Trailblazers of the credibility revolution in economics win a Nobel : Planet Money : The Indicator from Planet Money Joshua Angrist, Guido Imbens and David Card won the economics Nobel on Monday. On today's show, we talk to the Princeton professor who mentored two of the winners.

A Nobel prize for an economics revolution

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

GREG ROSALSKY, HOST:

So, Darian, we're talking because a little committee in Sweden made a little announcement yesterday.

DARIAN WOODS, HOST:

A little announcement or the most hotly anticipated date on the economics calendar.

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GORAN HANSSON: Welcome to the Royal Swedish Academy of Sciences and today's press conference about the prize in economic sciences in memory of Nobel.

ROSALSKY: The Nobel committee announced three winners of the prize this year - Joshua Angrist, Guido Imbens and David Card. Shortly after the announcement, UC Berkeley hosted an online talk with David Card, and David thanked a special someone.

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DAVID CARD: Orley Ashenfelter, who was my thesis advisor. And Orley was really instrumental in setting up kind of a revolutionary change in the way economists do research. And I've really benefited from the inspiration that he provided.

WOODS: So when we were thinking about who to talk to about the 2021 Nobel Prize in economics, we thought who better than the revolutionary change instigator himself, Orley Ashenfelter?

ROSALSKY: So from what I understand, you were the supervisor of not one but two of today's winners of the Nobel Prize. Is that true?

ORLEY ASHENFELTER: That is true. They're great students, by the way.

(LAUGHTER)

ROSALSKY: Yeah, they're great students - not hard to believe there.

This is THE INDICATOR FROM PLANET MONEY. I'm Greg Rosalsky.

WOODS: And I'm Darian Woods. Today on the show, we try to get Orley Ashenfelter to supervise us and give us some of his magic. And we ask how these Nobel laureates spearheaded a revolution in the field of economics.

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WOODS: Orley Ashenfelter is an economist at Princeton University, and he's been there for a long time. There, he supervised - you guessed it - two of the 2021 Nobel Prize winners, David Card and Joshua Angrist.

ROSALSKY: My first question is, is there, like, a secret to your supervision? Are you doing something special?

ASHENFELTER: That's a very good question.

ROSALSKY: Orley's secret is - OK, he has no secret. But with his guidance, his students did end up winning the Nobel Prize, which comes with some serious perks. I mean, the three winners are splitting over a million dollars. Plus, they also get to call themselves Nobel laureates and, you know, milk that for the rest of their careers. But that's just the cake. For David Card at UC Berkeley, there's also the icing.

Apparently, UC Berkeley gives free parking to Nobel laureates. Do you know this?

ASHENFELTER: Yeah, they do.

ROSALSKY: (Laughter).

ASHENFELTER: Yeah. In fact, they have a - there's a - the parking signs say NL on them.

ROSALSKY: (Laughter).

ASHENFELTER: Yeah.

ROSALSKY: I just learned this. But I also heard this, and I'd like to verify with you whether it's true or not. Apparently, David Card does not drive to work. He bikes to work. So...

ASHENFELTER: Yeah, I think he does normally.

ROSALSKY: So the free parking might not actually be much of a benefit for him.

ASHENFELTER: He might start doing it. The big problem is - I think one of the reasons he rides a bike is because it's so damn hard to park.

WOODS: So what did David actually do to deserve that coveted free parking at Berkeley? The Nobel Prize committee said it gave him the award for, quote, "his empirical contributions to labor economics," end quote. And in making the announcement, the committee members specifically talked about his pioneering work doing natural experiments.

ROSALSKY: Natural experiments. One of the most prominent examples of this is a study David co-authored with the late economist Alan Krueger. The paper was written in the early 1990s, and it was called "Minimum Wages And Employment: A Case Study Of The Fast-Food Industry In New Jersey And Pennsylvania." Up until then, economists thought about the effects of the minimum wage in the same way they thought about a lot of other subjects, which is mostly in theoretical terms. And standard economic theory said a higher minimum wage kills jobs.

