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About this book

Economics is a science that can contribute substantial powerful and fresh insights! This book collects essays by leading academics that evaluate the scholarly importance of contemporary economic ideas and concepts, thus providing valuable knowledge about the present state of economics and its progress.

This compilation of short essays helps readers interested in economics to identify 21st century economic ideas that should be read and remembered. The authors state their personal opinion on what matters most in contemporary economics and reveal its fascinating and creative sides.

Table of Contents

Frontmatter

Christine Benesch Recommends “Mostly Harmless Econometrics: An Empiricist’s Companion” by Joshua D. Angrist and Jörn-Steffen Pischke

It might be a bit surprising to find an econometrics textbook in a collection of “economic ideas you should remember.” Mostly Harmless Econometrics: An Empiricist’s Companion by Joshua Angrist and Jörn-Steffen Pischke is far more than a textbook. It differs from traditional econometric textbooks because of its catchy title and refreshing language.

Christine Benesch

Matthias Benz Recommends “The Political Economy of Government Responsiveness: Theory and Evidence from India” by Tim Besley and Robin Burgess

“There are no famines in democracies,” Nobel-Prize winning economist Amartya Sen famously argued. It is less well known that he also stressed the role of a free press. In his view, politicians have to take the well-being of the citizens more into account if they run the risk of being voted out or if their actions are monitored by free media.

Matthias Benz

Aleksander Berentsen Recommends “Bitcoin: A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto

The most important contribution in economics in the twenty-first century is the paper Bitcoin: A Peer-to-Peer Electronic Cash System. It was published via a mailing list for cryptography in 2008 under the pseudonym Satoshi Nakamoto. The basic idea of the paper was to create “A purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.”

Aleksander Berentsen

Thomas Bernauer Recommends “Tracking the Ecological Overshoot of the Human Economy” by Mathis Wackernagel, Niels B. Schulz, Diana Deumling, Alejandro Callejas Linares, Martin Jenkins, Valerie Kapos, Chad Monfreda, Jonathan Loh et al.

Rees, Wackernagel, and others are shedding new light on environmental burden-shifting processes in the global economy. Distinguishing consumption from production-related ecological impacts in the context of international trade could change our conventional territorial notions of what international environmental externalities are. This, in turn, would have big implications for how international trade and environmental agreements are designed and responsibilities among nations are assigned.

Thomas Bernauer

Peter Bernholz Recommends “Redesigning Democracy: More Ideas for Better Rules” by Hans Gersbach

In his speech in the House of Commons on Nov. 11, 1947, Winston Churchill pronounced the famous dictum: “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” Churchill was and is still right. Fundamental problems remain even within the best existing democracies. Hans Gersbach designs democratic systems better able to prevent the latter developments.

Peter Bernholz

Norbert Berthold Recommends “The Son Also Rises: Surnames and the History of Social Mobility” by Gregory Clark

The growing level of income inequality over the past decades has intensified the interest in social mobility. The prospect of social advancement appeases the “relative” losers. Therefore, social mobility may be considered the glue that holds unequal societies together, both intra- and intergenerationally.

Norbert Berthold

Urs Birchler Recommends “Why Every Economist Should Learn Some Auction Theory” by Paul Klemperer

Many people think they hardly ever participate in an auction. Yet, they may be wrong. Auction-like formats abound in settings that do not look like auctions at first sight. Examples range from queuing, job search, court litigation, architectural competitions to Bitcoin mining. Knowing some basics of auction theory and a few pitfalls of auction practice can make the difference between success and disappointment. Reading Klemperer’s paper means time well invested.

Urs Birchler

Luigino Bruni Recommends “The Idea of Justice” by Amartya Sen

Amartya Sen has given contributions to ethics and philosophy of economics that have become milestones of contemporary debate. The criticism of the idea of happiness deserves special consideration by any scholar of subjective well-being and, in general, social scientists. In his vision and critique of happiness, most of Sen’s ideas of economics and philosophy are synthesized.

