 Ladies and gentlemen, very welcome at this very first Vrienden of Kopenhagen Lecture. It's a great honour for myself, Oswald Kuhne, I'm the chairman of the foundation, to host you all here this afternoon. It's a new initiative from our foundation, and as many know, but also many probably not net you know, de Vrienden of Kopenhagen is a group of very well committed alumni, which try to support the university with all means. That is with knowledge, with introductions, with networking, and with support, among others also financial support. And today is one of our new initiatives to make sure that we try to support and to connect the university with their alumni and with the outside world. Because that finally is important if we also look at the theme of our university understanding society. It's also a great honour that a lot of students are here today, because we all are linked with one item, that a lot of us have graduated at this university, and a lot of them today try to graduate at this university. So we all are very pleased that you are here today, en we hope that we can offer you a very inspiring afternoon. Why this lecture? Because we do have a lot of initiatives from our foundation, boardroom meetings, all kinds of other networking activities. But we believe that it is very important to bring high level knowledge to this university, by which we can also reach the current students. And what we finally hope, of course, is when they finally graduate, that they will become a new friend of Copenhagen, and that they again can support the university for many, many years. So we like to contribute with our activities to our international orientation of this university. And for that reason we are very pleased and honoured to host this afternoon Professor Danny Wodewijk here. So once again thank you for being here. You flew in this morning out of Boston. So the first thing I did this morning was looking outside whether there was a big fork and you could not land here. And then we had a big problem, but we are very pleased that you are here and take the time to honour this very first lecture. And we also are very pleased, but I will come back to that later this afternoon, that we have taken the initiatives from the alumni to introduce two new scholarship, one for the best bachelor student and one for the best master student. But for that I will refer to a later moment in the program. I also want to pay special attention to an initiative from one of our alumni, Marek van Balagorje, who offered us this afternoon the so-called tri-handshake app. I believe most of you have been handed over small cards. So if you are interested and we would very please welcome you to do that, download that app and use it as a tool for making use of this very unique network. Also for the current students. We believe this is a very nice tool to be connected with alumni, prominent alumni of this university. And Marek, thank you for taking this initiative for this. We also have some special announcements. We have some changes in the board of the foundation. Unfortunately Patrick Vermeuler has to stop somewhere in the first half of this year, after more than ten, even thirteen years. Officially it should be ten, but we have a little bit like this. And we are very pleased that Peter van Berder will take over his position in the board of the foundation. So we welcome Peter for that. En we also working on our next anniversary, which we try to celebrate in January 2018. And in the coming weeks we will try to nominate a committee to work on that, to organize a very special program. We also are very pleased that today we have approximately forty alumni of this university, which are not yet a member of the foundation. En of course in daily life I'm a businessman, and I will put on my commercial face. But we really hope, we sincerely hope that you will join our foundation after this meeting or somewhere in the coming months. Because we believe this is a really unique group of alumni, and we hope that you are connected with us. And also by doing that, helping our nice and beautiful and intelligent university to further develop in that. Please, if you have any question that come to me, or to one of the other board members, and we will support you in that becoming a friend. And finally, we do have also a so called who is who app, for those who are not yet in, have activated that, please do that. Because it's another way to communicate with each other, and to use the network. And then finally some upcoming events. We probably will have a meeting in Utrecht, in somewhere before summer, where we tried to visit both Dutch railways through our friend Bert Groenewegen, and also the School of Catalogic Theologically in Utrecht. Difficult always. We also have two boardroom meetings, one at Randstad Holding, where CEO Jacques van de Broek will host us. Which is very interesting, and we will announce in the coming months some others. And we probably will celebrate our anniversary next year in January 26. So please do put that already in your agenda. Well, that's for my part of this moment. Once again, I hope we all will have a very inspiring afternoon with this first Copenhagen-Freeden of Copenhagen lecture. And then I'll give the floor to Sylvester Eifinger, who will introduce Danny Waterway further to you. Sylvester, thank you. And Glashofer, is that possible? Welcome. Well, I see that our auditorium is already fully occupied, which is of course what we desired, of course. And even on the balcony, there are some places occupied. Thank you very much for coming here. I won't repeat a welcome. I will introduce Professor Daniel Rodig. I'm very honored and pleased to introduce my colleague and friend, Professor Daniel Rodig of Harvard University. We know each other for quite some time. We both gave recently keynote speeches at the Columbian Banking Summit. You remember in June 2016, which was a big event, the five times the audience, 3,000 people in terms of academics, policy makers, ministers, senators, CEOs, bankers. It's the biggest event there. And I was very impressed by the speech there by Danny Rodig in Kathugena en had asked him on behalf of de Vrienden van Kopenhagen whether we would be prepared to give this first Vrienden van Kopenhagen lecture in 2017 here at Tilburg University. Many people have asked me what makes Danny Rodig so special as an academic, as a columnist, as a policy advisor, and particularly as a human being. What is the secret of Uncle Danny as the students at Harvard University like to call it? Which is a sign of affection by the students. First of all Danny is a first rate academic in economics, political science and social sciences. In the tradition of the political economy as a profession used to be called in the past since Adam Smith. Danny published Pathbreaking Thoughts in his books on Globalization, Inequality and His Famous Trilema and also on the Rights and Wrongs of Economic Science which we will hear more of today. About this Trilema, that's a very interesting and provocative thought which was launched by Danny in his first books about globalization. It's about incompatibility of globalization, national sovereignty and democracy. As we now see in many nation states and particularly in the EU, in the European Union. However today he will speak about his last book what you see here at Screen Economic Rules. And with these books, especially with the last book, he fits in the tradition of our founding father of Tilburg University, professor Martinus Kobahage, the priest-economist Martinus Kobahage and the way Martinus Kobahage saw the raison d'etre of our university by striving both for academic excellence and advancing society. Secondly, Danny is one of the few economists and political scientists who have been able to bridge the gap between academia and the real world. He published in the most prestigious academic journals, I won't repeat the whole list of publications that would be too long, but also published in the most renowned policy journals about the consequences of these academic thoughts for policymaking. Moreover, he is also a monthly contributor with his fascinating commentaries to Project Syndicate, the number one opinion website in the world. I really encourage you to read his commentaries monthly on every issue you can think of, economics, social sciences, politics. Important is that you have to understand that this way of dealing with recent issues is also particularly typical Danny in the sense that he's bridging the gap also to the real world problems. And thereby he has not only changed the economics and a political science profession, maar also in the way important institutions like the International Monetary Fund and the World Bank have changed their perspectives and views on globalization and inequality. What used to be called the Washington consensus that was the thought that globalization is good for everybody, for the rich, for the poor, for the middle classes en has no consequences in terms of redistribution between the various classes. And of course it's thanks to Danny's insights and books that IMF at World Bank have changed also their view and also