WOODS: David and Alan wanted to move beyond that standard 101 theory and see how the minimum wage affects jobs in the real world, now inspired by the way that researchers in the medical field had credibly shown that cause and effect using randomized experiments - you know, like randomly dividing people into two groups that are statistically identical. Researchers offer one group the actual treatment, and the other group gets the placebo. They then compare the outcomes of both groups, and then we have it. We have credible evidence about the effects of that treatment.

ROSALSKY: David and Alan dreamed of being able to do this kind of research themselves. But the problem for them - and all social scientists, really - is it's a logistical nightmare, if not impossible, to divide up large groups of people and conduct social experiments on them, at least for many kinds of policy questions.

WOODS: So when the state of New Jersey raised the minimum wage, David and Alan saw the opportunity for a natural experiment. They were going to approach it as if it were a randomized trial.

ROSALSKY: Fast food restaurants in New Jersey were the treatment group, and fast food restaurants just across the state border in eastern Pennsylvania were the control group.

ASHENFELTER: What happened was they knew that there was going to be an increase in the minimum wage in New Jersey. And before the minimum wage took place, they went out in the field to collect data. So they designed a study of what the effect would be without knowing what the effect would be. Like, that's exactly the way science should operate. You shouldn't look at it exposed then try to rationalize what you saw.

ROSALSKY: So here was this credible way to try and measure cause and effect. And the paper really captured the world's attention when they released their findings. Alan and David found that contrary to traditional economic theory, the minimum wage increase in New Jersey did not kill jobs.

WOODS: That finding that this increase in minimum wage didn't kill jobs was a bombshell for the economic world. It challenged an orthodoxy that had dominated the field for decades. So the study and a lot of similar ones that used natural experiments really put that technique on the map, and it led to a movement that economists sometimes call the credibility revolution or the empirical revolution.

ROSALSKY: David and Alan fired some of the opening shots in this revolution, and after that, that's when Guido Imbens and Joshua Angrist came on the scene. They added more sophisticated statistical techniques to decipher cause and effect. Joshua Angrist, by the way - he was also a student of Orley's and early vividly remembers his doctoral dissertation.

ASHENFELTER: His dissertation was really, I thought, a remarkable example of this natural experiment idea.

WOODS: So Joshua Angrist looked at the Vietnam draft, which was done as a random lottery.

ASHENFELTER: So there always been this claim that people who went in the military were way better off than those that didn't. And, of course, that was based primarily on the Second World War, where everybody basically had to serve. And if you didn't, you were a total loser. So what Angrist did was to actually study the - using this randomized experiment, the effect of being more likely to be serving in the military on people's incomes. And he found that it didn't increase your income. It reduced it.

WOODS: So this finding really struck people that serving your country can result in ending less over your lifetime. And the reason that Joshua Angrist said was primarily because serving in the military means less time getting job experience in the civilian world, and that loss of experience translates to lower pay. And it's findings like these that can potentially catch the eyes of leaders and voters and really move the needle in changing policies to improve the world.

ROSALSKY: Orley continues to collaborate with Joshua. I mean, they're close. In fact, when I was interviewing him, Orley received a call. He took it, and it was Joshua.

ASHENFELTER: Pretty happy day. I'm just talking about, you know, a guy from NPR about - I'm literally on a Zoom with him.

WOODS: That's a really great moment, Greg. And this is now the second time that a group of empirically minded economic researchers have won the Nobel Prize in recent years.

ASHENFELTER: It's a nice thing because the Nobel Committee has been so fixated on economic theory for so long that there have now about a couple of prizes that I think point to the way in which economic analysis is now primarily done. Most economic analysis is now applied and empirical and not just in labor economics but in many, many fields.

WOODS: The sad part about the Nobel Prize is, for whatever reason, it's not awarded posthumously. David's colleague Alan, who died in 2019, would have surely shared in the prize had he lived. But we don't need an official prize to also recognize that he was also a big part of the revolution. This episode of THE INDICATOR was produced by Julia Ritchie with help from Josh Newell. It was fact-checked by Brittany Cronin and Taylor Washington. Our senior producer is Viet Le. The show's edited by Kate Concannon and is a production of NPR.

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