Professor Matthew Jackson attends to The vanguard by phone from California, after receiving the Frontiers Award from the BBVA Foundation, which on numerous occasions has been the prelude to the Nobel Prize in Economics.
Shouldn’t global trade have brought world peace?
Most of the conflicts we still see are confined to areas or between partners that have little trade and conflicting interests. At the same time, there are situations where the leadership appears to be somewhat separate and divorced from the interests of its people.
Is the war in Ukraine against Russia’s economic interests?
It is difficult to explain to the people who run a country that they are clearly going against the interests of its population. If citizens were duly informed and could see the damage that the conflict is going to cause to their economy and their lives, the increase in inequality… If people were aware of all these costs, I think they would not make the decisions that their leaders are taking right now. There is a disconnect. Let’s hope that the backlash that has arisen in various parts of the world will have an impact, because a complete disconnection between a leader and his people is ultimately not sustainable for long.
You showed that sometimes, when we make decisions, we are influenced by the network in which we move. Perhaps Putin lost perspective, or shared views with people who have similar thoughts…
Yes. Putin may be quite isolated and out of touch and talking to the wrong people. It’s also possible that he’s just out of touch in a way that he doesn’t really care to be, because he has other ambitions. It is difficult to know to what extent the Russian president realizes how devastated some groups will be by the fall of the ruble. The poor will really suffer much more than the richest people, who have some ability to weather these kinds of storms. Beware: Putin may have overestimated his ability to hide information and keep his own population ignorant about what is really going on and why.
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How does our social environment influence when acting?
We think we make our own decisions, but there are a number of limitations. The most basic are simply the information we have and the opportunities. For example, very basic life decisions about where to work or what to study, what careers to choose, or whether to go to university or accept a job in your city or town…depend to a great extent on your social circumstances and your community. It is easy to think that we have a lot of autonomy, but once you start to contrast those limitations and the restrictions of the network you realize that, for example, some people do not know what it would be like to try a certain degree or what it would take to do it , even having the necessary talent. We overestimate the control we think we have over our lives, as if we can always decide our destiny.
But in our economic behavior, do we listen to other people or do we just want to hear someone to confirm our point of view?
We are a strongly social species, so we now depend on everyone around us for our well-being and for our livelihood. It is evident in children at certain early ages, when they are very attentive to what other children are doing, what they are wearing, how they act, how they talk, what they read, what they see, what they play. Conformity is a very powerful force that dissipates somewhat as we grow older, but not as much as one might expect. So I think we’re a very influenced species by the people around us, and that means that local culture and local norms can end up being very powerful drivers of our behaviors.
So, Putin aside, the human being is not so rational when making a decision, is he?
Economists often think of markets and the invisible hand. But once you start to overlay the social context and behavioral biases, you understand why there are frictions in terms of inequality, that the world doesn’t work as well as it should, or as we would hope it would. This is noticeable in labor markets and in education. Both are very important for our well-being and are the ones that are strongly restricted by our social environment.
Have economic sanctions against Russia prevented international military intervention?
Yes. They have exposed, for example, the dependence of Russian banks on the Swift system. In the case of oil and gas it is more difficult to see, because the world is not willing to give up its supply entirely. I would say that the Russians to some degree underestimated how connected their economy was and failed to see how damaging these sanctions could be. Those that have been applied in the past have been somewhat limited and to specific and smaller countries. Instead, they are now being done on a massive scale, against one of the world’s largest economies, and with a concerted effort by many countries at once. We had never seen such a thing before.
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We are now much more globalized than before. We live in a big network. But do you think that after the war this trend can change and lead to greater self-sufficiency?
From the outset, it must be recognized that the benefits of globalization have been exceptional in two ways. One, the decrease in poverty throughout the world in the last thirty years, especially for developing countries. We still have a long way to go in this regard, but it has been enormous progress. Second, part of this globalization is driven by companies themselves. For example, I advise some Silicon Valley companies and recommend that they hire computer scientists in China. There they can hire three developers for the price of one in California. Well, I think that’s not going to stop. There could be some movement back and maybe there will be a little more protectionism. At most, some companies will rethink their supply chains a bit, perhaps to further diversify. But when labor costs are three times higher in one region than in another…companies almost need to go global if they are to compete.
The European economy continues to recover after two years of the pandemic. Inflation is at the highest level in almost twenty years. Energy is getting more and more expensive. Public finances are affected, with skyrocketing debt. Now there is a war in Eastern Europe. How can we deal with this situation?
Unfortunately, in many of these things that you mention you refer to phenomena over which we have no control. For example, the pandemic is not something that can be made to disappear just like that. I also don’t think people expected the Russian situation to take the turns it has, and the cost of imposing these sanctions may be great. In any case, I have been surprised by the resistance of the economies and the fact that we are not in a much worse situation, considering everything you have just listed. It’s been a pretty devastating period historically for everyone. There has been an enormous amount of pressure on economies, shocks to the labor market and supply chains. And all at once. Thanks to the policies put in place, where governments are trying to spend to get businesses back to normal, it has done reasonably well. It is not an easy period. I’m glad I don’t have to be a politician right now making these decisions.
What have we learned from the pandemic?
The speed at which these phenomena spread is dramatic. It will not be the last pandemic, so we have to be prepared. But there are long-term issues that we really have to deal with as basic long-term structural issues that I think are going to be more and more urgent in the next decade or two: for example, how are we going to deal with climate change and make sure we It doesn’t affect our lives too much.
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