How Economics Can Save the World
A review of Erik Angner's new book!
How Economics Can Save the World is the title of Erik Angner's new book. If you are into behavioural economics or philosophy of economics, you probably know Erik and already read some of his works. Erik is the author of widely-popular and very good textbook, A Course in Behavioral Economics, and of one of the most-read articles from the Journal of Economic Methodology: "We're All Behavioral Economists Now". Erik is also the author of numerous journal articles and book chapters covering topics such as behavioural and experimental economics, the science and philosophy of happiness, and the history, philosophy, and methodology of contemporary economics. He is what one might call a serious academic who is well-known because of his top-notch work in philosophy and economics. He has a long CV filled with affiliations, grants, publications and two PhDs. Yes, two PhDs: one in Economics and the other in History and Philosophy of Science, both from the University of Pittsburgh. He is currently working as a Professor of Practical Philosophy at Stockholm University, where he also directs the PPE Program.
Looking at Erik's CV and credentials, one gets the feeling that he is perhaps not the kind of person to write a trade book that argues that economics can save the world. In fact, if you read his work, you can see that he is too careful an academic to make bold unqualified claims about economics or about anything, really. But on the other hand, having attended some of his talks, I know that he has the gift for communicating complex arguments to wide audiences. So, I think, with two PhDs under his belt and a talent for simplifying things, without oversimplifying them, Erik has the right combination of skills and knowledge to pull off a trade book that argues that economics can save the world.
The question then is: does he deliver? The short answer is yes. If you are interested in economics and want to learn more about it, How Economics Can Save the World is the perfect book to read. It is easy to read and fun. It keeps its promise, convincingly arguing that economics can be useful in saving the world.
Note however that Erik does not argue that economics will save the world: economics can save the world, but this does not mean it will save the world. Erik argues that economics makes the right recommendations, but success depends on too many other things. So, the real argument of the book is the following: listen to economists, they have valuable advice, economic recipes alone however will not be enough to solve world's problems, but listening to economists will make it more likely that we will succeed.
Perhaps, then, a better title for the book could have been: How Economics Can Help Improving Our Chances to Save the World--Provided That Economics Is Used Properly And In Combination With Other Sciences.
But seriously, Erik is very careful in explicating what "economics can save the world" means. He also has a Substack post dedicated to this and argues that “given the right conditions, and in the hands of a skilled practitioner, the judicious application of" economics "makes a sizable difference to the chances of" saving the world.
"It’s not as though every bit and piece of economics can save the world. Some aren’t intended to and many don’t. It’s not as though economics is the only thing that helps. Economics is a complement to other efforts, not a substitute for them. Economics won’t work magically and on its own. It needs a skilled practitioner, buy-in from politicians and the public, proper access to relevant resources, and a good grounding in ethics and esthetics." Angner, in Saving the world.
Erik is too humble to say this but in How Economics Can Save the World he is trying to make it sure that everyone -- including economists -- understands the nature and scope of economics better. Why? Because our success in saving the world depends on a good understanding of what economics can and cannot do; on our understanding of its value and limits, that is. As a fellow philosopher of economics, I can say that Erik is doing a very good job in improving this understanding. Yet, as I argue below, not all the time. This is because there is a trade-off involved in making things simpler for the general reader: to make things simpler, one needs to leave out some complex issues. Although Erik is very careful in qualifying his arguments and mentioning complexities and difficulties, at rare occasions he cannot escape oversimplifying, leaving the reader with a false sense of understanding concerning complex problems.
What to expect from the book?
Well, the book will give you research based answers to several questions such as "how to eliminate poverty" or "how to get rich". Obviously, the list of questions answered in the book do not exhaust the list of questions that we need to answer to be able to save the world. The book does not promise this. Instead, it tries to convince the reader that economics has the ability to solve our problems by giving a sample of examples.
Not all the questions in the book are about important challenges that the world and societies are facing either. To show this I collected the questions that are discussed in the book under three categories. Big challenges, societal challenges, and individual challenges. This is a very rough categorization, but I hope it will be helpful in showing what to expect from the book.
Individual challenges
A large chunk of How Economics Can Save the World addresses what I call individual level problems: saving more retirement (How to Get Rich), making wise life decisions (How to Be Happy) or remaining sane while trying to raise happy children. There is also a chapter on how to be humble, which is a bit more difficult to categorize, but I put it to the individual level as it is mostly about overcoming the individual overconfidence problem.
