in buyer power, the merged entity would likely be able to extract lower prices from suppliers and/or otherwise adversely impact suppliers in the relevant markets.

“We are also concerned that the consolidation with the proposed merger would lead to reduced investment and innovation by suppliers, meaning reduced consumer choice and/or quality of grocery products in New Zealand for consumers.”

As I noted in my previous post, it is interesting that the Commerce Commission does appear to be considering competition as it relates to suppliers, and not just consumers. The problem is that, when there are fewer supermarkets, there is less competition among the buyers of suppliers' products. And the supermarkets could use their market power as a buyer to drive down the prices that they pay to suppliers. The Commerce Commission seems to consider there to be a real risk that the merger would lead to a substantial lessening of competition among the supermarkets in buying from their suppliers.

One thing that has disappointed me about the coverage is the lack of the use of a rarely-used word in economics: the oligopsony. What's an oligopsony?

When a market has a single seller, it is a monopoly. When a market has a single buyer, it is a monopsony. When a market has just two sellers, it is a duopoly. When a market has just two buyers, it is a duopsony (which is essentially what we have avoided by this merger not being approved). When a market has a few sellers, it is an oligopoly. The retail market for supermarket products is an oligopoly, since consumers can only buy from one of a few sellers. When a market has just a few buyers, it is an oligopsony. With only three large supermarket chains (Foodstuffs North Island, Foodstuffs South Island, and Woolworths), New Zealand has a supermarket oligopsony in the wholesale market for supermarket products, since suppliers can only sell to one of a few buyers. The Commerce Commission decision ensures that the wholesale market remains an oligopsony.

Read more:

• The Commerce Commission, competition and total welfare
• The Commerce Commission and the Foodstuffs merger

Noah Smith on why imports do not subtract from GDP

I am not a macroeconomist. Against my protestations, I have taught macroeconomics in the past, but now I exclusively teach microeconomics. There are certain aspects of macroeconomics that I thought I knew well, like how GDP is calculated. There is a simple method of calculating GDP that we teach in first-year economics, which we call the expenditure method: Y=C+I+G+(X-M). Y is GDP, C is consumption spending, I is investment spending, G is government spending, X is exports, and M is imports. It all seems rather straightforward. However, I genuinely learned something new and important this week about that formula.

Noah Smith has a great post explaining why imports do not subtract from GDP. Check the formula above, and then read that sentence again. Imports do not subtract from GDP. But it's right there in the formula! The thing I learned from Noah's post is that imports are included in C, I, and G. And so, the subtraction of M in the expenditure method formula prevents us from counting imports in measured GDP, by zeroing them out. Imports are not subtracted from GDP. Because they are both added to GDP (through C, I, and G), then subtracted (through -M), the net effect of imports on GDP is zero.

As further explanation, it is worth quoting Smith's post at length (the strikethrough and underline in one of the formulas is my correction of it):

Let’s talk about what GDP is. GDP is the total value of everything produced in a country:

GDP = all the stuff we produce

Imports aren’t produced in the country, so they just don’t count in the formula above. And they aren’t alone. There are plenty of other important things in the Universe that have don’t get counted in GDP, simply because they have nothing to do with domestic economic production. The number of asteroid impacts in the Andromeda galaxy is probably important to someone, but it doesn’t count in U.S. GDP. The population of the beluga sturgeon in Kazakhstan is probably important to someone, but it doesn’t count in U.S. GDP. Imports don’t count in U.S. GDP because, like asteroid impacts in the Andromeda Galaxy and the population of beluga sturgeon in Kazakhstan, they don’t involve domestic economic production in the United States.

In fact we can divide GDP up a different way from the Econ 101 breakdown. Let’s divide it up according to all the categories of people who might ultimately use the stuff... we produce in the U.S.:

GDP = Capital goods we produce for companies + Consumer goods we produce for consumers + Stuff we produce for the government + Stuff we produce for foreigners

Again, imports are nowhere to be seen. But exports are in here! Exports are just all the stuff we produce for foreigners. So the formula is:

GDP = Capital goods we produce for companies + CapitalConsumer goods we produce for consumers + Stuff we produce for the government + Exports

This is a perfectly good formula for GDP. But instead, here’s what economists do. They add imports to the first three categories, and then subtract them again at the end:

GDP =

(Capital goods we produce for companies + Capital goods we import for companies)

+ (Consumer goods we produce for consumers + Consumer goods we import for consumers)

+ (Stuff we produce for the government + Stuff we import for the government)

+ Exports - Capital goods we import for companies - Capital goods we import for consumers - Stuff we import for the government

This type of equation adds in three different types of imports, then subtracts them all again at the end. It’s mathematically equivalent to the formula above it, because if you add imports and then subtract them out again, you’ve just added 0. And adding 0 does nothing. Imports still don’t count in GDP in this equation.

OK, now let’s realize what the terms in the equation mean:

(Capital goods we produce for companies + Capital goods we import for companies) is just Investment.

(Consumer goods we produce for consumers + Consumer goods we import for consumers) is just Consumption.

(Stuff we produce for the government + Stuff we import for the government) is just Government purchases.

Exports - Stuff we import for companies - Stuff we import for consumers - Stuff we import for the government is just Exports - Imports.

So the equation is now:

GDP = Consumption + Investment + Government purchases + Exports - Imports

This is just our good old Econ 101 equation. It looks like imports are being subtracted from GDP, but now you (hopefully realize) that this is because imports are also being added to consumption, investment, and government purchases! Consumption, Investment, and Government purchases include imports, so we subtract out imports at the end so that the total effect of imports on GDP is zero.

Smith leverages that explanation to explain why a focus on reducing imports will not increase measured GDP (at least, not directly). That is an important argument in an era of increasing trade protection, aimed at reducing imports to the benefit of the domestic economy. That trade protection is not likely to work - at least, not through the simple mechanism of reducing something that is subtracted from GDP. Because, as Smith tells us, imports are not subtracted from GDP.

[HT: Marginal Revolution]