admitted that in important policy papers. He will certainly do the same with his last books on the rights and wrongs of economic science. In that book Danny takes a close look at our discipline to examine what falls short and when it works. He argues that economics can be a powerful tool that improves the world but only when economists abandon universal theories and focus on getting the right, the context right. His book is a forceful critic both on the economics profession but also a defense of the discipline on the other hand. Thirdly, Danny has always been in the front of the troops sometimes very much in front of the troops very independent and completely original in his thinking. But what I admire most of all is that he also is very courageous. Courage is also important. In maintaining your course as opinion leader sometimes against all vested interests and mainstream thinking. And that's not easy. Without offending any colleagues in the profession he's very elegant and very gentlemanlike in that. That attitude has to do with his personality. En his development as economist, a political scientist but also as a human being in the past decades. By this unique combination of three dimensions first, broadness in social sciences economics, political science in every aspect second, of bridging the gap between academia and the real world and thirdly his independence in originality and originality of his thinking then he has created his own school of thinking with many followers around the world from left to right within developed countries and developing countries inside and outside the mainstream of economics and political science and that's quite astonishing. He is complying with all the elements Keynes always attributed to what an economist or political economist should be. Consequently he has become one of the most prominent economic and political thinkers of this time. Before I give the floor to our keynote speaker of today I would like to share a little anecdote met you which occurred during the recent weeks I love anecdotes When the Freener van Kopenhagen lecture was announced I was approached by many economists editors of newspapers and other media in our country countless because we were restrained in the number of interviews by time limitations we were forced to choose two sets of newspapers which for having exclusive interviews with Denny and had to regretfully decline the other request of newspapers and other media what happened is typical for the fame and standing which Denny acquired as opinion leader in economics and political science and globalization and inequality on the rights and wrongs of economics the other newspapers who couldn't have an interview phoned him at his Harvard office for having also exclusive interviews on globalization, inequality and other issues which was quite interesting of course the only two exclusive interviews which will appear shortly will be in the financiële dagblad and ASB as a combination respectively at Algemeen Dagblad and the Brabant Dagblad also in combination so then you know that these are real exclusive interviews you may have read some of his articles books and interviews but today you will hear him exclusively real exclusively live on stage and therefore I now wish to give the floor to the keynote speaker of today Professor Denny Rodrik who will share his thoughts with you thank you thank you very much Sylvester for a very kind and gracious introduction it's really a pleasure and an honor to be here for these proceedings I might be a bit jet lagged having arrived only this morning but I'm very excited to be here with you so what I'll be talking about is some of the ideas in this book that came out I guess about a year ago but many of these issues have regained prominence because of the backlash against sort of established ways of thinking economists have never been regarded very positively by society but certainly in the last year our credibility and legitimacy haven't improved much now the book is interesting in the sense that as Sylvester said most of it is actually a positive evaluation of economics and that's for many readers that's been a bit surprising because I've been known as a critic of many economists many ideas that have come out of economics but in some ways this is paying my debt back to the profession of just saying that there's a lot of good things in economics as well I guess part of it is also due to my contrarian nature which I think Sylvester alluded to which is that by the time an idea such as economics is no good becomes conventional wisdom I get very I feel that it's a wrong idea and it needs to be fought back against so here I'm finding a rearguard action to defend economics against its critics although as you see I think some of the points that I make is really about how economics has been used in the public domain by economists so I do have my criticisms as well but I hope maybe at the end we can also tie it back with our discussions about what's happening with globalization the populist backlash and so forth let me begin with probably the one time everybody hears about the economics discipline is in October when the Nobel prizes are announced and of course the critics of economics always say these are not real Nobel prizes and there's a sense in which they are not but that's a different story here is the people who won the Nobel in economics I guess for the last four years and I think this really represents the best and the brightest of the economics profession and they present a side of the economics discipline which actually is very different from the side that typically the public sees and I think you know I want to start off as to sort of what's critical and what's the absolutely wonderful thing about economics that these people represent that you actually don't often get from the way that you hear economics represented in public debates of whether it's inequality and globalization one thing is that somewhat paradoxically none of them has actually contributed a very big idea what they have done is develop sort of a collection of frameworks so for example the last years winners last October was Bank Holstrom and Oliver Hart on the left at the top en they won the Nobel collectively for their work on contract theory and that's really a collection of frameworks what I will shortly call models collection of models that explain in highly stylized settings how you might devise the incentive arrangements in a setting where the interest of what's called the principle for example the owner of the firm diverges from the agents for example the manager of the firm and you can apply that kind of framework with minor changes to a whole lot of different things right next to them was Jean Tirol who won the prize the year before for his work on industrial organization what was that again a collection of frameworks about how to think about issues of regulation in very different domains of whether it's sort of credit cards of whether it's the railroads or whether it's the internet and I remember distinctly a journalist I think it was the New York Times interviewing Jean Tirol and asking desperately trying to get at what's the big idea here what's the big message that's going to be the headline French economist wins Nobel for and pushing him on what's the big idea in your work Jean Tirol having tremendous difficulty articulating what that big idea is en in the end he sort of gets very frustrated he said every market is different the way you would regulate the internet is different from the way you would regulate the credit card business the way you would regulate the railroad industry and what my models do is highlight some of the salient effects in different settings of these different kinds of market relationships and how regulation might work but it's not a big idea similarly Angus Deaton he won the Nobel for basically empirical work in development it's a series of empirical applications in different settings typically to rural households and their decisions on how to consume how to save what to produce and so forth no big idea but very careful empirical application that tries to get some basic economic facts such as what is the price elasticity of demand for rice and how does that depend on how big your household is or what your income level is and so forth it's very different from the way economics is sometimes presented as the market or state intervention or being pro or against globalization the models that these people developed at best are shedding just sort of partial light on these kinds of questions but they would be the first to say that the point is not to have one big idea one big theory but to develop a different contextual understanding of how markets work in different kinds of settings if you will going back I think this was four years ago perhaps the most paradoxical public standpoint Nobel prize was awarded to three economists working in the area of finance I have two of them here Eugene Fama whose main contribution individually they had a big idea Eugene Fama's big idea was that markets are efficient Bob Schiller next to him his big idea is that markets are inefficient