That a problem is an individual level problem does not imply that its solution will not help in solving group level or society level problems. On the contrary, addressing these challenges are key to addressing more complex challenges. For example, consider the chapter on how to get rich. Erik recommends that you do the following: save, invest in index funds, borrow judiciously, and improve your financial literacy. He also explains why we fail to follow this advice, again using economics. Now, if economics can help people save and invest more, it will also help the economy in various ways, helping to solve larger scale problems. Nevertheless, the book's recommendations are to the individual, not to policy makers. It does not tell us what governments and regulators should do to improve the institutional conditions that prevent people from saving more or to fight scammers who benefit from people's financial illiteracy. Instead, the book warns the individual and gives recommendations concerning how to do better.
All four chapters that deal with the individual level are fine pieces of work. Erik masterfully tells stories while discussing relevant research in a very clear and informative way. At times it is as if he is reading the readers' mind, answering the questions that pop up in your head almost immediately. At other times he puts his teacher hat on and explains every step in his argument carefully and patiently. Only rarely, he falls into the trap of overexplaining things. All in all, these chapters are a pleasure to read even though they fall short of saving the world.
Societal challenges
Three chapters in the book address group or society level challenges. These are by far the best chapters in the book. In How to Give People What They Need, Erik discusses market design, particularly Alvin Roth's work, and the design of the spectrum auctions. If you ask any economist to show you how economics can be useful to the society, they will probably mention at least one of these examples. And for good reasons. Roth and his colleagues are literally saving lives every day because their work helps in matching more patients with kidney donors. Economists helped Federal Communications Commission (FCC) to raise billions and billions of more dollars by designing its auctions. Literally saving lives by designing a "market" for kidney exchange is no mean feat, but I still consider it among societal challenges rather than big challenges. The same goes for the design of auctions. The reason is that compared to eliminating poverty at a global scale or solving climate change, designing markets require taking into account a smaller number of institutions, organizations and people; and the coordination and cooperation problems involved are relatively less complex.
Erik is at his best when he is discussing these societal challenges. For example, his explanation of Alvin Roth's research and contributions is by far the most accessible take I have ever read. But it gets better. In "How to Change Bad Behavior" and "How to Build a Community", he discusses Cristina Bicchieri's and Elinor Ostrom's work. This is a rare thing. Erik's discussion of economics of norms and institutional economics is informative, insightful and a pleasure to read. I should warn you though, in these chapters the recommendations the reader gets to save the world are not as straightforward as the ones in the chapters that deal with individual challenges. And understandably so: these are more complex societal problems and they do not easily lend themselves to easy solutions and recipes.
Having said this, I must also note that the simplest solutions we get from How Economics Can Save the World are about the most complex problems that the book discusses. And this is where my criticism begins.
Big challenges
Big challenges are those challenges that require actions at multiple levels (i.e., from the individual to the national level) and coordination between these actions. They also require the attention of multiple societies and nations, requiring coordination and cooperation at the national and international levels. One such big challenge discussed in the book is climate change. The other one is poverty. The book's answers to both challenges are fairly simple and perhaps surprising for non-economists: taxes and cash transfers, respectively.
Before going further please note that I could have categorized poverty as a societal challenge. In fact, it is a societal challenge. However, I place it here among big challenges because of the book's promise to save the world: eliminating poverty in a neighborhood or at a certain location is a less complex problem than eliminating poverty at the global scale. However, if you do not like my categorization, you are welcome to consider it as a societal challenge.
OK! Now let's look at poverty. Erik argues that if we wish to eliminate poverty, we should listen to economists and give money to the poor in the form of unconditional cash-transfers. Why? Because randomized controlled trials show that unconditional cash-transfers work. Erik warns us that what works in one place does not necessarily work in other places. However, he argues, there is enough compelling evidence to try this as a solution. He also adds that economics alone cannot solve the problem of poverty: one needs to get many things right for this solution to work. Nevertheless, he argues, cash-transfers can get people out of the scarcity trap, and this is an important goal in itself.
In the chapter on poverty, Erik also tries to show that economics is not a dismal science, using economics research on poverty as evidence: (i) economists try to solve the problem of poverty using evidence-based methods, and (ii) research on poverty -- and economics in general -- advises us to treat everyone the same, including the poor. The section entitled "The dismal science" is very good, and I do not want to ruin it for you by giving spoilers. Let me say only this: if you are calling economics a dismal science or thinking of doing so, you really need to read this chapter.
