Looking Around You

By: Dr. M. Ray Perryman
Published in syndication October 20, 2021

Three Americans have received this year's Nobel Prize in Economics. One half went to David Card (University of California, Berkeley) "for his empirical contributions to labour economics," and the other half was awarded jointly to Joshua D. Angrist (Massachusetts Institute of Technology) and Guido W. Imbens (Stanford University) "for their methodological contributions to the analysis of causal relationships."

In plain English, these economists demonstrated the value of observing the world around us and, in the process, really changed our thinking about solving social problems, with profound implications. Each year, the Royal Swedish Academy of Sciences awards the Prize (formally the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) in recognition of ideas and research that increase our understanding of important issues in economics and related areas.

I've often said that a problem with economics is that, unlike traditional sciences, you can't put the economy in a laboratory and test outcomes under varying conditions. However, the work of these researchers has enhanced our understanding of the best available alternative – "natural experiments."

Natural experiments occur when one part of the economy or society (such as a specific country or state) is for some external reason treated differently than others. By studying outcomes under diverse conditions, it is possible to make valid inferences. For example, one country might enact stricter immigration laws than its neighbors. If we carefully analyze the situation using appropriate methods, we can decipher knowledge regarding the effects of such policies.

David Card studied the effects of minimum wages, immigration, and education. His analysis during the 1990s challenged the accepted thinking of the day through conclusions such as increasing the minimum wage does not necessarily lead to fewer jobs and that incomes of people who were born in a country can benefit from new immigration (though those who came earlier might be negatively affected).

Joshua Angrist and Guido Imbens worked to solve methodological problems with natural experiments, helping develop ways to use them to more precisely isolate cause and effect. This enhanced understanding facilitates the use of such experience in answering questions such as the optimal years of school for future success. I must mention that another great thinker and former Deputy Treasury Secretary, Alan Krueger, worked with these three on their seminal efforts and would likely have shared the accolade had he not suffered a tragic death in 2019.

Looking around at what happens in the economy can teach us a lot. I have often used this approach. While we can't put the economy or society in a lab, we can observe situations where the world provides us with the next best thing and draw conclusions with implications for policies to enhance prosperity for all. Stay safe!!