ok and to balance it out er was a third actually an econometrician was trying to basically figure out which one is right now the point of course is that they both made critical contributions Eugene Fama helped us understand as a benchmark model that the circumstances under which in fact financial markets were efficient you couldn't beat financial markets like stock markets systematically and Bob Schiller actually developed our understanding of a whole set of circumstances under which in fact markets would not be efficient there would be excessive volatility for example in financial markets in the way that information wasn't going to be provided very so I think subtly the message of the Nobel committee in this prize wasn't that either one of them was the right one it's just that depending on context depending on time, depending on market each one had a particularly important message but that you had to take them together that you wouldn't if you believed that Eugene Fama was right the whole time then you would end up in the global financial crisis as you did in 2008 on the other hand if you think Bob Schiller was right the whole time then you may not want to have financial markets at all or you might want to just have them extremely heavily regulated so the book is really about sort of how you can make sense of this about how something a science or a discipline that doesn't have big ideas that in fact has a lot of contradictory ideas in it can also be useful the sense in which that is actually a science because what I'm describing is a very different kind of a science from the natural sciences or the way that natural sciences think of themselves it's actually very different from the way that often economists think of the kind of science theirs is and I'll explain that in a second and how in fact that might be practical and relevant and useful now after I wrote the book I came across this quote from John Maynard Keynes and as typical Keynes put everything much better than anybody could have put in fact had I seen this quote before I wrote the book I might not have written the book because this encapsulates the message of the book which is much better than I had the ability to do so and the quote is really it goes to the heart of the matter economics is the science of thinking in terms of models which are joined to the art of choosing models which are relevant so you need two things you need the model to discipline your thinking and those are going to be highly stylized frameworks and then second you need what do you call the art or what in fact is the craft of figuring out which is the relevant model to the setting at hand so the art and the craft it's not exactly purely judgment calls we have a lot of techniques empirical techniques that actually allow us to do that one of the main messages economists are extremely good at developing these models extremely bad at choosing the models that are relevant and I think this is where we go wrong in practice ok now a few years back actually this was back in the early 1970's there was an economist who might be well known here who was a who wrote this mock ethnography Axel Lyonhoff wrote this mock ethnography about sort of the the tribe the econ tribe as you call them and that highlighted back in the 1970's the critical role that models played he called them sort of models status of the adult male is determined by his skill at making the model of his fields status is achieved only by making models and most of these he didn't have a very high opinion of models so the message I'm going to give you is different but he said most of these models seem to be of little or no practical use and that accounts for the backwardness and abject cultural poverty of the tribe ok he stressed that basically models determined everything the status in the profession is also determined how economists think about other social scientists so for example he says that in explaining to a stranger for example why a member of this tribe the econ tribe holds the sociogs or the pole size in such low regard the econ will say they do not make models and leave it at that now of course this is a lot less true today than it used to be at the time but it's still a very clear dividing line between who is afforded status and standing among economists and who doesn't do you make models are you expressing yourself with models also the other thing that Leonhofer stress is that in fact there are different models economics is really a collection of different models and also got to the heart of one problem that I'll highlight which is that people get excessively attached to their own models so the micro people are attached to the micro model the macro people to the macro model now some of these distinctions are not very relevant today given the discipline has changed but I think some of these parochial attachments are still the case now so models are highly stylized simplifications and you may want to think of them sort of one parallel you want to think of them as a map so if you're leaving your house and you're going to get somewhere and then a map will allow you how to get there and in fact that particular analogy is is used in what is probably the shortest short story ever written which is also the most effective piece of philosophy of science I've ever read and this is from Jorge Luis Borges and this is the entire story one paragraph I won't let you you can read it while I explain what it says basically it says that it was this empire long time ago where the cartographer the map makers in the empire were so dedicated to perfection that they made these incredibly detailed maps so the map of the empire was as large as the size of a province the map of the province was as large as the size of a city and pretty soon they got dissatisfied even with that so they started to draw maps that were one to one exact size of the area they were drawing and then he relays in the same of Tussaud it takes longer to explain what the story is than to read it later generations found absolutely no use for these so then basically maps were found in discarded in the desert because nobody could use them the whole point is that what gives maps their power and their usefulness is precisely that they are stylized abstractions simplifications of the reality that if you actually try to get every detail right if you made these maps one to one they would lose all their usefulness so extremely important point that you can never legitimately criticize a model because for it's being simple because simplicity is this virtue the whole point it's a bug it's not a bug it's a feature you can criticize the other domains as I'm going to do it but the first line sort of criticism of economics or the economic approach which is that it's based on highly stylized simplifications of reality is not a legitimate criticism at all and the answer for that I think is given in this quote but going on with the map analogy the kind of map that you're going to need when you step out of your house depends very much on where you're going and what kind of vehicle you're going to use if you're going to be traveling by subway you want a subway map if you're going to have on your bike you want a map that shows the bike path if you're going to go travel to another city with your car you want the highway map if you're going to be walking you want the walking map and if you take the wrong map it's not going to be very useful so there are alternative ways of simplifying alternative stylized simplifications and it's going to be very critical to know which map you're taking with you and that's really the second half of economics now so the argument just models in fact are a key to the scientific nature of economics and what they do is they help us understand complex social reality by laying bare a very large variety of causal relationships one at a time so the virtue of a model highlights one of these relationships at a time second and I think this is a point that economists miss and I think this gets us into mischief the whole time economists have this notion of of their science as one where it develops vertically you start with a bad model you test it, you improve it, it becomes better you test it again you tweak it, it becomes even better and then vertically over time you're attaining perfection with the best model I think this is the wrong way of thinking about economics and what models do precisely because social reality so varied over time space and context no model can actually be perfect at best it's one that can identify the relevant relationships in a particular setting and what that means is that models are really economics is really an inventory at best is a library of partial explanations each one of them non universal each one of them context specific so economics therefore as science develops not vertically by having an ever improving set of models with the later ones replacing the older ones but in fact horizontally by having more and more models that explain the complex social reality or or new things that were not explained before and I would argue that if you think of economics in the way that I've just