On the positive side, the chapter on poverty is very good. It showcases how economists use their tools to shed light on important and difficult problems. It also convinces the reader not to call economics a dismal science. On the negative side, the book does not delve deep into the problem of poverty and its many causes. It falls short of discussing the complex set of causes that needs to be tackled to eliminate the poverty from the world. As Erik himself shows in the rest of the book, economists have a wide variety of tools to analyze the institutional and political conditions that bring about poverty, but these are left aside. Do not get me wrong, this is a really good chapter on the economics of poverty. I am only saying that given that this is a book for the uninitiated, it would have been nice to briefly mention what economics of growth and institutional economics tell us about eliminating poverty. Perhaps Erik underestimated the reader in this chapter, preventing him from bringing the more complex issues to the front. Or perhaps, he wanted to convince the reader that economics can provide simple solutions to complex problems. I do not know. In any case, the chapter downplays the risks involved in designing policies and programs that will influence the lives of millions of people based on small scale trials and more importantly by bracketing institutional and political determinants of poverty.
The second big challenge the book discusses is climate change. How to fix climate change? The answer is carbon taxes. The book, once again, does not propose that this is the only solution or that it will solve all our problems. Instead, it argues that in addition to other policies, carbon taxes are likely to reduce carbon emissions. And even if this is not true it is unlikely that taxes will do real harm, Erik adds.
There is of course a grain of truth in all this. However, tackling the climate change problem (and saving the world) is a significantly more complex problem than reducing carbon emissions at one location. Erik convincingly shows that introducing carbon taxes will reduce carbon emissions at the location that it has been introduced, but he does not discuss what is required to solve the problem at the international level. There are problems of coordination and competition that needs to be tackled at the national and international levels. There is a given network of local, national, and international institutions that set the rules of the game, which are resistant to change. There are also interests groups that influence how the game is played at the local, national and international levels. There is the problem of not knowing the right levels of taxes to introduce given the uncertainties. Then there are the trade-offs between short- and long- term economic goals. I can just go on. The point is, the economic lesson about carbon taxes does not easily translate to policy; not only because politicians do not understand or like carbon taxes, but also because the climate change is a wicked problem. Things get messy once one steps away from research and approaches national and international politics.
And finally, it is not entirely true that "taxes will do no real harm". First, as Erik teaches us in his book, there is always an opportunity cost involved. Without knowing this, we cannot say that a chosen level of taxes will not cause real harm. Assuming that taxes work as advertised and all countries act in harmony, consider choosing the wrong level of tax. If it is lower than it needs to be, it will delay the solution and we will head into a climate catastrophe. If it is higher than it needs to be, it might negatively influence economic growth that takes many people out of poverty every year. That is, harm will be done if we do not know the exact level of taxes that need to be implemented. The question then is do we know that exact level? No! Do countries act in harmony as we assumed? No! So perhaps, we might do real harm by using an inappropriately designed and implemented tax policy.
Note also that the economics of climate change is a very rich area of research and almost anything you can think of to challenge the economic approach has been addressed in that literature. Even the critics like Nick Stern and Joe Stiglitz agree to this. Economists even have proposals concerning how to fix the failures of global climate diplomacy, which emphasize experimentalist and bottom-up approach to policy making. Unfortunately, none of this gets any screen time in How Economics Can Save the World.
Again, do not get me wrong, this is an excellent chapter on externalities and carbon taxes. I am simply saying that the chapter falls short of discussing how economics can save the world by tacking climate change.
As a result, with respect to big challenges, the book ends up leaving the impression that poverty and climate change are easy to solve problems--if only politicians listened to economists. To be fair, Erik makes every effort to provide a balanced perspective on these issues. However, he leaves out a lot too. For this reason, I am afraid, many people will leave the book thinking that poverty can be eliminated by handing out cash and climate change can be solved simply with more taxes. I know that this is not Erik's intention. I also know that Erik knows all the complexities involved. But I guess this is the trade-off: trade books are fun and easy to read, but at a cost. Erik tells us in the book that economics is about trade-offs and opportunity costs. So, this is also economics.
In conclusion
How Economics Can Save the World is an excellent book that offers a thought-provoking look at the potential of economics to address our challenges at the individual, societal and global levels. Whether you're an economics student or a seasoned economist, this book provides valuable insights that will deepen your understanding of the field. Economists should also read this book to see how economics research can be communicated in a clear and engaging way. The target audience of the book are not economists, though. The book is written for non-economists who would like to learn more about economics. The book surely succeeds in reaching out to non-experts. Erik communicates complex economic concepts in a clear and engaging way, making this book a joy to read. The readers will find Erik's ideas and arguments accessible and informative.
How Economics Can Save the World not only highlights the potential of economics but also explores the ways in which it can be improved. For this reason, I think, it is a must read for philosophers of economics. Note that I did not discuss Erik's ideas on economic methodology in this review, but I might write about this later.
To conclude, I highly recommend this book to anyone interested in economics. Period. Give it a read and be inspired! You can thank me later.