What are ‘natural experiments’ which fetched the 2021 Economics Nobel?
Three US-based economists won the 2021 Economics Nobel Prize for pioneering ‘natural experiments’, The Royal Swedish Academy of Sciences announced Monday.
The Prize was split two-way. One half went to Canadian-born David Card of the University of California at Berkeley while the other half was awarded to Israeli-American, Joshua D Angrist from the Massachusetts Institute of Technology, and Dutch-American Guido W Imbens from Stanford University.
Peter Fredriksson, who chairs the Economic Sciences Committee, said in a media statement: “Card’s studies of core questions for society and Angrist and Imbens’ methodological contributions have shown that natural experiments are a rich source of knowledge.” “Their research has substantially improved our ability to answer key causal questions, which has been of great benefit for society.”
What are natural experiments? Let us look at the definition provided by The New Palgrave Dictionary of Economics. “Natural experiments or quasi-natural experiments in economics are serendipitous situations in which persons are assigned randomly to a treatment (or multiple treatments) and a control group, and outcomes are analysed for the purposes of putting a hypothesis to a severe test; they are also serendipitous situations where assignment to treatment ‘approximates’ randomized design or a well-controlled experiment.”
In a rough-and-ready sense, it stands for real-world situations that are studied for their effects on individuals. “Natural persons” or “events” are randomly divided in an experiment between a controlled group and a treatment group.
The key to these observational experiments is that the results are often “serendipitous”, or ones leading to new surprising discoveries.
Canada-born economist Card used this approach to assess the impact of minimum wage increases. Those who argue against increasing floor wages, a labour-welfare measure, cite unemployment as an unwanted side-effect (since employers have to pay more in wages, they hire less). Card’s experiment showed that this needn’t be the case always.
Natural experimental approaches are based on “exclusively natural events as instruments”, according to a 2000 paper published in the Journal of Economic Literature by Mark R Rosensweig and Kenneth Wolpin.
Natural experiments weren’t always a conventional approach in the study of Economics, but have a rich history of at least four decades.
For instance, Wolpin did use some of this approach in a study on India entitled, “A New Test of the Permanent Income Hypothesis: The Impact of Weather on Income and Consumption of Farm Households in India,” published in the International Economic Review in 1982. The natural event in this study was of course weather patterns.
“Natural experiments are everywhere,” Eva Mörk, a member of the Prize Committee for the Alfred Nobel Memorial Prize in Economic Sciences, was quoted as telling a news conference by Reuters on Monday.
The Economics Prize is officially called the Sveriges Riksbank Prize in Economic Sciences. Winners are awarded a sum of US $1.14 million.