explained it that this would counter most critiques of economics as well as by the way as I said economists own description of what is it that they do and here is the problem the reason that I think in practice we run into trouble we have a loss of reputation is that we often end up developing excessive attachments to a particular model we forget that is a model we treat it as the model and we don't spend enough time thinking about how we navigate among these models figuring out which of these models are the one relevant one when do we use pharma when do we use Schiller so let me just go a little bit scratch a little bit the surface of how economics works because if you're not an economist or if all you've done in economics is do economics 101 the introductory course in economics you might think that economics is a set of predestined conclusions for example that government intervention always reduces inefficiencies of the markets or for example that raising the minimum wage is going to reduce employment levels this is not in fact how economics works in economics the answer is always it depends and what these models do is they tell you what it depends on so you might say how could a science where the answer is always it depends how could it be possibly useful because it tells you what it depends on and knowing what it depends on actually gives you a way of checking reality against what it depends on and figuring out in fact whether the model you're using is a relevant one or not so let's take about some questions that we might want to ask economists what's the effect of minimum wage on employment what's the effect of expansionary fiscal policy economic activity what's the effect of capital flows and economic growth in a developing country what's the effect of trade liberalization on economic performance around the world you can imagine a whole bunch of running the list of all these sort of policy relevant highly germane questions which we would want economists to answer for us the answer to each one of these economists who is being honest to his or her discipline will tell you the answer to each one of these is it depends but I can tell you more it depends I'll tell you what it depends on different models produce different results and just to give you the simplest example here let's take the minimum wage example what are the employment consequences of a minimum wage imposed by the government everybody who has taken any economics has seen this the cross supply and demand competitive market in labor markets there's an equilibrium with an equilibrium wage level so if the government doesn't intervene there's no wage floor there's a wage rate and an equilibrium level of employment in this market so the government says no I don't like this equilibrium wage I'm going to raise the wage level to this floor so it raises the minimum wage to that level no matter what will happen employment level will decline because people who demand firms in establishments facing now a higher wage will reduce their demand for employment and therefore employment level will fall if you take econ 101 this is the only thing that you will know about and you will think that economics is a definite answer to the question about what's the effect of the minimum wage on employment what does it say at the very bottom a competitive market what is it that I've assumed here I'm assuming that the market is a competitive one but in particular that there are a lot of employers out there each of whom is really competing to hire workers let me just change that assumption and instead think about what an economist calls a monopsonistic market it's like a monopolistic market except that the market power is not on the on the side of a seller of good but on the buyer of a service in this case a buyer of labor services so think of a local labor market where there is a large retail establishment that actually has some market power in other words it can actually by choosing how many workers it employs it can affect the local wage level so it's a relatively large employer so in this case we're no longer dealing with a perfectly competitive market we're dealing with something that's more like a monopsonistic than equilibrium in this market is going to be driven by very different considerations I'm not going to run you through the mechanics of this but I'll just assert the conclusion of this model which is that if I actually put a minimum wage in this market as long as it's not too high I will actually get an increase in employment in this market not a decrease is het result intuitively the result for this the reason for this is that in the monopsonistic market where employers are behaving strategically to keep the wage costs low if you now prevent them from doing that by giving them a minimum wage floor they no longer have any ability to control wages and therefore they act as if they were competitive and that actually increases their employment level diametrically opposite results depending on what you assume about the the nature of the market is this a curiosity it's not there is a huge discussion in the American context where minimum wage issues are still very alive what this level should we have one or not whether in fact it's the left picture or the right one that is the relevant one a lot of empirical results that look at the effect of minimum wages in different local labor markets in the United States and often they produce the result on the right kind of the one in the right panel you put a minimum wage on employment either employment doesn't change or employment level rises so maybe it's the monopsonistic model that applies there you can apply this kind of this and I'm just giving you one policy question and it just runs through the entire discipline of economics it always depends it was a one of my intellectual heroes is Carlos Diaz Alejandro a Cuban born economist international economist who passed a long time ago one thing he wrote I think this was back in the 1980s he said by now by now any graduate student by picking his assumptions appropriately can produce any policy conclusion he or she wants in economics now that doesn't make that policy conclusion the right one the point of producing that is that it makes it explicit exactly what that conclusion actually hinges on and therefore leaves that conclusion challengeable on the basis of whether the critical assumptions that derive that conclusion hold in the real world or not we can think of I'm going to give you two different ways of thinking about economic models which I think in terms of the rhetorical value of models they're powerful one is that you can think about economic models as actually fables or little parables they're very simple they're explicitly not real artificial they have a very clear storyline so you can remember you can have the story they sell they have a very transparent moral about what outcome is and you have a different fable or different parable for every situation sometimes saving a lot is a good thing sometimes saving a lot is a bad thing you have parables about both and the same about economic models alternative you can think of economic models as experiments now this might seem puzzling because from stories to experiments from one extreme of non scientificity to another extreme but actually models are experiments they are thought experiments but they have many aspects that are similar so what does a lab experiment do it lab experiment isolates effect of a specific cause or intervention so if you want to isolate the effect you're looking at from the interference from air pressure you conduct the experiment in a vacuum and the same with a economist model you abstract away from complications so that you can clarify causal links the same also with questions about extrapolation every time you do an experiment and you want to think about how it would apply in the real world you need to think about other conditions that might interfere with the extrapolation and the same with the model the way that you apply to the real world let me talk about a couple of things that often when people think about models they obsess about that I think are really the side issue not the core of it one is the role of math most models in economics are mathematical they're explicitly stated in the language of mathematics but doesn't mean that the math is actually critical to the model one of the best modelers of all time was Tom Schelling my former colleague at the Kennedy School who recently passed got the Nobel Prize in Game Theory and he expressed all his models in verbally now I never understood the genius in his models until they were explained to me with math and this is why I say that economists use math not because they are smart but because they are not smart enough and I think the point of the math is to make sure that you understand exactly what the result is and also exactly what it hinges on so when we use math we're not it's not a special skill that gives special powers it just allows us to make sure that we're explicit about the nature of her assumptions about the relationships and the conclusions really about clarity and consistency