Tomorrow we will know the recipient of the Nobel Prize in Economics. This is not a ‘true’ Nobel, coming some 50 years after Alfred Nobel established the original prizes in physics, medicine, chemistry, literature, and peace. The Swedish Central Bank established the Prize in Economic Sciences in Memory of Alfred Nobel in the late 1960s as a way to counter what it saw as the virulent spread of social democracy across Nordic countries in particular.
The Nobel Factor, a new book by Avner Offer and Gabriel Söderberg, traces the development of the Nobel Prize in economics, which grants authority and ‘Nobel magic’ to economics above other social sciences, and ensures laureates are listened to on every subject. Economics itself is seen as being more scientific, more worthy of the ears of the powerful, as a result of the Nobel prize. The impact of neoclassical economics, the dominant form of economics which emphasises market based interactions above all others on policy makers through teaching and research, is assured because of the Nobel prize.
Offer and Söderberg begin their book with what may well be the best combined explanation, intellectual history, and critique of neoclassical economics and its policy variants I’ve ever read. From there we have a discussion of the social and economic context for the creation of the prize in economic sciences, and an extended discussion of the conflict between free market and social democratic values in the Nordic states in particular. There’s a really interesting series of chapters tracing the evolution of European politics and the individual awards and their subject areas. There’s a great chapter focusing on Assar Lindbeck, a forceful personality and someone who shaped the Prize.
The story gets a little more complicated once the Prize itself evolves, because it’s not a simple case of rewarding only those who espouse ‘markets are great’ approaches, like Friedman and Hayek. For example in Chapter 7, we learn a lot about empiricists, experimentalists, econometricians and behaviouralists who won the Prize because of their rejection of equilibrium approaches to economics. In Chapter 10, the failure of economics to understand, model, or respond to the growing threats posed by unfettered global capital markets gets a very thorough treatment.
Overall I found the book riveting in that it is written in a deep and scholarly way. I buy the ‘Social Democracy vs Markets’ argument about the genesis of the economics Nobel in the 1960s, but I’m not sure the evolution of the Prize is as clear cut as it could be, after awards to people like Oliver Williamson and Lin Ostrom and Vernon Smith.
The book concludes on a hopeful note. The authors write on page 278:
“To recapture validity, economics has to come down to the ground of argument, evidence, and counterargument, supported by reason and an open mind. In the quest for valid knowledge, for those of Enlightenment disposition, it is well to ignore black boxes, the magic of prizes, and the lure of immutable laws”.
I couldn’t agree more. As intellectual, social, and political history, the Nobel Factor is well worth your time getting stuck into.
My wish for tomorrow’s Prize: Duncan Foley for his work on Public Goods and General Equilibrium, and Charles Manski for his work on just about everything else.
The box below should display the Nobel citation tomorrow around lunchtime.
19 replies on “The Nobel Factor”
While the Economics prize is not one of the original Nobel prizes, it seems at best pedantic (& in my opinion, simply wrong) to say that it is not a “true” Nobel prize. The organization which awards them itself does not appear to distinguish between the economics & other prizes. I think they are best judge. For example there was an event some years for all living Nobel laureates & the economists were invited along with the others.
FYI (courtesy Google).
As a non-economist, but making a judgement on the basis of the role being played currently by some “laureates” of the prize, it seems to me that Hayek was right. (Of course, he did not have to accept it, the prize that is).
In sum, the point made is neither pedantic nor wrong.
The authors spend a fair bit of time going through Nobel’s personal correspondence to argue he wouldn’t have been too happy with an award for this category. The bureaucratic structures are also different as is the source of prize money. It’s a graft of one thing onto another, really.
You write, “The impact of neoclassical economics, the dominant form of economics which emphasises market based interactions above all others on policy makers through teaching and research, is assured because of the Nobel prize.”
I consider neoclassical economics to be the economic research developed around the time of the marginalists (of which TCD made a decent contribution), up the standard supply and demand framework of Marshall.