Luigino Bruni

Monika Bütler Recommends “The Economic Importance of Financial Literacy: Theory and Evidence” by Annamaria Lusardi and Olivia S. Mitchell

Interest compounding, accounting for inflation, and diversification of risks—economists know the importance of such knowledge for sound financial decisions. Noneconomists should know as well. That is where Annamaria Lusardi and Olivia Mitchell step in. Motivated by huge differences in retirement wealth among otherwise similar elderly households, the two researchers think about meaningful and simple ways to measure financial knowledge.

Monika Bütler

Peter Cauwels Recommends “Critical Transitions in Nature and Society” by Marten Scheffer

Your favorite band saved their epic hit single for last, and the crowd bursts in ecstatic applause. At first, the handclapping is quirky. Then, randomness dissolves and the audience organizes a regular beat. A spectator manages to construct a fancy statistical model showing that the synchronicity could not possibly have happened, with any statistical significance, in the period since the inception of the universe. Simplified like this, it is obvious that his model is fatally flawed. As the system shifts from random to synchronized, its identity changes. A model designed on a meticulous observation of Dr. Jekyll will never be suitable to predict the demeanor of Mr. Hyde.

Peter Cauwels

Sir Paul Collier Recommends “Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being” by George A. Akerlof and Rachel E. Kranton

Identity Economics is an accessible account of rigorous and highly original work by outstanding economists. Standard economics has embarrassingly little to say about the crises engulfing Western societies, failing to predict the financial crisis and silent on the mounting social crisis. Identity Economics provides a manageable approach to addressing such issues: it restores economics as a social science while retaining a framework in which economic tools are applied.

Paul Collier

Reto Cueni Recommends “Too Much Finance?” by Jean-Louis Arcand, Enrico Berkes, and Ugo Panizza

Can there be too much finance in a country? No, of course not, many would argue. Why should firms having easy access to banks, which finance their new projects be a problem? Until now, more bank lending in a country is usually seen as a positive impulse inducing more economic growth. This paper explains why such a view has its limits and why these limits are crucial for today’s world.

Reto Cueni

Jakob de Haan Recommends “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” by Daron Acemoglu and James Robinson

Economists have for some time recognized that institutions play an important role in explaining differences in the wealth and poverty of nations. But whereas most previous research focuses either on economic or political institutions, this book offers an excellent framework explaining how both economic and political institutions drive long-run economic development.

Jakob de Haan

Reiner Eichenberger Recommends “Self-Interest Through Delegation: An Additional Rationale for the Principal-Agent Relationship” by John Hamman, George Loewenstein, and Roberto Weber

Real-life behavior in situations where individuals can delegate their decisions to agents and where there are many action alternatives differs systematically from behavior in experiments with narrowly constrained action alternatives. This, however, does not mean that experiments are totally useless.

Reiner Eichenberger

Lars P. Feld Recommends “Happiness, Economy and Institutions” by Bruno S. Frey and Alois Stutzer

Frey and Stutzer analyze factors that affect subjective well-being. They focus on institutional effects, in particular the impact of direct democracy, on well-being, using Swiss data. The size of the effect amounts to the happiness effect of a jump from the lowest to the second lowest income class. Interestingly, foreigners benefit less than the Swiss, such that an additional procedural utility occurs beyond pure income effects.

Lars P. Feld

Reto Foellmi Recommends “Firms in International Trade” by Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding and Peter K. Schott

Since World War II, we have seen an ever-increasing amount of international exchange of goods, services, labour and capital. In politics and society alike, the potential effects of this phenomenon are eagerly discussed more than ever. However, knowledge is still scarce how this important feature of globalization affects the functioning of markets and firms on a smaller scale.

Reto Foellmi

Nicolai J. Foss Recommends “Economics and Identity” by George A. Akerlof and Rachel E. Kranton

Social identity has entered the discourse of social scientists, pundits, and politicians to an extent that no one could have anticipated only about a decade ago. Thus, recent electoral events have strongly pointed to the importance of identity.

