Does light shine in applied research in economics?
I studied theoretical economics when I was in university, so I am very interested in the Nobel Prize in Economics（Prize in Economic Sciences）.
According to the Nihon Keizai Shimbun today, there was an article about the Nobel Prize in Economics. I would like to write mainly the outline of the article.
□On the 14th of tomorrow, the Royal Academy of Sweden will announce the Nobel Prize in Economics.
Although the theory of economics is often thought to be difficult with mathematical formulas (I have learned it), there are many things familiar to our lives.
In 2019, the application of economics to seasonal topics such as minimum wages and work style reforms is also a promising award area.
■ First, let’s review the recent awards:
(1) In 2018, two American researchers, Mr. Paul Romer and Mr. William Nordhaus, were crowned.
Mr. Romer clarified the role that knowledge plays in order for the country and companies to grow.
(2) The research of Prof. Richard Sailor of the University of Chicago, which won the Economics Award in 2017, is also greatly related to environmental issues.
■ In consideration of recent award trends, what areas will be the focus of the 2019 Nobel Prize in Economics?
Prof. Toyoki Sakai of Keio University (the university I studied) says, “Labor and education are promising.”
Surprisingly, Prof. Sakai “predicted” the winners of Romer and Nordhouse in 2018 and became a hot topic.
This year,he predicts that “Nobel Prize selection committee members familiar with the fields of labor and education will focus on research since the 1980s”.
It is also interesting to see if the prediction is true.
□Labor field
① Minimum wage:
The first is Professor David Card of the University of California, Berkeley.
Professor Card’s research is famous because it is a study on the minimum wage that has been increasing in recent years in Japan.
In traditional economics, it was thought that employment would decrease if the government raised the minimum wage. Companies are paying wages that are commensurate with the ability of workers, so they thought that if they forcibly raised the minimum wage, they would dismiss workers who were less productive in terms of cost and stop hiring new workers. Professor Card and other researchers challenged this traditional way of thinking.
②Research on hiring company employees:
Professor Edward Radia of Stanford University has challenged the problems that plague corporate personnel.
The problems or issues are as follows.
“What should be newly hired is a person who can expect stable results, or a person who has the risk of quitting, but who may generate a large return.”
Prof. Radia and researchers have been nominated for the Nobel Prize for several years, and they have applied economics to the management of human resources and organizations.
【 Current status】
Personnel managers and people who hit the doors of companies have different incentives.
If the hiring party is resigned by the worker, the hiring party may choose to quit seeking better conditions.
Both sides are also faced with “information asymmetry” that does not know each other’s thoughts.
Mr. Radia studied how organizations with these different incentives and information asymmetries can achieve better results.
By the way, the answer to the previous question is “If the cost of quitting is acceptable, you should choose a high-risk candidate.”
In addition, Mr. Radia is developing discussions that lead to current work style reforms, such as promotion and compensation.
□Measurement field
The key point is how to handle data:
When studying the impact of minimum wages and organizational management, the problem is data handling. For example, just because the employment decreased in certain areas after raising the minimum wage, the cause may be simply because the economy has deteriorated.
Researchers in a field called econometrics have continued to think about how to divide the data that determines these “causes and consequences”.
In the field of natural sciences such as physics and chemistry, causal relationships can be examined using data obtained through experiments. However, in economics where humans make one-time decisions, it is not easy to observe experimental data.
■ Causal reasoning
Therefore, what was devised by Professor Emeritus Donald Rubin of Harvard University in the United States is a technique called “causal reasoning”.
For example, say you want to measure the effectiveness of a web ad for a product.
Even if the number of consumers who bought products via web advertising has increased, it cannot be said that everything was the result of advertising. Simply because the product may just fit the consumer’s preference via web advertising. Therefore, it is important to separate the data.
In this case, the pure effect of the advertisement can be measured for the first time by dividing the group through the web advertisement and the group that has the same preference but did not go through, and comparing the sales of both. In this way, a technique called “causal reasoning” has been refined for data processing technology to link the cause of “web advertising” and the result of “sales”.
■ Structure estimation
However, there are many cases where there is no reference data in the past for actual human and corporate behavior. Harvard professor Ariel Paix and others have pioneered a method called “structure estimation” that predicts the future from limited data.
For example, when companies that make similar products try to merge, there is no data to know in advance how much the merger will change the price of the product. However, you can apply data about the products and customers of the company you are merging to a model based on economic theory and predict the outcome.
The method of simulation by applying this model is called “structure estimation”. Currently, it is also applied to pre-examination of mergers by the government.
Rubin’s causal reasoning and Paix’s structural guess are both strong candidates for the Nobel Prize in Economics.
Professor Yasutoshi Watanabe of the University of Tokyo points out that “causal reasoning and structure estimation are now methods used in business sites such as IT companies.”
□Financial sector
Prof. Nobuhiro Kiyotaki from Princeton University is a Japanese who has been a strong candidate for several years.
○ Mr. Kiyotaki has been studying the mechanism of the financial crisis that makes the recession serious by the small negative shock to the economy through the fall of land prices and housing prices since the 1990s. The 1997 paper “Credit Cycles” has been cited many times, and has been applied to crisis response by global central banks and regulations on financial institutions.
○ In the financial field, Ben Bernanke, former chairman of the Federal Reserve Board (FRB), is also a candidate.
Bernanke, who studied the Great Depression in the 1930s, found out that it was the bankruptcy and the uproar of financial institutions that could make money worse.
Bernanke experienced the global financial crisis in 2008 while serving as chairman of the Fed. At the beginning of the crisis that started with the collapse of US financial giant Lehman Brothers, Bernanke quickly invested huge public funds into other major financial institutions, avoiding the chain of failures.
Although criticism has been raised for bailouts to financial institutions, it is now well-established that it has stopped the spread of the crisis. This is an example of applying cutting-edge economic theory to reality.
What areas of economics will win this year from the minimum wage to the financial crisis?
The content of the award will highlight future challenges, and we want to believe and expect that solving these challenges will enrich people’s lives.