Like David Colander, I don’t think the economics produced today resembles anything like that of 1870. Of course we continue with some of the best bits (e.g. first welfare theorem), but then again neoclassical economics took the best bits of what Marx classified as classical economics (e.g. gains from specialisation/comparative advantage).
Do you not think Keynes (and Samuelson, and many others) marked notable departures from neoclassical? So an important question: what do you define neoclassical economics as?
I think you’re thinking of classical economics Enda, pre-marginalist. I define neoclassical economics as equilibrium and maximisation economics. There’s a great post by Marc Lavoie I’ll dig out that says it better than I could.
Needless to say Stephen, I think you’re the confused one!
Colander (2000, Journal of the History of Economic Thought) notes that “The root term, Classical, was coined by Karl Marx (1847) as a description of David Ricardo’s formal economics”.
Aspromourgos chronicles the history of “neoclassical economics” in the New Palgrave. Initially Veblen used the term to describe Marshallian economics, but “the meaning [of neoclassical economics] which became the accepted convention after the Second World War, extend[ed] it to embrace marginalist theory in general”
So by this standard: Classical is roughly Smith and Ricardo, call it approximately 1776-1820; and neoclassical is roughly Marshall and Jevons, so approximately fifty years later, 1870-1920. Of course these dates are very loose – for example, there’s a good case to classify Cournot (~1840) as neoclassical but to exclude Jevons (1871) – but in any case, the dominant paradigm around 1920 was certainly neoclassical. Let’s call it 1916 to make it an even 100 years.
From here, it is unanimous that The General Theory constituted and caused a fundamental departure point. Indeed, Colander notes that Keynes lumped classicals and neoclassicals all together, suggesting the world should be seen as classical and neoclassical as pre-Keynes, and everything else post-Keynes; and given the importance of his work that bit of a boast isn’t all too misplaced. Most too would agree that Samuelson caused another discrete break, as did the introduction of game theory from von Neumann, Nash, up to the likes of Harsanyi etc. Game theory assumes utility maximization and Nash is known for his equilibrium proof, but the strategic interaction of agents was an enormous departure from the atomistic assumptions of Marshall et al. Not surprisingly, the welfare properties and policy implications of these equilibria are also enormously different. As Blaug (1998) writes: “Neoclassical economics transformed itself so radically in the 1940s and 1950s that someone ought to invent an entirely new label for post-war orthodox economics”. Consider Schelling’s idea of sorting equilibria to what Marshall would have thought about housing markets price and quantity. They both use “rational maximization” and equilibrium, but they have fundamentally different modeling approaches, and outcomes.
Most would agree that economics transformed itself again in the 1970s with Akerlof/Spence/Stiglitz, and with the likes of Kahnemann and Tversky, where we saw large-scale jettisoning of unreasonable assumptions. Just about every major subsequent contribution, from labour search to new trade theory, can be interpreted in this framework. Consider Matthew Rabin’s behavioural theory work, looking at the implications of the likes of hyperbolic preferences. This is behavioural economics, but there is still a utility function and an equilibrium, but where the policy conclusions lend themselves to Thaler & Sunstein-esque nudging/intervention. Is this still neo-classical?
Further, I would argue that economics transformed itself yet again (!) in the 1990s when computing power facilitated the so-called “credibility revolution.” That’s a silly name, but there is a stark difference in the identification restrictions imposed in empirical work 2016 than in 1986.
So ultimately I’m with Keynes in thinking that neoclassical economics died circa 1936. After Keynes came game theory, and Samuelson’s so-called synthesis of neoclassical and Keynesianism, and so I think it is quite unreasonable to consider anything post-1950 as “neoclassical”. Even thereafter we saw the introduction of asymmetric information and behavioural marking a huge departure, and then a further departure along the lines of Card/Angrist/et al. So to pull it back to the hundred years, I don’t think 2016’s economics is anywhere near close enough to 1916’s economics to still be classified as the same school. The difference between 2016’s work and 1916’s work is much, much larger than the difference between Marshall and Ricardo, regardless of their common mechanism of maximization and equilibrium.
