The 2021 Nobel laureates of Economics challenged the theoretical orthodoxy in the field of economic sciences. David Card, Joshua D Angrist and Guido W Imbens stepped out of their academic towers and applied natural experiments to test the validity of theories and to examine conventional ideas.

Natural experiments use real-life situations to assess the effect of any theorisation on the masses; an approach that gained currency and expanded to other fields, revolutionising the approach towards research.

Dr Card was recognised “for his empirical contributions to labour economics”. Through empirical evidence in New Jersey, USA, in the 1990s he challenged the view that wage increase should always lead to a fall in employment. Dr Angrist and Dr Imbens shared the other half of the Nobel Prize “for their methodological contributions to the analysis of causal relationships”. They came up with research tools that help economists use real-life situations to test big theories, like, for instance, how additional education affects earnings. Dr Angrist found that the effect of an additional year of education was nine per cent in income.

A closer look at those who made it big in terms of Nobel in economics over the past 52 years would encourage one to view them critically through generational, regional and gender lenses. Of the 89 distinguished laureates, only two were women; Elinor Ostron in 2009, and Esther Duflo in 2019.

The average age of the recipients is 66 years, with Esther Duflo being the youngest at 46 years when she won the honour two years back.

The Nobel for Economics this year acknowledged the efforts of those favouring natural experiments to examine conventional ideas

American universities have a sort of monopoly in the category, with 62 winners. The remaining 27 belonged to 15 other countries. There have been eight Britons, followed by three Norwegian scientists, two each from France and Sweden, and one from Finland, Israel, Canada, India, Germany, Russia and Holland. There have been five instances of dual nationals winning the award; Cyprus-UK, US-Israel, France-US, Canada-US and Netherland-US. Amartya Sen of India and Paul Milgrom of Israel have been the two winners from Asia.

Many Pakistani economists, including five women, were approached for their comments on this year’s winners. Except for two responded. They were either too busy or did not wish to share their opinion. Among those who responded, Dr Ali Cheema was excited, calling the selection “excellent”.

“The winners this year have given a boost to the credibility revolution in economics, which has provided innovative empirical methods to establish causality. This is essential for assessing the effectiveness of policies, interventions and the consequences of events. We say that vaccines are effective against Covid-19 because trials establish whether or not a vaccine ‘causes’ the immune system to make antibodies and should or should not be approved. Empirical methods to establish causality were much weaker before the credibility revolution, and I think this contribution warrants the prize,” he said.

At a time when the world was still busy figuring out the systemic failures that had led to the 2007-08 financial crisis, and policy adjustments to check system abuses, the pandemic shook the very foundations of the global economy and triggered recessionary trends. The two events within a short span of 11 years had raised questions both on the collective human understanding of the system and its fault lines, and the sustainability of the global order.

“It reminded the thinking heads and policy-makers of the pitfalls of blind commercialisation. It also highlighted lack of space offered by societies to critical thinkers, and underscored misallocation of resources to a level where it is endangering the future of humanity,” commented a watcher.

Dr Ishrat Hussain was delighted as he believed labour wage needed to move upward for tackling income inequality. “David Card along with the late Alan Krueger had done pioneering empirical work in the US labour markets, disproving the conventional belief that higher wages suppress employment rate. This new insight has powerful public policy implications as higher compensation acts as an incentive for improved labour productivity and better income distribution.”

Commenting on the value of recognising the work of economists on the current economic crisis and the gender balance of the awardees, he said: “Nobel prize is not always given for tackling current economic problems, but path-breaking life-long achievement in the field. Environmental, institutional and behavioural economists have also been honoured. Poverty economists, such as Abhijit [Banerjee] and Esther [Duflo], got it a few years ago. I suspect gender economists are also in line for future awards”.

Elaborating on the contribution of the two women laureates, he said: “Elinor Ostram, a political scientist, made an innovative contribution to the management of common-pool resources, showing that the standard models using state and markets were narrow in their scope and could not have generalised validity. Esther Duflo went the other way to demonstrate that grass-root field experiments based on randomised controlled trials provided more manageable solutions to poverty reduction. Both these awardees did challenge the conventional wisdom and showed practical ways of tackling the most critical problems of environmental sustainability and poverty reduction facing humanity.”

Politics drive the decisions of statesmen, but the economists can’t be absolved of the responsibility of economic policy bungles since the end of the Cold War over the past two decades. They were clearly as shocked by major economic events of the last 20 years as the rest of us. They were unable to foresee where the dominant market model was leading the world.

Unfortunately, conventional approaches continue to dominate the work of economists in Pakistan. The debate of alternative economic models of development in Pakistan has yet to start, it seems. The fact is reflected in the economic programmes of three major political parties PPP, PTI and PMLN. In essence, besides minor variations in the order of priorities, they are almost identical.

Published in Dawn, The Business and Finance Weekly, October 18th, 2021