nothing more fancy than that but I often find partly because I'm not so smart but I guess that even people smarter than I am would have the same problem sometimes I think the intuition of a particular explanation is pretty clear if I don't express it in the language of a formal mathematical model and when I do I often find that I'm missing something I'm missing a critical assumption that has to be there for my intuition and so the math helps me get it second often we think about economics working in a model where everybody is hyper rational and completely self interested actually neither feature is critical to economics and both can be relaxed so it's really a side issue third very important point about the assumptions it is in the very nature of modeling that you have to have unrealistic assumptions every time you're abstracting away from some feature of the world to create a simplified model you are producing some unrealistic assumptions and I think Milton Friedman tried to assume that he would try to argue saying that basically relevance of the model had nothing to do with the realism of the assumptions I wouldn't go that far he said what's really important is whether the critical assumptions are true or not the difference between all assumptions and the critical assumption is that changing the critical assumption would change moving the critical assumption in the direction of making it more realistic would actually change the result in a substantive way not changing all assumptions need not do it in that way you know when I say that economics is really sort of these models are making economics a science or a scientific discipline what exactly do I have in mind one is the point that I've kept stressing which is that models allow us to be extremely clear and transparent about the nature of the story we're telling about the hypothesis, the causal chains second having models having these abstract models help us precisely select which one of these partial explanations may be the more relevant one in a given setting we can do it after the fact through formal statistical or empirical tools over time and that would be like applied policy analysis with having each one of these stylized models have different implications different assumptions we can test them informally against the real world and decide third, very important and this is a feature of economics that I think is extremely important that often many other social sciences lack which is really it's a method of sorting out disagreements it's a difference between arguments that can be shown to be wrong versus those in the famous phrasing of Pauli arguments that are not even wrong in the sense that you don't even know how you disprove them because they are stated in such loose informal way so even when two economists don't agree they know exactly what it is that they're not agreeing on and often times what is it that they're not agreeing on may be something that relates to the real world and that can be formally or informally tested for example the magnitude of the elasticity of labor supply if you think the elasticity of labor supply is very low then you wouldn't care too much about high tax rates if you think that as long as high tax rates provide a lot of resources for transfers that would be good for equity without very negative consequences for efficiency if the labor supply elasticity is very large then you worry a lot about the incentive effects of high taxes you would worry that a lot of people would be dropping out of the labor market or working less so there would be high price to pay for more equity or for more redistribution there we are what appears to be a very significant ideological disagreement between the left wing and the right wing in economic policy and economics actually boils down to one very specific parameter in a model which can in principle be estimate and finally the point about the accumulation of knowledge which is that it's really it's a horizontal accumulation that when you think about how our understanding of the way markets work it hasn't developed because better models have replaced worse ones we had the perfectly competitive model that was the one that Adam Smith was talking about then that perfectly competitive model was taken and we added features of imperfect competition like monopoly or oligopoly but that didn't replace the perfect competitive model because some models are some markets are more akin to perfectly competitive than imperfect competitive then we took those imperfect competitive models and said maybe there's asymmetries of information too so then we developed models of asymmetric information but those models of asymmetric information did not displace the models of imperfect competition of models of perfect competition because there are markets where asymmetric information don't matter so you need all those models and you will sometimes you'll apply one sometimes you'll apply the other ok now sometimes one of the good things that has happened in the economics discipline on the last ever since I got my PhD is it becoming much more empirical and doing things empirically really leaves much less room for ideology because the empirics discipline the kind of conclusions you can derive now there's temptation within the economics profession these days to actually say well now our empirical tools have developed so much it's not just our fancy econometrics and statistical tools but we now have all these big data that we can use to develop answers so why theory why need theory, why need this formal framework why these models at all we don't need them at all let the facts speak for themselves I think this is actually wrong way of thinking in the social science is because facts never speak for themselves you're always interpreting them through some frame it's much better to do it explicitly rather than informally on twitter somebody I don't know actually gave me the perfect example of that which was that he mentioned if you toss a coin ten times and nine times out of ten it comes up heads you look at this and say that's a surprise are the facts speaking there here why is it a surprise because you had a prior expectation that this coin was fair model of a fair coin and if you toss a fair coin ten times on averages come out five times as far times tails so there's an implicit model that you're applying to that the simplest of facts how many times it comes up heads or tails but in the absence of that what do you make of that you don't know so every fact requires an interpretive frame and I think our obsession with big data and a lot of statistical techniques often ignores that without even getting into the question how you would actually extrapolate any finding from a particular locale to somewhere else and that always needs modeling alright there are a lot of different approaches I said that the critical thing to use these models intelligently is going to be to figure out when you apply one model as opposed to another when do you apply Schiller when do you apply the monopsilistic labor market model when do you apply the perfectly competitive labor market model economists actually have a lot of formal and informal ways of doing that and I've listed some of these here getting into them would become too technical and would be too boring but the point is that we have a lot of techniques for navigating across these models the striking thing is that in economics we rarely systematically teach these techniques the approach to focus tends to be in undergraduate classes in the basic competitive model with all the benchmark results so you get a very misleading view about the diversity of results within economics in school if you're a PhD student you do basically all the latest models the ones that are the latest fad or the fashion and we don't actually do a good job of teaching our students about the value of this diversity and the need to think about both formally and informally how to navigate this in my own work I tend to do a lot of work on economic growth in the context of developing countries and doing that work is always trying to navigate different models of economic growth going to Ethiopia which model is the relevant growth model for Ethiopia where I would look at physical and human capital is it the endogenous growth model where it's all about R&D is it a trade and growth model is it a dual economy model is it a structuralist model each one gives a different focus a different priority for policies the work of an applied policy economy is always to navigate across these different types of models and figure out which one captures the most relevant features so now let me draw back and sort of begin to wrap up by using sort of the set of arguments that I've developed so I've only scratched the surface to confront some of the criticisms that that economics is under for example for something I mentioned from the from the outset the notion that so much of economics is really about developing these simplistic reductionist theories this is a feature, it's not a bug the problem only comes when you treat a model as the model so you treat the latest model or an established benchmark