Nicely written Enda, but it elides the central issue that methodologically what is taken as economics in textbooks and journals requires both core assumptions, to a greater or lesser degree. In fact the later economists you cite like Joe have modified the central core, rather than displacing it. Take Herbert Simon, someone whose work I know pretty well. Can you say that his work has substantially altered 2016’s economics? I’m not taking anything away from the great work you cite, but there is a core of Maximising Micro/RBC/DSGE/ that holds to almost all the tenets of the pre 1936 version you’re describing. Also, on the computational elements of the credibility revolution, see Velupillai (2000) for a dissection.
I suppose where we differ is that I don’t see maximization as such a defining feature of neoclassical economics. We can both name the classical economist who noted that it is not from benevolence that the butcher, baker, or brewer provides us with dinner, but self-interest. I think that is largely correct – that people are actively making choices – and their self-interest is a substantial determinant of those choices. I agree with you that that’s core, but I don’t think that’s distinctly neoclassical.
One relatively defining feature of neoclassical in my view is the absence of “frictions”, where frictions can be psychological or “menu costs” or what have you. (A fair rebuttal is that reference to frictions already anchors us to a base of frictionless.) On the psychological front, in reference to Herb Simon, a lot of research effort was expended trying to figure out bounded rationality. My understanding is that the infinite regress problem simply constituted a dead-end, and that is why his work is not core to 2016 economics. I would contrast bounded rationality to 1970s asymmetric information problems which are now core (and back to the topic of this thread was awarded another Nobel today) but represents a distinction from the frictionless neoclassical world.
“This is not a ‘true’ Nobel, …” Yep! Its a Bank Prize – oops!
So how would folk like to classify Frederick Soddy FRS, who did win the Nobel Prize for Chemistry in 1921 for his work in working out the schemata for the radioactive decay products from Uranium to Lead? Then abandonded his profession and pursued economics – “Wealth, Virtual Wealth and Debt” (1933). And then there was Nicholas Georgescu-Roegen (an economist) who took a few pot-shots at the advancing dinosaur of neo-liberalism – “The Entropy Law and the Economic Process” (1971) – and a fat lot of good it did him. Got devoured he did.
““To recapture validity, economics has to come down to the ground of argument, evidence, and counterargument, supported by reason and an open mind.”
Economists need to go somewhat further than ‘grounded argument’. They need to acknowledge that all economies are land-based physical processes which consume finite resources and that economic growth (or more correctly rate-of-growth) is an exponential function and that an econmies can only expand so far, that expansion will eventually plateau-out and will then decline. Bit inconvient that, but its a grounded argument based on the Physical Law and a rule of Mathematics. Can I be hopeful?
The Economics prize should be abolished. The idea that Economics is the Queen of the Sciences as well as the tribunal before which all human undertakings must justify themselves is poisonous. The “prestige” of economics has a lot to answer for. It is time it were knocked down several pegs: its practitioners know little and what they do “know” is riven to the core with politics.
It should be replaced with a Nobel Prize in Philosophy, which is a much more honest and self-aware discipline, not to mention more foundational.
Economics is incoherent. Brexit pushes the rational agent theory to the limit. The Phillips curve was last spotted south of Tijuana headed for a barbecue in Elvis’ house.
We are back to deflation. Well done . you deserve a biscuit.
If, as the FOMC anticipates, the economic recovery continues at a moderate pace, with unemployment slowly declining and inflation expectations remaining near 2 percent, then long-term interest rates would be expected to rise gradually toward more normal levels over the next several years. This rise would occur as the market’s view of the expected date at which the Federal Reserve will begin the removal of policy accommodation draws nearer and then as accommodation is removed.
In short, over the past few years, and especially during the past 12 months, FOMC participants have significantly revised down their estimates of potential long-run U.S. economic growth, the long-run or “natural” rate of unemployment, and the long-run (“terminal”) value of the federal funds rate—all of which are key determinants of economic performance.