Nicolai J. Foss

Bruno S. Frey Recommends “Mindful Economics: The Production, Consumption, and Value of Beliefs” by Roland Bénabou and Jean Tirole

Behavioral economics has been a huge success in economics—despite its misnomer (economics has always been behavioral, so the field should aptly be called “economics and psychology” or “psychological economics”). Today, a large number of economists engage in laboratory experiments. Despite useful insights, it is often difficult to see what distinguishes them from psychology. Bénabou and Tirole’s article provides a most useful survey of recent insights of psychology and makes a successful effort to integrate them into economics.

Bruno S. Frey

Jetta Frost Recommends “Collective Action and the Evolution of Social Norms” by Elinor Ostrom

Until now, economic theories of the firm have treated behaviour as postulated assumptions and described it as exogenously given. Accordingly, the content of firm members’ preferences ultimately determines organizational governance. However, applying Elinor Ostrom’s work to organizational governance allows for interpreting preference patterns endogenously. She provided the underpinnings for the propensity to cooperate based on the development and growth of social norms. Organizational governance can thus make it possible to reinforce conditional cooperation.

Jetta Frost

Clemens Fuest Recommends “Yes, Economics Is a Science” by Raj Chetty

Every economist who participates in debates about economic policy knows that, among “ordinary people,” the reputation of economics as a science is not great. The fact that economists often disagree is cited by many as proof that economic research is unreliable. For instance, the difference between “hawks” and “doves” in monetary or fiscal policy is an issue that regularly hits the headlines. Interestingly, most people know from their own experience that doctors often come up with different diagnoses for the same patient. But that does not make many people doubt that medicine is a science. Raj Chetty’s article is very helpful because he clearly explains what we can expect from economic research.

Clemens Fuest

Allan Guggenbühl Recommends “Storytelling Animal. How Stories Make Us Human” by Jonathan Gottschall

The economy is based on innovation. People are willing to buy new products or use services when they feel the quality of their lives will improve or a need is satisfied. With technical products, this is obvious: the new iPhone has more storage space, or the automatic lawn mower frees us from tedious gardening. With services, which are offered by humans and include personal interaction, it is more complicated; quality is not the core argument.

Allan Guggenbühl

Jochen Hartwig Recommends “In It Together: Why Less Inequality Benefits All” by OECD

Income inequality is “the defining challenge of our time,” former US President Barack Obama said in a speech in December 2013. Undoubtedly, the financial crisis and the sluggish recovery in its aftermath have increased attention to rising inequality. The OECD published a report titled In It Together: Why Less Inequality Benefits All in 2015. This is a text you should read and remember because it thoroughly points out why inequality is harmful and what can be done to reduce it.

Jochen Hartwig

Jürg Helbling Recommends “Capital in the Twenty-First Century” by Thomas Piketty

Piketty puts economic inequality back on the agenda not only of economic debate but also of public discussion at large. Whereas mainstream economics considers budget restrictions for households and firms and emphasizes the importance of private property rights, Piketty addresses the unequal distribution of wealth and its consequences for economic growth and social stability. For him, economics is a social science—or political economy—that seeks to contribute to an understanding not only of the current problems but also of the history of industrial-capitalist societies by taking political structures and processes into account as well. Piketty uses a historical and statistical approach to examine the development of the unequal distribution of wealth in Europe and the United States since the late eighteenth century.

Jürg Helbling

Sir David F. Hendry Recommends “An Analysis of the Indicator Saturation Estimator as a Robust Regression Estimator” by Søren Johansen and Bent Nielsen

It may be thought that testing for outliers and shifts everywhere in a sample might adversely affect statistical inference. Fortunately, the rigorous and innovative analysis by Søren Johansen and Bent Nielsen for impulse-indicator saturation (IIS) allays such concerns. Under the null of no outliers, the limiting distribution of the IIS estimator of economic parameters of interest converges to their population parameters at the usual rate and is normal for stationary data. Yet IIS checks for an unknown number of outliers, of unknown magnitudes and signs, not knowing in advance where they occur in the data.

Sir David F. Hendry

Gerard Hertig Recommends “Legal Origins” by Edward L. Glaeser and Andrei Shleifer

Clearly, culture, politics, and religion are likely to influence the legal regime and its economic impact. The crucial issue, however, is whether legal origin is a proxy for merely one or for several of these factors.