model as the only one that could be applied economists are always often criticized for re-fying markets in the context of of the diversity of economic models that exist in economics economics is criticized for having conservative market oriented bias again it's not clear there are many more models of how government intervention can make things better not just for equity but also efficiency then there are models that actually show markets are efficient so I could just run through this this list and I think many of these these criticisms are actually not particularly relevant to the way that economics in the seminar room is practice I think you know it's not to say that there aren't severe problems with economics but I think they originate less from the economics of the discipline than from the sociology of the discipline if you will that you know one syndrome is what I've kept stressing is sort of mistaking a model for the model syndrome that you expect model that worked in one second will always going to work all the time so you overlook alternative models so for example very critically in the run up to the global financial crisis we had excessive focus in policy discussions on models where financial markets were efficient and in models where the ability of the government regulation to improve efficiency and incentives in financial markets were very limited so you had too much pharma too little shiller and that also is not only gets the policy conclusion wrong it also leads to overconfidence it leads to hubris economists lost confidence it's not only that they may have been occasionally wrong but it's also the confidence with which they have uttered those conclusions have been overstated in line of the diversity of models within their own profession second approach is you know I've emphasized you know this diversity but in practice often economists are going to exhibit a categorical preference for certain assumptions or certain exits so you don't need to have rational households and investors but typically economists will tend to exhibit a preference for these rational and forward looking individuals in the way they think about markets even when they may not be relevant third is looking for the keys where the light is as opposed to where you might have dropped them in the nature of economics is that you tend to prefer questions for analysis that are amenable to the tools of analysis you have so often you miss out some of the big issues in the way that for example in the discussion on globalization many of the distributional questions are many questions about social norms or social dumping in trade were ignored by economists because that wasn't there was an immediate relationship to the kinds of tools that they had developed and one of the things that I find extremely problematic is what I call this problem of implicit political economy theorizing in policy discussions which is to say that economists will often involve themselves in a political debate by taking sides and on the basis of a very poorly developed implicit political economy argument again globalization in the globalization debate economists mostly acted as cheerleaders for globalization mostly favored trade deals now they knew very well because it's in standard trade theory that globalization and trade deals produce not just winners but they also produce a lot of losers should not have been a surprise because it's in the standard comparative advantage standard trade theory models that they teach in fact the benchmark models of comparative advantage have very stark distributional consequences from opening up to trade and from globalization so it's built in into these models but the economists would emphasize the efficiency gains that the size of the pie would be larger they would say very little about distribution and if the distributional issues came up they would say you can't deal with it in other ways or it's unlikely to be big in the long run everybody can gain it's not good for the government to sort of interfere here just for equity and when you scrutinize that why they were doing that the argument would be that well you don't want to feed the barbarians we don't want to provide ammunition to the barbarians who are the barbarians the barbarians were the protectionists who would be basically taking these nuances the caveas and use it for their own protectionist ends it's as if if you had a distribution of the barbarians they were basically asymmetrical on only one side of the issue as if there weren't any barbarians on the other as if there weren't pharmaceutical companies we were abusing intellectual property rights rules in trade deals as if there weren't any multinationals who were abusing these trade agreements to get one sided legal so it was very poor political economy on their part to think that and this in the end I think came to haunt economists because I think a big reason why we as economists lost credibility in this debate is because we came to be viewed as a as a party to the debate as sort of on the bank having joined the bandwagon for globalization cheerleaders as opposed to the group that was speaking truth to power that is sort of laying out the tradeoffs and explaining the likely consequences and if we had done that maybe we would have had more credibility today when now we are in fact seeing the barbarians so to speak having hijjacked the process is in fact many of the things that are being said today about trade by nativists and populists are downright false but when economists are now speaking against those things it's not getting any traction it's not getting traction because I think we've lost credibility so let me just let me just end here by sort of saying that saying that you have diverse viewpoints that economists is a portfolio of models that all kinds of different conclusions are possible is not a weakness of economics is actually a strength that by saying these things you're actually closer to discipline than by actually by taking just one-sided view and I think it's also sort of the best response that an economist can have to criticism from the outsiders who are to say but you're not taking this factor into account you're ignoring this the best answer to that is to say okay let's model that too and I think this is the right time finally I think thinking about economics inherently as this portfolio I think also makes us more modest and gives us greater humility in the way that we approach public problems and engage the public debate which is something that we economists can use thank you Danny for this wonderful lecture which makes us humble again and even more humble than before and your speech was not only thank you very much was not only about economics or political economy it was also about social sciences in general social sciences should realize that it always depends on and we have some time for questions Q&A however we are constrained by time because we have also the scholarship and price that means that we have some 50 minutes I would ask you if you want to take the floor for a question first to introduce yourself second which institution you represent and thirdly that you constrain yourself to at least one or two sentences in terms of questions and other monologes please nobody well oh here here sorry yes maybe you can stand up yeah I am a part time professor I graduated at this nice university and in the past and my question is I am more or less fighting for more pluralist economics and you said economics is already quite diverse and pluralist but if you look at the mainstream what we get taught in general it is still very based on very strong assumptions about human behavior rationality especially in finance in my area of risk management and I think what we get taught at universities is not helpful it's too homogeneous and too limited in what the teaching and so we are together with people in the UK but also here in the Netherlands we think in economics we try to change education for more diversity and my question is here is the question about research is diverse and there are lots of different people lots of different models but do you think that the average educational program is diverse enough great question and the answer is no I think the problem is is that you get a sense of that diversity much much later once you get to be a graduate that's when that conclusion dawns on you but if you take just the first year or the first couple of years then it tends to be that we teach just the benchmark models so you teach how markets are efficient how comparative advantage works and in a sense you can understand the reasoning behind that because those are disciplines crown jewels are these counterintuitive notions to the average person on the street imagine this chaos of a market where everybody is acting just to maximize their own self interest and there's no government apparently anywhere of course there has to be a government to enforce contracts protect property rights but that's sort of in the back somewhere imagine in that sort of apparent chaos that the market produces efficiency incredible we're very proud of that result we're students about this