What are the implications of these revisions for monetary policy and Fed communications? Over the past couple of years, FOMC participants have often signaled that they expected repeated increases in the federal funds rate as the economic recovery continued. In fact, the policy rate has been increased only once, in December 2015, and market participants now appear to expect few if any additional rate rises in coming quarters
I hope Thaler gets it.
2016 Nobel Prize in economics goes to Professors Oliver Hart and Bengt Holmström for their work on contract theory, including incentive structures.
Incentives in the form of bonuses and buybacks have destroyed the current system . It doesn’t really matter what the latest formula is. It is the same problem as 90 years ago
“They were careless people, Tom and Daisy- they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they had made.”
― F. Scott Fitzgerald, The Great Gatsby
“Who are these guys?”
Oliver Hart and Bengt Holmstrom Win Nobel in Economics for Work on Contracts.
There have been 63 US and British winners of 78 prizes including today’s (some of the Americans have been naturalised.)
Germany has had 1 winner and Amartya Sen is the only Indian winner. He has both been educated and worked in the UK and US. Norway/Sweden has had 5.
Civilisation has haltingly developed through experience, innovation, wisdom and common sense. I haven’t looked at why today’s winners have made a seminal contribution through their research on contract theory but let’s not forget, in the advancement of knowledge, there are unsung heroes in part of the world which will never produce a Nobel winner in Stockholm compared with Oslo!
Why no Irish one since 1968?
“Why no Irish one since 1968?”
Why no Irish olympic 100m sprint champion? No Irish triple grand slam tennis winner? No irish astronaut?
A Finn winning yesterday was hardly a black swan event!
Christopher Pissarides 2010; Robert Aumann 2005; Daniel Kahneman 2002; W. Arthur Lewis 1979 and, maybe Friedrich Hayek 1974? There are other winners from small countries.
Two Trinity grads have won science Nobels even though Ireland lacks a tradition in science, and of course over 48 years the chances are not high.
However, we do have some advantages: Native English speaking, long a part of the Anglo-Saxon world, and no culture shock in moving to the UK or US!
I’m not convinced about this asserted conflict between the promotion of markets and social democracy as, for example, set out here in quite a polemical manner by Avner Offer:
And I doubt, given its choice of Hart and Holmström, that the awarding committee would be convinced either. These blessed “free markets” may be viewed in a number of ways. For example, there are markets where goods and services are commoditised – and there is always pressure to increase commodisation, and there are markets made up of principals and agents, or of service-providers, service-users and those who ultimately pay for services. It is in the latter that markets have to be made and contracts drafted and negotiated. It is in this area that Hart and Holmström have made their contributions.
But this is not a choice between market mechanisms and social democracy. It is, as Hart and Holmström have shown, very much a case of “horses for courses”.
However, there is very little recognition that in the inevitable “mixed economy” those who clamour for “free markets” will seek to rig, distort and subvert them, to suppress efficient competition and to suborn governing politicians and regulators to authorise and protect their rent-seeking. Equally there is limited recognition of the extent to which those clamouring for “social democracy” are adept at pursuing or validating economy-sapping rent-seeking of their own.
It should not be surprising that the increasing number of citizens excluded, impoverished and marginalised by this conspiracy of rent-seeking across the political and economic spectrum, as the opportunity has arisen or arises, have voted for Brexit and support populists and xenophobes such as Trump, le Pen, Orban, etc.
Ireland is fortunate (relative to other EU member-states) that, by chance or design, a sufficient number of voters have engineered a situation where either FG or FF provide a minority government (well short of a majority) largely representing the overwhelming centre-right, “small c” conservative majority – with the deluded left and pseudo-left largely excluded. However, rent-seeking is so pervasive that the economic trade-offs underpinning this political settlement may not be sustainable:
63 US and British winners of 78 prizes. And the 2 economies have been destroyed. The economics Nobel is bulls@it.
Welcome back deflation. We really missed you.