Gerard Hertig

Bruno Heyndels Recommends “Gender Quotas and the Crisis of the Mediocre Man: Theory and Evidence from Sweden” by Timothy Besley, Olle Folke, Torsten Persson, and Johanna Rickne

Some things we, economists, do not like. Maybe because we were taught to dislike them. Maybe because that is who we are. It seems like some things should be disliked. Political incorrectness may be one of these. We tend to dislike “should.” Among economists, gender quotas in politics tend not to be liked. The meritocratic critique is that competence, not sex, should form the basis of political representation. Imposing more female representation would lead to less competent representatives and inferior policies. The claim is that constraining choices has rarely made the world a better place.

Bruno Heyndels

David Iselin Recommends “The Superiority of Economists” by Marion Fourcade, Etienne Ollion, and Yann Algan

In 2015, Marion Fourcade, Etienne Ollion, and Yann Algan published an article in the Journal of Economic Perspectives that sheds light on economics in an unconventional way: The authors give a sociological perspective on the economics profession. They show how economists found their way to the top of the social sciences and how this reflects back into their self-perception.

David Iselin

Beat Kappeler Recommends “Beyond the Keynesian Endpoint: Crushed by Credit and Deceived by Debt – How to Revive the Global Economy” by Tony Crescenzi

Demand management by way of additional public spending is obsolete, if private and public debt levels are such that they must be reduced. This deleveraging will pull the marginal propensity to consume into reverse. It will be way below the assumptions of Keynesians and their multiplier. Public spending therefore cannot be increased in order to reduce unemployment and foster growth, even less so as the public debt must be reduced in the first place. Shifting the ills of the private sector to the public sector, as practised after the financial crisis, is not possible any more. There are now overleveraged societies.

Beat Kappeler

Martin Killias Recommends “Crime and Everyday Life” by Marcus Felson and Rachel Boba

You remember the times when, walking the streets, we regularly had to watch the ground in order not to march into what a dog might have left on the sidewalk? Many cities enacted regulations providing for fines or other punishment to deter careless dog owners. Nowadays, streets are clean, even in countries where the problem used to be a real nuisance. It was the invention of small plastic sacks that allowed dog owners to collect from the ground whatever their darling had left over. No other feasible measure might have achieved such success, at least not at acceptable costs.

Martin Killias

Hartmut Kliemt Recommends “Violence and Social Orders” by Douglass C. North, John Joseph Wallis, and Barry R. Weingast

Violence and Social Orders reminds economists that the free markets of Western open-access societies that extend “stability of possession, its transference by consent and the execution of promises” to large numbers of citizens are political institutions. In a world in which the use of violence in furthering the interests of particular groups is always an option, the nonpartisan enforcement and prevalence of the legal conventions of natural law that are constitutive of the private contract society is a truly astonishing phenomenon: real politics creates a non-political sphere.

Hartmut Kliemt

George Loewenstein Recommends “Self-Signaling and Diagnostic Utility in Everyday Decision Making” by Ronit Bodner and Drazen Prelec

To the extent that other people lack information about us, we can sometimes signal our “type” via our behavior. For example, if a generous person would give to a beggar, but a selfish person would not, then one can signal one’s generosity by giving. The fundamental psychological assumption behind self-signaling theory is that people often lack information about themselves. Given such a lack of self-knowledge, we may make judgments about ourselves in the same way we do about others, inferring who we are from the actions we take. This creates a motive to take actions that signal desirable characteristics or traits.

George Loewenstein

Ulrich Matter Recommends “Towards a Political Theory of the Firm” by Luigi Zingales

Classical economic theory has used the term firm to describe atomic entities in free markets or simply equated the firm with a collection of contracts. Zingales contrasts this view with reality and draws two core conclusions. First, large shares of global economic activity take place within a few dozen firms. Second, he stresses that while this fact is largely ignored in economic theory, it poses the risk of a “Medici vicious circle,” in which economic and political power reinforce each other, threatening both free markets and democracy.