result imagine that you're two countries are trading with each other and one country can produce every good more expensively than the other country and yet they can profitably trade with each other both countries ends up in the aggregate better off could there be a more counterintuitive result the principle of comparative advantage we're so proud of that these are crown jewels we want to share with them in the process we either run out of time when we want to share by the way this result really depends on a whole bunch of auxiliary assumptions many of which are actually violated in the real world and let's think about what happens when each one of these might be violated we never have any time to get there or we've internalized the importance of these results so much as teachers that we even don't think those auxiliary assumptions matter so either of those two particularly the undergraduate student a student who gets limited exposure to economics which is going to be 95% of everybody who studies economics I think gets a very misleading so we definitely have to do a better job of doing that teaching I'd be the first one to admit that I don't know exactly how to do that because I know that by the time you get students to understand the principle of comparative advantage you've already spent a lot of time on it so I'm totally with you with the spirit of the question that we don't do the undergraduate teaching right there's a version of your question which is about whether diversity in economics and teaching also should include non-neoclassical models and that's a tougher question and so let me not get into it but I think the main thing is that we the main answer to your question is we economists are our worst enemies because when we expose the students with what our field is or when we expose the media or politicians and policy makers with what our field is we give a very distorted view of what discipline is and then we run into trouble next question oh there's a gentleman there hello my name is Michael Leach I'm a doctoral student at the law faculty quick question following on the education theme would you be able to elaborate on what the implication or ramifications for the teaching of economics would be if you're correct in saying that the selection and application of models is what we're doing wrong or we're treating it wrong but I was wondering if you could if that is an art form rather than a science then what does that mean for the way we teach economics thank you thank you thank you thank you thank you thank you thank you thank you ja, I mean first you have to teach the variety at least give the students a sense of the variety of models and then you say in the real world how are you going to be selecting those and there was a slide which I went through very very quickly and the way you do that is basically by sort of thinking you know what would you be seeing in the real world if a model a as opposed to model b applied so let me give you a a practical real world example so when you look at a country you go to a developing country there is a very low investment rate private sector is an investment and you say you know this is a problem why and immediately there are two models that might occur to you one model says that the reason that investment low is because there aren't enough savings in the economy savings driven so the problem is on the supply of savings side there is not enough savings and therefore people cannot invest the second model says no the problem is actually on the investment demand side people don't want to invest they may not want to invest because their property rights are very not well protected, the government is corrupt taxes are very high, whatever reason the reason is on the investment demand side rather than on the investment supply side two very different models obviously your policy solution would be very different the moment you've stated this informed you've developed these two models there is a formal and informal test you can carry out whether it's one or the other for example if it's the savings constrained model it's like suppose a solo kind of a class neoclassical growth model then you should see low investment and high interest rates savings are constrained, people want to invest but there isn't enough savings therefore it should be relatively high interest rates whereas in the other case when you demand that binding people don't want to invest so they don't demand a lot of funds from the banking system so interest rates will be low immediately two models have generated model driven implications that give you a way of figuring out whether it's one or the other another example in the same kind of setting if investment is constrained by saving if for exogenous reason the economy receives a lot of transfers for example commodity terms of trade improved or a lot of remittances come in all of a sudden you're relaxing the savings constraint because a lot of money is coming from abroad then you should see a very strong investment response because you've listed the savings constraint but if the problem was on the investment demand side with the same shocks the economy will respond very differently you'll see consumption increasing of money comes from abroad people don't want to invest they'll simply consume more so you can look at the recent experience of the country and say when there's had an increase in commodity booms or in terms of trade or capital inflows coming in which way the country behaving so this way of thinking doing the diagnostics of figuring out which model is the more relevant one you can apply across the board in all kinds of models and across all kinds of policy issues in each case is sort of asking question what does the model imply about the pattern of correlations in the data and look for differences in those patterns and then see either formally or informally whether they hold in the data I hope that was responsive to your question Thank you Last question Yeah, that's stupid Oh, there Oh, my name is Harman alumni of university what you're saying here is that you have all those different kinds of models I think what we see in real life is that people pick the model they like what I'm just wondering is if we have our policy makers they have to pick the right model they will pick the one that they like will there be a way for economics to really support our policy in the future Will it just always be a fight between different fields My hope would be that economists would be honest to their profession and say if the critical assumptions on which the model that the policy maker has chosen is vastly at variance with reality that the economics profession would say look, this is the wrong model because of A, B and C for the kind of reasons that I just cited that the critical assumptions are already implications of the model aren't consistent with what we observe Now, often of course it's not that clear cut and then what's going to happen is some people are going to say no, the labor supply elasticity is very high other people will say no, it is very low and there will be disagreement of views even then what I would want to see is economists rather than converging on some prior understanding of what's the politically correct thing to say that they reflect those disagreements in public so that what the public hears is not what appears to be a consensus in fact they hear precisely the divergence of views that in turn reflects the true uncertainty in the economics profession about the value of a parameter or the value of the relevance of one model as opposed to the other because then what the public gets is a true reflection of the uncertainty about which model applies and often, maybe most often the truth will be that we actually don't know we're making decisions under uncertainty but better to give the public a sense that that's what's being done than have this prior consensus either because of this kind of implicit economy theorizing I talked about of a sense that politicians don't want two handed economists they just want a one handed economist well that's if you can't say I don't know you cannot be a scientist politicians they can't but that's a different role we've actually justified for a politician to say I think this is how the world works I think this is what is going to make everything better it's not even contingent on the politician to be explicit about what the model underlying that view is hopefully there is a consistent view but it's not the politicians view to articulate that model but it's I think it's incumbent on economists to articulate that model we have views on its relevance ok, thank you very much big applause for Dede Rode Danny also on our behalf I'd like to thank you very much of course you said a lot of interesting things a lot of food for thought I myself have two takeaways probably big part of this group is economists from profession or from study like myself the other half is not and probably what I see as today you make a big split because we economists now have to re-study re-evaluate everything we have been teached because we always thought there is only one model which will