Prof. Julian Jamison

Theory & Practice
Economists in utopia?

Theory: Julian Jamison
Assistant Professor of Managerial Economics and Decision Sciences

Designing markets for the common good: Economists, like engineers, are using experimentation to build better models

Contrary to popular opinion, economics does concern itself with social outcomes. The standard view of an economist, one I tend to agree with, is that capitalist economics benefits society: markets are simply an efficient mechanism for the distribution of goods.

Compare this method with communism. Perhaps if the government knew everything (individual preferences, all available production technologies, etc.), and if it could control everything, and if it had our best interests at heart, then a communist system might be able to increase social welfare. But what are the odds?

I teach my Kellogg microeconomics students that government interventions are often a bad idea, as in the case of steel tariffs recently in the news. These tariffs are not bad because economists worship some Platonic ideal of “free trade.” They’re bad because they hurt people: workers in Brazil and Russia who are deprived of the American market, as well as Americans who pay more for a new car because of higher steel costs. If you want to help U.S. steel workers (a concern I share), then extend unemployment benefits and subsidize job training — don’t support a troubled industry.

Capitalist economics is good, but it’s not the complete story. Markets don’t always work. One example of a public good is the difficulty of keeping one citizen safe from refractory countries without keeping her neighbors safe as well. So instead of having private markets for defense, the government uses taxes to provide defense for everyone. Something similar happens with negative externalities such as pollution — one factory’s waste harms all businesses and individuals in the neighborhood, creating a rationale for government regulation.

Another way that economics affects society is by specifically studying welfare in fields such as public health. How should foreign aid be spent to improve physical welfare in developing countries? One choice is to build modern hospitals in major cities, a visible sign of progress. But it’s not the most cost-effective option. Much better is to put dollars into preventive care (e.g. vaccinations and education) in rural areas. In fact, the most bang for your health buck is achieved by sending girls to primary school! The girls grow up healthier and eventually raise healthier children.

I have done some theoretical work on how to measure the global burden of disease. For instance, which is worse: one death from tuberculosis or two cases of blindness from polio? It’s an unpleasant thought, but unfortunately resources are limited and policy-makers must decide how to spend. I’m also currently considering discount rates for the far future: Why and how much do people care what happens after they die? This is an important question for charitable giving and NPOs, as well as for environmental economics. A final topic is microfinance, the concept of giving small loans to individuals in developing countries to allow them to start local businesses (e.g. buying a cell phone and then selling telephone service). Economists are still studying how beneficial and generalizable these programs are.

Economics is changing rapidly, including the nascent field of “design economics.” To truly help society, economists will have to become more like engineers — not simply studying markets, but building them. Economists now run laboratory experiments; in fact the Nobel Prize was just awarded for exactly this. I ran one experiment last year in South Africa to study the perceived and actual value of information for consumers. The more we know about how people behave under different incentives, which is what economics is really concerned with, the better will we be able to design institutions that benefit society as a whole.