Ulrich Matter

Peter Nijkamp Recommends “The False Duality of Work and Leisure” by Joy E. Beatty and William R. Torbert

Leisure contributes positively to the economy. Economists have frequently addressed the effect of leisure time on individual or collective economic outcomes (e.g. wages, productivity, efficiency, well-being). Productive time and free time are seen as enemies: more leisure time tends to reduce individual or aggregate economic performance. But leisure time and income are not necessarily antipoles: to achieve a higher position on the income ladder does not always require spending more hours on work and less hours on leisure.

Peter Nijkamp

Karl-Dieter Opp Recommends “Nudge: Improving Decisions About Health, Wealth, and Happiness” by Richard H. Thaler and Cass R. Sunstein

The book proposes a wide version of the economic model. The assumption of perfect information is dropped, and all kinds of preferences are admitted. Not only egoism, but also, e.g., the motivation to follow accepted norms or to gain status are included. This allows a better explanations of many phenomena such as rule following, sanctioning or voting. Only such a model can be used for “libertarian paternalism” assuming that people can be influenced by “small changes in context.”

Karl-Dieter Opp

Margit Osterloh Recommends “Do Women Shy Away from Competition? Do Men Compete Too Much?” by Muriel Niederle and Lise Vesterlund

Gender differences in preferences receive huge attention in the popular press. However, in economics this issue was neglected for a long time. Today, the situation has completely changed. To a great extent, this is due to Niederle and Vesterlund’s article, which was among the first to address whether women and men differ in their attitudes to competition. A series of laboratory and field studies confirm that women shy away from competition with men, and women underperform when competing against men.

Margit Osterloh

Martin Ravallion Recommends “Poverty Traps” by Samuel Bowles, Steven Durlauf, and Karla Hoff

The idea of a poverty trap has been around for a long time, but remains relevant today. In the classic model, over time, a low-level attractor pulls in any wealth-poor people nearby. Yet, this coexists with other, preferred, equilibria—some stable, some not. Getting people out of the trap will not be possible with only a small transient gain in wealth, and people in their better equilibrium can be vulnerable to large downside shocks. The idea has important implications for development policy, including social protection.

Martin Ravallion

Susan Rose-Ackerman Recommends “Corruption, Norms, and Legal Enforcement: Evidence from Diplomatic Parking Tickets” by Raymond Fisman and Edward Miguel

The article by Ray Fisman and Edward Miguel, “Corruption, Norms, and Legal Enforcement” illustrates an important strategy for empirical researchers to use when faced with difficult-to-study topics. It should inspire others to be similarly creative in locating usable data that can be an alternative to randomized controlled trials. Such trials, although a valuable tool, cannot answer many important social science issues. Even if done well, they ought not to replace other forms of data gathering.

Susan Rose-Ackerman

Katja Rost Recommends “The Network Structure of Social Capital” by Ronald S. Burt

Burt connects sociology with economic insights. He argues that short-run advantages on the path to equilibrium in markets can be explained by network entrepreneurs: by brokerage in the social structure of relationships. Societies are markets in which people exchange a variety of goods and ideas in pursuit of their interests. Certain people and groups receive higher returns to their efforts by enjoying higher incomes, becoming prominent, or leading more important projects. From a human capital point of view, people who do better are more skilled. From a social capital point of view, people who do better are better connected.

Katja Rost

Christoph A. Schaltegger Recommends “Toward a Second-Generation Theory of Fiscal Federalism” by Wallace E. Oates

Oates distinguishes between a first and a second generation of theory on fiscal federalism. The first draws more on welfare economics; the second points more strongly to political economy aspects and incentive problems. All research in this field began with the decentralization theorem. The different levels of government should provide public goods according to their natural perimeter of effect. Since in reality a perfect assignment of public goods is not possible, fiscal equalization in the sense of an arrangement for fair cost sharing is of importance.