create all solutions and secondly the not economists among us will win today because from the past we as economists always thought we understand mathematics and the rest of the school in this university doesn't understand mathematics so we know the truth but as you said we now as of today we need to be quite humble so probably as of this afternoon half of this group will look down at us economists so thank you for that but I'd like to give you some special well we are very honored by you having here giving your first freedom of Kopenhagen lecture is a typical Tilburg kind of drink and probably most economists as of today need this more than ever when they need to answer that question that last question if you don't know anymore which model to apply and a typical university sweater so thank you once again thank you very much well we now come to the next stage of this program that is the announcement of the so called freedom of Kopenhagen scholarship and the freedom of Kopenhagen prize which we have introduced as of today for the best bachelor student and the best master thesis so from a bachelor point of view it is about giving a prize to the best student and using that prize for further study special small note the prize is not to make a nice travel to all kind of nice cities especially used to stimulate further study probably abroad or somewhere else to really develop yourself further and also for the master thesis best prize we are pleased to give award for that and to use the money also for further study in some of the areas and first of all I have the jury report and I will present it shortly but all persons which are named which are nominated are already on the top of their group the people which are nominated here are nominated by the schools of this university so in fact it is not one award maybe one award really is handed over but I think we need to give applause applause to all nominees because they already are the top of this university in each school both from a bachelor point of view as from a master thesis point of view I want to express that especially because at the end there is only one winner but all the other people are very special and we also hope that they see this prize or award or this nominee as a further stimulant to develop yourself further well let me come to the let's call first the Vrienden of Copenhagen Scholarship which is for the best bachelor student and the two criteria we have looked at from a jury point of view is both academic excellence but also especially societal relevance because as we have a theme from the university understanding society then it's very important that it not only about academic relevance and of course as I said we like you to spend the award on what we call executive education well let me first go to the nominees of the Vrienden van Copenhagen Scholarship so that's for the best bachelor student the first is Pearl from Lockhausen from the bachelor psychology secondly Christina König and I know that most of you are present maybe it's nice that the one who are present that they stand up so that all the rest know who they are so maybe probably first Pearl I don't know where Pearl is there's Pearl Christina König Valerie and I have to announce it precisely Puschel and Remco Geerfleet he took a lot of time to especially come out from Oxford yes those are the four nominees we consist of myself Patrick Vermeulen van de Board of the Vrienden van de Copenhagen Foundation Emile Aert Koen Bekking Sylvester Eifinger en Frederik Knut and together we have come together and try to come to a conclusion while we considered five nominees for the Vrienden of Copenhagen Prize and four nominees for the Vrienden of Copenhagen Scholarship those nominees have been nominated by their respective schools and we were very impressed by the quality and excellence of all nominees this is the crème de la crème of our student community and the schools were only allowed to nominate per category only the best students were selected to compete for the Vrienden of Copenhagen Scholarship and Prize and as I just presented the nominees of the Vrienden of Copenhagen Scholarship it's a great honor for me now to report you on the conclusion of the jury if we all nominees have obtained exceptional academic results and show personalities and profile that makes Tilburg University proud the nominees are students that go further than their regular curriculum our curriculum that they will pass with flying colors so we'll interest in becoming a full person participate in a large range of extra collicular facilities and are driven to advance society in a way that the founder of this university Martines Copenhagen has described and we were finally anonymous about the winner of the scholarship and we are very pleased to announce that Pearl has won the scholarship so Pearl I will read the final conclusion the jury was particularly impressed by Pearl she wrote an excellent bachelor thesis that her department is currently together with Pearl turning into a thesis into an academic article and that especially for a bachelor student is very special and so that's one we've shown her ability to not only consider her own discipline but also others too on top of that she has an international profile and of all nominees Pearl is a student who takes the most effort to use her understanding of society in order to advance society and therefore it's our choice for the Vrienden of Copenhagen prize so we decided to award you this award this first award we are very pleased to do that thank you very much now I go to the Vrienden of Copenhagen prize which is for the best master thesis from the different schools and again those are put forward by all the schools to the jury this is Frederik Haafkamp I don't know if Frederik is there was Frederik I'm gonna not I do not gonna read all the thesis because some of them are very specific subject but again very good thesis Mike Michael Spikmans my new third one Susanne Hendrickse fourth one Thomas Kuipers and the fifth one Yvonne Balsius yes and our Oscar uitreiking the final who is the winner it's a very honor to us and we are very pleased that Susanne Hendrickse is the winner for the first Vrienden of Copenhagen prize so please Susanne come forward let me first what we wrote you wrote an absolute masterpiece with considerable relevance for our society something that already was acknowledged by a prize of the Tilburg University in November for economic excellence of academic excellence and that was very special you managed to look at societal challenge from three completely different angles and left a reader with some very good conclusions and questions for further research and we are sure to see more of this kind of reaches in the years coming forward it was first difficult because all thesis were very good at a very high profile but we still believe and we all were anonymous in that that we selected you because your research theme will become extremely relevant in the years to come the whole industrial and technological revolution that will change society and everything what you are writing down is first a subject that will become very relevant and will be also a challenge for society and hopefully also this university will contribute to give the answers maybe to that you dealt with the theme in a very clear and methodical way and a thesis reads like a novel so again we are very pleased to award you this prize and hopefully it stimulates you to further study in this area we gaan nu naar de boven we gaan nu naar de boven oh ja sorry finally both winners we will we will offer them also a first three year membership of our foundation and of course we hope that you will stay a friend forever because we like to have original thoughts among our friends so before we come to a final conclusion of this afternoon the official program I'd like to hand over the floor to Kuhn Bekking which will speak the final words, the closing words of this official part Kuhn thank you Oswald it's my honor and pleasure on behalf of the executive board to thank you all for being here especially the mayor of Tilburg, Peter Rodanis who is amongst us and the representative of our province of Northern Brabant, Bert Pauli thank you all for being here thank you friends for being here prospective friends, please join de vrienden van Kopenhagen you are more than welcome also on behalf of the executive board thank you professor Eifinger and professor Rodrik for your great inspiring lecture he already mentioned it but the professor is also active on twitter and we just briefly discussed talked about it and as you know people nowadays especially Americans that are active on twitter get a lot of attention especially those speaking truth to power professor so maybe that's also an explanation why you have so much media attention these days but thank you very much for being here and of course we are extremely proud of all these young talents here the nominees and the prize winners we really enjoyed reading your work and we were very very impressed about our future that is currently here so thank you very much for being here and please join us for having a drink thank you