Nobel Prize-winning ‘natural experiments’ approach made economy more robust
The “natural experiments” approach to economics that won three researchers the 2021 Sveriges Riksbank Prize in Economics has helped make the field more robust, economists say.
Joshua Angrist from the Massachusetts Institute of Technology (MIT) in Cambridge, Guido Imbens from Stanford University in California and David Card from the University of California, Berkeley, received the award for their work which shows how causation can be inferred real-time observation data. world natural experiences. Their work has been used to examine, for example, how different minimum wages affect jobs and firms; and the economic impacts of immigration.
“Causality is the holy grail in economics,” says Diane Coyle, an economist at the University of Cambridge and author of a new book, Cogs and monsters: what the economy is and what it should be. The decision will be widely welcomed by economists, she adds. “These are people who have advanced the ‘applied turn’ in economics through their work on methods of detecting causal relationships.”
Understanding cause and effect in the social sciences is hampered because controlled experiments – such as randomized controlled trials (RCTs) – may not always be practically or ethically possible. But the economy has undergone “a credibility revolution,” says macroeconomist Lisa Cook of Michigan State University at East Lansing, “and these people have been central to it.”
The award came as a “total surprise,” Card said. Nature. “I thought there were a lot of very deserving alternatives.” Card thinks the main impact of the trio’s research is “to get people to spend a lot more time and effort developing credible, high-quality empirical evidence, and ‘exposing’ weak evidence.”
“Before these three and [the late Princeton University economist] Alan Krueger,” economists “just said correlation isn’t causation, then just threw that maxim away and made causal claims without the evidence for them,” Cook says.
By making the conclusions of economic research more robust, the laureates have helped to secure the observations as a basis for developing reliable policy decisions. “You don’t want to use a bunch of correlations to inform policy,” Cook says. “You want to be as sure as possible that there is a causal link between the policy you want to put in place and the outcome you are interested in.”
She stresses, however, that the approach of using natural experiments is not a panacea. “Sometimes,” she says, “we don’t have enough facts to put the puzzle together” to create a reliable causal story.
An ethical solution
In the natural sciences and medicine, researchers may seek to establish causal relationships by conducting experiments, such as RCTs, in which one variable is changed while others remain unchanged.
Drugs, for example, are tested using RCTs, with one group of people randomly assigned to receive the drug and another to receive a placebo. RCTs can sometimes also be used in economics – they were at the heart of work that saw the 2019 prize awarded to Esther Duflo and Abhijit Banerjee, both at MIT, and Michael Kremer, now at the University of Chicago in the Illinois. But often this approach is impossible or even unethical – for example, it would not be appropriate to impose unequal wages on a group of people to assess the relationship between income and productivity. The three winners have played a crucial role in the development of an alternative strategy.
In 1991, Angrist, in collaboration with Krueger, examined the question of whether more educated people are more likely to earn more throughout their working lives.1. They pointed out that it cannot be assumed that more education causally leads to higher incomes. Indeed, people who choose to study for longer periods may also have associated motivations or attributes that also increase their earnings. To determine whether educational attainment determines earnings, the two researchers looked at the natural experience offered by compulsory schooling. In the United States, people born at different times in a given year will be in the same class at school. This provides a natural cohort to measure the relationship between the time a person spends in school and their earnings.
Card and Krueger, on the other hand, examined what happens to employment levels when a minimum wage is introduced or changed. In the early 1990s, they used the natural experiment provided by comparing employment levels in two neighboring US states, New Jersey and Pennsylvania, which had different minimum wages, but which might otherwise be considered comparable.2. Card also examined the effects of immigration on wages – an issue relevant to today’s debates in the United States and Europe.
In 1994, Angrist and Imbens developed a mathematical formalization for extracting reliable information about causality from natural experiments, even if their “design” is limited and compromised by unknown circumstances such as incomplete participant compliance.3. Their approach showed which causal conclusions could and could not be supported in a given situation.
So there are strong connections between the work of the three recipients, says Card. “Much of my work, Angrist and Krueger in the late 1980s and early 1990s, was motivated by the same wide range of concerns about the credibility of standard approaches to studying things like minimum wage, return in school, the costs of military service, and the effects of immigration,” he says.
Card, like many others, believes that if Krueger – who chaired the Council of Economic Advisers in former US President Barack Obama’s administration – had not died in 2019, he would have shared the prize as well.