Christoph A. Schaltegger

Mark Schelker Recommends “Salience and Taxation: Theory and Evidence” by Raj Chetty, Adam Looney, and Kory Kroft

Salience refers to the degree of (in)attention individuals pay to an important aspect of a choice (e.g., a tax): even though individuals know about it and have experienced it before, they might not, or not fully, consider it when making the actual choice. Neglecting non-salient information can cause imperfect optimization. This is a significant extension of the traditional approach, in which the quality and quantity of information, or uncertainty, are key. An early and interesting study comes from Chetty et al. (American Economic Review 99:1145–1177, 2009). They ask whether the salience of a value-added tax (VAT) affects individual decision-making. They analyze a setting in the USA, where the VAT is added only at the cashier, and show that individuals do not fully internalize it if only net-of-tax prices are displayed.

Mark Schelker

Sascha L. Schmidt Recommends “Moneyball: The Art of Winning an Unfair Game” by Michael Lewis

The efficient-market hypothesis states that asset prices fully reflect all the information that’s extant, and therefore it is impossible to consistently “beat the market.” Accordingly, market prices should only react to new information. Until the beginning of this century, professional baseball was seen as such an efficient business, because all teams should have been able to access the same established performance metrics of the players. Billy Beane, General Manager of the Oakland A’s, demonstrated that there are undervalued assets in a seemingly efficient market and therefore refuted the efficient-market hypothesis.

Sascha L. Schmidt

Friedrich Schneider Recommends “Public Choice III” by Dennis C. Mueller

Public choice is the study of behaviour at the intersection of economics and political science. Constitutional political economy provides important insights into the relationship between effective constitutions and the behaviour of ordinary political markets. The use of the public choice analysis in politics and economics has overall not been as successful in policy advice and is not as important in overall economics as we, the public choice scholars, wish it to be. The victory of public choice in mainstream economics may not yet have arrived, and the share of public choice contributions remains small. Nevertheless, I am convinced that there will be a great future in public choice.

Friedrich Schneider

Ronnie Schöb Recommends “Economics and Identity” by George A. Akerlof and Rachel E. Kranton

People want to be happy, but happiness cannot be derived merely from economic prosperity. Economists became more and more interested in other values that determine individuals’ well-being and thus affect their behavior. Social psychology proved helpful in highlighting the great importance of social identity on subjective well-being, and George Akerlof and Rachel Kranton deserve credit for bringing these considerations to economic reasoning. They argue that social identity strongly affects economic outcomes, and incorporating the concept of identity into an economic model of behavior thus allows a better understanding of many decisions that individuals make when interacting with others.

Ronnie Schöb

Gerhard Schwarz Recommends “Why Capitalism?” by Allan H. Meltzer

The book presented here brings neither an important theoretical breakthrough nor an original idea, but it gives a stimulating answer to a fundamental question, asked after the subprime crisis of 2008 even by many lukewarm supporters of the market economy. It is written by an outstanding economist, Allan H. Meltzer (1928–2017), who due to his modesty, seriousness, and unwillingness to produce headlines is less known and estimated than he deserves.

Gerhard Schwarz

David Stadelmann Recommends “Public Policy and the Initiative and Referendum: A Survey with Some New Evidence” by John G. Matsusaka

In most developed economies, about half of gross domestic product is redistributed through means of collective decisions. The remainder is profoundly influenced by laws, regulation, i.e. by collective decisions again. Collective decisions themselves are more and more often taken by employing instruments of direct democracy. An increasingly critical, reflective, and educated citizenry requests more direct control over policy issues that are of importance to them. The trend towards direct democracy is likely to continue throughout the twenty-first century.

David Stadelmann

Bruno Staffelbach Recommends “The Lucifer Effect: Understanding How Good People Turn Evil” by Philip Zimbardo

What makes good people do bad things? What leads normal people to behave immorally? Such questions reside in ethics, law and politics, as well as within all people as moral subjects, as actors, as persons affected by decisions and as players in public and private organisations. There are two ways in which human behaviour can be explained. One looks for reasons in the character of the individual perpetrator. This has indeed become the rule in our ever more individualised world in the industrial west. The central questions are, Who is responsible? Who caused it? Who is to blame?

