## Rethinking Economics — Angus Deaton ## Source details **Canonical URL:** [Rethinking Economics — Angus Deaton](https://www.imf.org/-/media/files/publications/fandd/article/2024/03/how-econ-must-change-deaton.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2024/03/how-econ-must-change-deaton.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2024/03/how-econ-must-change-deaton.pdf.json) --- ### General failings of the discipline - Economics has "large bodies of often nonobvious theoretical understandings and of careful and sometimes compelling empirical evidence," but the profession is "in some disarray." - Failure to predict the financial crisis and possible contribution to it through "an overenthusiastic belief in the efficacy of markets, especially financial markets whose structure and implications we understood less well than we thought." - Excessive partisanship among experts: "Recent macroeconomic events, admittedly unusual, have seen quarrelling experts whose main point of agreement is the incorrectness of others." - Economists may have a "vested interest in capitalism as it currently operates." Key thematic shortcomings: - Power - Emphasis on free, competitive markets and exogenous technical change "can distract us from the importance of power in setting prices and wages, in choosing the direction of technical change, and in influencing politics to change the rules of the game." - "Without an analysis of power, it is hard to understand inequality or much else in modern capitalism." - Philosophy and ethics - The profession has "largely stopped thinking about ethics and about what constitutes human well-being." - "Welfare economics has long since vanished from the curriculum," leading to defaulting to "an income-based utilitarianism" and equating well-being to money or consumption. - Current thinking gives individuals more weight than "relationships between people in families or in communities." - Over-valorization of efficiency - Many adopt Lionel Robbins' definition and "valorize" efficiency over equity, risking that "when efficiency comes with upward redistribution—frequently though not inevitably—our recommendations become little more than a license for plunder." - Keynes’ prescription—reconciling economic efficiency, social justice, and individual liberty—is incompletely addressed: "We are good at the first, and the libertarian streak in economics constantly pushes the last, but social justice can be an afterthought." - Empirical methods - The "credibility revolution" (randomized controlled trials, differences in differences, regression discontinuity designs) remedies weak causal claims but "have the effect of focusing attention on local effects, and away from potentially important but slow-acting mechanisms that operate with long and variable lags." - Historians may better identify "important mechanisms that are plausible, interesting, and worth thinking about," even if they "do not meet the inferential standards of contemporary applied economics." - Humility - "We are often too sure that we are right." Powerful tools require assumptions "that are not valid under all circumstances." ### Personal change of view (Change of heart) - The author, after "more than half a century" as an economist, reports substantial changes in prior positions. - Unions - Previously viewed as a nuisance; now sees that "large corporations have too much power over working conditions, wages, and decisions in Washington, where unions currently have little say compared with corporate lobbyists." - Unions historically "raised wages for members and nonmembers," contributed to social capital and political power; their decline has contributed to "the falling wage share, to the widening gap between executives and workers, to community destruction, and to rising populism." - Acemoglu and Johnson: "the direction of technical change has always depended on who has the power to decide; unions need to be at the table for decisions about artificial intelligence." - Trade and globalization - Greater skepticism about "the benefits of free trade to American workers" and doubt that globalization was the principal cause of the "vast reduction of global poverty over the past 30 years." - Belief that "the reduction in poverty in India had little to do with world trade," and China’s reduction "could have happened with less damage to workers in rich countries had Chinese policies caused it to save less of its national income, so that more of its growth of manufacturing could have been absorbed at home." - Reassessment of ethical trade-offs: previously defended harm to working Americans as a price for global poverty reduction; now questions that defense and emphasizes obligations to fellow citizens in addition to aiding those in distress. - Immigration - No longer endorses the near consensus that US immigration is unambiguously good with "little or no cost to domestic low-skilled workers." - Notes longer-term analysis: "Inequality was high when America was open, was much lower when the borders were closed, and rose again post Hart-Celler (the Immigration and Nationality Act of 1965) as the fraction of foreign born people rose back to its levels in the Gilded Age." - Suggests historical dynamics (e.g., the Great Migration) were shaped by immigration patterns and employer preferences. - Interdisciplinary engagement - "Economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Adam Smith once did." ### Broader diagnosis and call for transformative change - Urgency: "The need for drastic change in the economics discipline has never been so urgent." - Humanity faces existential crises: "planetary health and environmental challenges becoming major concerns." - The global economy was "already limping and fragile before the pandemic"; recovery "has exposed deep and worsening inequalities not just in incomes and assets but in access to basic human needs." - Resulting sociopolitical tensions and geopolitical conflicts risk creating societies "that may soon be dysfunctional to the point of being unlivable." - Critique of mainstream: "the discipline’s mainstream persists in doing business as usual, as if tinkering at the margins with minor changes could have any meaningful impact." - Long-standing problem: "Much of what is presented as received economic wisdom about how economies work and the implications of policies is at best misleading and at worst simply wrong." - Examples of mischaracterizations include: how financial markets work and whether they can be "efficient" without regulation; the macroeconomic and distributive implications of fiscal policies; the impact of labor market and wage deregulation. ### Key quotations and exact numeric references - "more than half a century" (author’s duration as a practicing economist) - "2015" (year the author received the Nobel Memorial Prize in Economic Sciences) - "30 years" (period referenced for global poverty reduction) - "Hart-Celler (the Immigration and Nationality Act of 1965)" - Direct quotes preserved: - "Without an analysis of power, it is hard to understand inequality or much else in modern capitalism." - "Welfare economics has long since vanished from the curriculum." - "When efficiency comes with upward redistribution, our recommendations frequently become little more than a license for plunder." - "We are often too sure that we are right." - "The need for drastic change in the economics discipline has never been so urgent." *Angus Deaton, Rethinking Economics (March 2024).* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/how-econ-must-change-deaton.pdf_