If 2008 was a sharp reminder that banking matters, then 2016 has reminded us that politics matters too — and, in both cases, the reminder has not been especially welcome. How should economists respond?
Until recently, both banking and politics tended to be something of a niche interest in the economics profession. This isn’t quite as insane as it might seem: if you want to analyse a complex world, you’re going to have to make some simplifying assumptions. For a generation or more, in rich countries, both banks and politicians have seemed complicated and not terribly important, so many economists have ignored them.
Development economists have paid closer attention to politics and have been rewarded for their efforts. Daron Acemoglu won the John Bates Clark Medal in 2005, and the late Elinor Ostrom, a political scientist, won the Nobel Memorial Prize in Economics in 2009. The reason for their interest is obvious: malfunctioning political institutions are a major reason that poor countries are poor.