Bruno Staffelbach

Tobias Straumann Recommends “This Time Is Different: Eight Centuries of Financial Folly” by Carmen M. Reinhart and Kenneth S. Rogoff

The global financial crisis of 2008–2009 not only shook financial markets, world trade, and governments but also the economics profession. It would be wrong to speak of a revolution, but a series of contributions by economists and economic historians have made it clear that we need to develop a deeper understanding of financial markets, debt dynamics, and macro-financial linkages in order to contain future financial crises.

Tobias Straumann

Alois Stutzer Recommends “Political Selection” by Timothy Besley

When a gulf opens up between citizens and politicians, as some diagnose for Western democracies these days, competitive elections are traditionally seen as a sanctioning mechanism that retrospective voters as principals use to tame their agents. In his contribution entitled “Political Selection,” Tim Besley greatly complements this view with a rich set of considerations and ideas. He emphasizes that the delegation problem should also be addressed by focusing on selecting competent and honest people into public office.

Alois Stutzer

Cass R. Sunstein Recommends “Scarcity: Why Having Too Little Means So Much” by Sendhil Mullainathan and Eldar Shafir

It is common to think that economics is the study of scarcity—in terms of goods and services. But economists have rarely studied cognitive scarcity, at least not in any sustained way. A moment’s reflection should be sufficient to show that human beings have limited mental bandwidth. That limitation has immense importance for our ability to focus and to act.

Cass R. Sunstein

Guido Tabellini Recommends “A Model of Social Identity with an Application to Political Economy: Nation, Class, and Redistribution” by Moses Shayo

The standard economic approach has been challenged by political scientists, based on extensive empirical and survey evidence. Sociology and psychology, much more than economics, hold promise to explain individual political preferences.

Guido Tabellini

Mark Thoma Recommends “Learning and Expectations in Macroeconomics” by George Evans and Seppo Honkapohja

Is it reasonable to assume expectations are formed rationally? In order to form rational expectations, people must know all of the equations describing the economy as well as the statistical properties of the shocks. In addition, they must use this knowledge to produce the best possible forecasts of how the economy will evolve over time. But how do people obtain the required information? Is it possible to use standard econometric methods to learn enough about the economy to produce rational expectations?

Mark Thoma

Benno Torgler Recommends “Economics Rules: The Rights and Wrongs of the Dismal Science” by Dani Rodrik

Economics like any field is subject to change, but change can lead to identity crises. What am I? An Econ? A Human? Perhaps even both? I feel like the search for the one and only universal model to map my twisted econ-human personality makes me even more depressed. Dani Rodrik is a great state-of-the-art shrink offering a remedy with his book drumming common sense into my mind. Economics can be viewed as a collection of diverse contextual models that do not lead to a unique conclusion.

Benno Torgler

Jean-Robert Tyran Recommends “Patience and the Wealth of Nations” by Thomas Dohmen, Benjamin Enke, Armin Falk, David Huffman, and Uwe Sunde

Why do some countries grow rich while others remain stuck in poverty? This has been one of the most important questions in economics at least since Adam Smith published his Inquiry into the Causes and Nature of the Wealth of Nations in 1776. Standard economic theory explains economic growth with reference to the abundance of physical and human capital and technology. Empirically, these factors are indeed related to income and growth across countries and therefore explain the latter variables in a statistical sense. But this correlation does not reveal the deeper causes of capital accumulation.

Jean-Robert Tyran

Ruut Veenhoven Recommends “The Broaden-and-Build Theory of Positive Emotions” by Barbara L. Fredrickson

Today two strands of happiness research have developed: happiness economics and positive psychology. This paper highlights one of the ideas developed in that latter tradition. Though the main focus of happiness research is on what makes people happy, a side issue is what happiness does to people. The broaden-and-build theory holds that how well you feel affectively tends to broaden your behavioral repertoire, among other things, by fostering activity and widening perceptual scope. This makes you function more effectively, as a result of which you build more resources, such as economic, mental, and social capital.

