David Daokui Li: The 2021 Nobel Prize in Economics is Different, Awarding the Methodology of the Past Three Decades

2021-10-13

The 2021 Nobel Prize in economics was awarded by the Royal Swedish Academy of Sciences to David Card, Joshua Angrist, and Guido Imbens for their empirical research on labor economics and their contributions to causality methodology. Upon the announcement of the award, Tencent Finance immediately connected with David Daokui Li, Director of ACCEPT at Tsinghua University and Co-president of the Society for the Analysis of Government and Economics (SAGE), for comments. According to Professor Li, “This year’s Nobel Prize in Economics actually reflects a new trend in the economic community. In other words, over the past three decades, economic scholars have paid increasing attention to verifying or discovering certain economic principles or phenomena from empirical data.”

The essential excerpts of the interview are provided as follows:

1. Why was the 2021 Nobel Prize in Economics awarded to these scholars?

This year’s Nobel Prize is more inclined toward awarding research methodology rather than theory. Over the past three decades, there has been a new trend in the field of economicsnamely, economic scholars have paid increasing attention to verifying or discovering certain economic principles or phenomena from empirical data.

Why is this the case? Previously, everyone assumed that certain economic principles were natural truths that did not need to be proven by numbers. For instance, people used to assume that when prices rise, demand should fall. Thus, when wages go up, the demand for labor goes down, and if the government enforces requirements for higher wages, enterprises should decide to reduce employment. However, over the past three decades, economists have argued that we cannot simply take these things for granted, and it is necessary to prove these principles through statistical analysis.

Half of the 2021 Nobel Prize in Economics was awarded for work in labor economics. We ought to adopt a broader understanding of "labor economics" as a field that uses a large amount of data to verify or discover a series of social phenomena. Nobel laureate David Card conducted his most vital work at Princeton University in collaboration with the late economist Alan Krueger. They used data to empirically examine whether the government’s enforcement of higher minimum wages for enterprises would reduce corporate employment.

In response to this question, it is tempting to assume that employment would naturally fall. However, these two scholars found through statistical experiments that this was not the case. They went to neighboring New Jersey and Pennsylvania for observation, finding that the number of employees increased in New Jersey, where the minimum wage also went up.

Their research findings triggered heated debates in the economic community. Some scholars said that their data was wrong, but I think that they were right in that there are so many real-life factors that could impact employment. An increase in minimum wage can motivate previously reluctant individuals to seek employment opportunities, increasing the number of applicants. As a result, employers will have a larger base of applicants from which to choose high-quality talents.

If such an optimal result is on the horizon, why are enterprises still reluctant to take the initiative to increase wages? This is because enterprises also have complicated decision-making mechanisms, so their decisions may not always be optimal. By referring to this case, I hope to demonstrate that the Nobel Prize in Economics was awarded to David Card mainly for his contribution to empirical research, with everything stemming from reality rather than theory.

Joshua Angrist, another winner, is best known for his research on the impact of military service on a person’s life. This is not only an economic question, but a sociological one.

During the Vietnam War, when the U.S. imposed mandatory requirements on military service, it began using a random lottery to decide who would serve. This random lottery mechanism eliminated certain factors of artificial selection, including education and personal will, making the final results more objective. Angrist found that after a decade, the wages of those who had been selected for military service was 15% lower than those who had not been selected to serve. This experiment was a randomized trial.

Guido Imbens, who does purely econometric methods, devised a statistical method to solve the problem of drawing lots, as the lottery may be affected by a series of other complicating factors. For instance, those who were not selected to become soldiers through the lottery may have chosen to join the military anyway. Those chosen via lottery were not necessarily the same as those who were not. Those who joined the military of their own accord could have been influenced by numerous complicated factors, and thus it is necessary to further distinguish these factors. How should we compare these factors, and which ones feature a stronger causality?

Strictly speaking, this year's Nobel Prize in Economics was not awarded for a specific theory, but for methodology. To some extent, this methodology has returned to empiricism rather than rationalism. Though the development of a society is a rational process, empiricists advocate basing research in reality and are only convinced through verification by data. In general, this year's Nobel Prize in Economics is essentially an affirmation of a new trend in the development of economics, which is composed of two aspects: First, the empirical method of starting everything from data; and second, the econometric methodology.

2. The Nobel Prize in Economics is more concerned with the problems of economics itself, rather than affirming a certain academic point of view. 

The Nobel Prize in Economics was not established by Alfred Nobel, but by Sweden’s central bank Sveriges Riksbank in the name of Nobel, and is officially referred to as the Prize in Economic Sciences in Memory of Alfred Nobel. In particular, the plural form of sciences indicates the award's emphasis on the research methods of the natural sciences. Of course, such an understanding is controversial from the outset, as many people believe that the research methods of the natural sciences are not fully applicable to economics, given that economic researchers are not neutral. As they are also an integral part of social and economic activities, researchers have their respective positions.

Nevertheless, in general, the Nobel Prize in Economics focuses more on issues related to the field of economics itself rather than the controversies that exist in reality. Economic scholars are mainly interested in the progress made in economics over the years, new trends of thought, and newly developed research methodologies. From this point of view, this year’s prize is actually an affirmation of the overall trend of the past three decadesawarded more on the grounds of the development of economics itself than an affirmation of a specific academic point of view. This year's prize is not to say that the minimum wage ought to be raised, nor does it suggest whether becoming a soldier brings benefits or not. It was not granted to affirm a specific discovery, but is aimed at reflecting and reviewing the development of economics itself.

In any case, the Nobel Prize this year demonstrates an emphasis on methodology. In this sense, it is truly faithful to the original intention of the award.

3. This year's Nobel Prize was awarded to a "group portrait" of scholars.

Some past winners of the Nobel Prize in Economics have been the founders of a specific field of economics, but that was not the case this year. From my perspective, three representative figures were selected and awarded this year, affirming a new trend in economics over the past three decades.

If you were to ask me whether these three people are the most suitable laureates, I would not dare say. I even think I might be able to find another three alternatives. I am inclined toward the opinion that this year’s prize was awarded to a "group portrait" rather than a single groundbreaking contribution.