Six Big Economic Ideas

About five years ago, The Economist published a series of essays, based around six big ideas in economics. Each essay is really well written, and I would strongly recommend that you read them. In no particular order, they’re about the Stolper Samuelson theorem from international trade theory, Minsky’s work on business cycles, Akerlof’s paper on information asymmetry, Keynes and the idea of the fiscal stimulus, Nash and early developments in game theory and finally the Mundell-Fleming model.

I got reminded of these essays when I wrote about Robert Mundell’s passing. And that, in turn, reminded me that I had wanted to see which ideas would make my list of six big ideas in economics. God knows if I’ll ever get around to writing these essays up – I know I would like to – but for what it’s worth, today is just about the list of ideas.

My criteria for selecting them is the following:

  1. The idea should be genuinely big. Other economists may disagree about whether it should make the cut or not, and that’s fine (in fact, that’s kind of the point. Maybe they’ll write their own lists!), but there should be no disagreement about the yuuugeness of the idea.
  2. It should be easy enough to explain in a single essay. Which in turn means it should be relatively simple, and not dependent on other big ideas for it to make sense. “Mr. Keynes and the Classics” is out, for example.
  3. It should be interesting, and applicable to the real world. Which, sadly, isn’t always a guarantee in academia.

For what it’s worth, here is my list of six big ideas in economics:

  1. Elinor Ostrom and her work on Common Pool Resources: there’s always a part of me that wonders if this is an idea that was underrated by economists and fairly rated by the rest of the world all along. Even the Wikipedia article notes that fieldwork played an important role in the development of her theories. Note that this isn’t (at all!) a criticism of Ostrom – but yes, it could be construed as a criticism of the rest of us economists. Maybe we just don’t look at the world often enough?
    Ostrom certainly did, and her conclusions have helped us economists understand how the world has been working so far, and how it might be made to work better in the future.
  2. Ronald Coase and The Theory of the Firm: Most people would be aware of the Coase theorem, and there is a case to be made for going with that paper rather than this one. But I remain fascinated with The Theory of the Firm, not least because of further developments in this field (Alchian and Demsetz, for one, and Hart and Holmstrom for another. There are many others, of course). In addition, how the theory has held up, and will hold up, because of the advent of modern communication, monitoring and signaling tools is a fascinating research question.
  3. Herbert Simon and Satisficing: “The Truth Lies Somewhere in the Middle” has become one of my favorite ways to simplify complex issues. Herbert Simon’s take on it was as follows: “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science.” And the scissor analogy remains one of the most beautiful explanations I have ever come across, of anything.
  4. Dani Rodrik and premature deindustrialization: This idea is relatively speaking more recent, and in some ways needs to be updated already. But if you leave aside the specifics and think about the major point that is being made: poor countries in the 21st century will not take the same path of development as did the poor countries of the 20th century, it is certainly a very powerful and all-too-relevant field of study. Recommended pairing: How Asia Works, by Joe Studwell.
  5. Partha Dasgupta and the inclusion of nature in GDP: I’ve phrased the idea very poorly, I am sure, and I have not finished reading the report – barely started, if anything. Plus, perhaps I am suffering from recency bias, who is to say? But I remain convinced that we will see a better, more realistic way to measure our economic wealth this century – and if we do, Sir Partha Dasgupta and his work will have led the charge.
  6. Ed Glaeser and the importance of urbanization: Cities and urbanization will define our lives in this century, current pandemic notwithstanding. And while there is a long list of economists who have been working in this area for a very long time, my favorite book about what I think will be the most important topic of study in economics this century has been written by Ed Glaeser. It is a love letter to the idea of the city, and I think more people should read it to understand why urbanization, when done well, is a phenomenon to be celebrated, and not an idea to abjure.

I hope, in all sincerity, that you strongly disagree with my list, and come up with your own!

EC101: Links for 10th October, 2019

  1. “Coase’s originality was not in his reasoning, but in recognizing that economic exchange is not the mere trading of physical goods but trading rights to property or rights to engage in certain types of conduct affecting property.”
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    Was Ronald Coase the first to come up with the Coase theorem?
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  2. “However, the joy of this book is less in the big picture than in the detail. And what a lot of it! The mind boggles at Smil’s extensive reading and absorption of information. We get the speed at which marathons are run – over the entire course of human history; the growth rates of piglets and weight of chicekns over time; sales of small non-industrial motors over time; the envelope for the maximum speed of travel; Kuznets cycles; Zipf’s law for city size…. The middle section of chapters offer a fantastic overview of technical progress over long periods in a wide range of technologies. I love all this detail.”
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    Diane Coyle thoroughly approves of Growth and Civilization.
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  3. “When a daughter is married, we do worry about her future. But why should I worry when the government of India is my son-in-law who married my daughter Syndicate Bank,” asked the late Tonse Madhav Ananth Pai in 1969, in the aftermath of the nationalization of the first-generation private-sector banks. Fondly known as “Brahma of Manipal”, Pai was the founding father of Syndicate Bank in 1925.”
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    A lovely read on bank mergers, bank nationalization and banks from a particular part of Karnataka.
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  4. “This is where the popcorn enters the picture. Pricey popcorn makes those lower ticket prices possible, And that is why you should buy popcorn at the movies.”
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    Expensive popcorn? Uh, no, cheap movie tickets. Yes, really. Cheap for whom, you ask? Welcome to microeconomics.
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  5. “This leads to the question: Why try these markets at all? This is quite similar to creation of super highways which help reach destinations much quicker but lead to accidents as well. Should we then not create highways?Policies always raise such trade-offs and hopefully, the regulator will take steps which minimise the negative aspect of creation of these markets.”
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    Amol Agarwal, in Moneycontrol, on securitization in real estate loans in India. Me, I think this is not such a great idea.