Ruut Veenhoven

Carl Christian von Weizsäcker Recommends “Trills Instead of T-Bills: It’s Time to Replace Part of Government Debt with Shares in GDP” by Mark J. Kamstra and Robert J. Shiller

Kamstra and Shiller propose a financial instrument issued by the government which they call “Trills.” A unit Trill is the right to receive from the government an annual payment equal to one trillionth of the country’s GDP in nominal terms. Trill security would fill a gap in the world of securities. “Trills” might allow investors a return very nearly as high as the S&P 500, with half the volatility. Indeed, investors gain a much higher return and lower volatility than if Trills are excluded from the mix.

Carl Christian von Weizsäcker

Gert G. Wagner Recommends “Homo Ignorans: Deliberately Choosing Not to Know” by Ralph Hertwig and Christoph Engel

For decades, economics ignored psychological traits and mechanisms. Cognitive psychology offers economists more than just “nudging”. It also offers “boosting,” which stresses the possibility to foster extant competencies. Boosting helps people get closer to the rational agents populating economic models. But psychology also deals with deliberately choosing not to know, introducing the Homo Ignorans.

Gert G. Wagner

Hannelore Weck-Hannemann Recommends “Orchestrating Impartiality: The Impact of ‘Blind’ Auditions on Female Musicians” by Claudia Goldin and Cecilia Rouse

Discrimination is a hot topic. Seminal contributions in economics have focused on disparities in earnings between groups, including gender differences. The widely used gap method attempts to control all relevant determinants of wage differentials, with the remaining gap undefined. The unobservable is subsequently interpreted as discrimination. Goldin and Rouse use an innovative approach to directly investigate and prove discrimination.

Hannelore Weck-Hannemann

Barry R. Weingast Recommends “Economic Backwardness in Political Perspective” by Daron Acemoglu and James A. Robinson

This paper is one of my favorites in the extensive and powerful Acemoglu and Robinson (AR) et al. corpus. Although it is not among their most recognized works, it deserves greater attention. This paper demonstrates the power of the political economics approach, especially how political institutions directly influence economic development.

Barry R. Weingast

Barbara E. Weissenberger Recommends “Management Control Systems: Performance Measurement, Evaluation, and Incentives” by Kenneth A. Merchant and Wim A. Van der Stede

A key challenge in management is to achieve behavioral control, i.e., to ensure employees contribute effectively to a firm’s goals. Kenneth A. Merchant and Wim A. Van der Stede address this challenge through their seminal economic “object-of-control framework,” which allows us to integrate the multifaceted theoretical lenses from economics, psychology, sociology, or politics and philosophy for understanding, analyzing, and resolving management control problems—a fascinating approach and economic idea well worth remembering.

Barbara E. Weissenberger

Ludger Woessmann Recommends “Measuring the Impacts of Teachers II: Teacher Value-Added and Student Outcomes in Adulthood” by Raj Chetty, John N. Friedman, and Jonah E. Rockoff

Increasing evidence shows that the long-term prosperity of individuals and societies alike depends crucially on their education and skills. The fascinating research by Chetty, Friedman, and Rockoff shows that high-quality teachers—those whose students show higher learning gains—have very strong effects on their students’ lifetime outcomes. If you replaced a teacher in the bottom 5% of the distribution with just an average teacher, this would raise the discounted value of the total lifetime income of the students in the classroom by roughly a quarter of a million dollars.

Ludger Woessmann

Klaus F. Zimmermann Recommends “Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being” by George A. Akerlof and Rachel E. Kranton

Economists explain individual behavior by market prices, total income, and preferences through a utility evaluation of alternative actions. A new research agenda adds an identity variable that depends on the individual’s actions, its assigned social categories, and the actions of others. Social norms related to expected behavior in social groups can influence individual behavior and choices. If monetary factors are constant, any choices in conflict with identity are avoided.

Klaus F. Zimmermann

Postscript

The present book on 21st Century Economics: Economic Ideas You Should Read and Remember contains 61 recommendations by the same number of scholars from many different countries and with a large range of research orientations.The recommendations given of what the individual scholars judge to be important for present day economics vary widely.

Bruno S. Frey, Christoph A. Schaltegger
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