Why do we *still* have a Nobel Prize in Economic Sciences?

Ingrid Robyens at Crooked Timber links to some fascinating discussion from Philip Mirowski of the role of Swedish domestic politics in the establishment of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, with emphasis on the way in which claims of “scientific” status for economics helped the claim of the Swedish central bank to independence from government.

In the broader context, it seems pretty clear that, if the idea had arisen even a few years later, it would have been rejected. In 1969, economics really did seem like a progressively developing science in which new discoveries built on old ones. There were some challenges to the dominant Keynesian-neoclassical synthesis but they were either marginalized (Marxists, institutionalists) or appeared to reflect disagreements about parameter values that could fit within the mainstream synthesis.

Only a few years later, all of this was in ruins. The rational expectations revolution sought, with considerable success, to discredit Keynesian macroeconomics, while promising to develop a New Classical model in which macroeconomic fluctuations were explained by Real Business Cycles. This project was a failure, but led to the award of a string of Nobels, before macroeconomists converged on the idea of Dynamic Stochastic General Equilibrium models, which failed miserably in the context of the global financial crisis. The big debate in macro can be phrased as “where did it all go wrong”. Robert Gordon says 1978, I’ve gone for 1958, while the New Classical position implies that the big mistake was Keynes’ General Theory in 1936

The failure in finance is even worse, as is illustrated by this year’s awards where Eugene Fama gets a prize for formulating the Efficient Markets Hypothesis and Robert Shiller for his leading role in demolishing it. Microeconomics is in a somewhat better state: the rise of behavioral economics has the promise of improved realism in the description of economic decisions.

Overall, economics is still at a pre-scientific stage, at least, as the idea of science is exemplified by Physics and Chemistry. Economists have made some important discoveries, and a knowledge of economics helps us to understand crucial issues, but there is no agreement on fundamental issues. The result is that prizes are awarded both for “discoveries” and for the refutation of those discoveries.

35 thoughts on “Why do we *still* have a Nobel Prize in Economic Sciences?

  1. Economics may not be as good as the natural sciences, but couldn’t the prize still be useful for highlighting important contributions to our understanding? In that light it doesn’t seem as absurd to reward people for contributing to the arguments on both sides of a debate.

  2. My own view is that there was one big mistake in Keynes’s General Theory, in that it derailed the incremental line of enquiry of the Marshallian school that was being carried on by Pigou et al. As I have a mathematical background, it struck me that the General Theory had come to a view that there was no natural tendency to settle on an equilibrium without outside management from reasoning that practically only used flows, suggesting to me that it might have abstracted out – differentiated out – anything that depended on stocks. Sure enough, when I looked around, I found that Pigou had wondered about this very thing, in the Real Balance Effect. Likewise, Pigou’s work on externalities and what can be done about them got pushed aside in Keynes’s line of enquiry – not refuted so much as neglected, and so not carried on as much as they might have been by Keynes’s own successors. All that does not make Keynes’s work wrong so much as incomplete, with the error as such consisting in the implications of the word “general” in “General Theory”.

  3. Rob

    While all the Nobels are somewhat capricious to judge by those who didn’t get one but richly deserved one – Fred Hoyle is someone who springs to mind – and disciplines which are overlooked or shoehorned into one of the existing categories – one has to admit they do at least provide public recognition for a lot of shy but brilliant people who richly deserved this.

    However the ‘Nobel’ for economics is a bit more of a problematic case.

    It came late, appears to be correlated with the Cold War entering a new phase and the rise of neoliberalism (if politics doesn’t wasn’t involved in the prizing giving process giving at the time as evidenced by the 1973 Peace Prize to Henry Kissinger then I’ll eat my hat – not to mention other pacifist luminaries like de Klerk, Sadat, Begin and Teddy Roosevelt). There is the marginalization of different thought streams, the source of the funds. There is the massive bias towards a. the USA and b. The University of Chicago. c. the Anglosphere – 53 of 74 being from the USA/UK. though oddly they cant make up their mind what the prize should be called – in English.

    One of the most notable economically oriented Nobel Laureates of recent times http://en.wikipedia.org/wiki/Muhammad_Yunus got his prize not from Economics but for Peace??!!

    And then we have the spectacle that despite this enormous bag of luminous economic roosters (they are of course mostly blokes) they presided over the GFC, great immoderation, ecological destruction and peak oil with really not much to offer in the way of advice – while their countries have racked up the most absurd levels of debt and oversee a gaggle of shore banking havens.

    By all means keep the prize but call it what it is – something like the “Gordon Gecko/University of Chicago/Swedish Central Bank Prize for Muddy/Ideological/Erroneous/Anglospheric Hack Economics”

    By all means give them awards

  4. ps John – apologies for reiterating many of your points but this so called prize and its attempt at credibility by association boils my blood. And Tks for the link to Phillip. Great stuff.

  5. Chin up, John! This year’s Riksbank prizes are indeed completely absurd (except Shiller’s, of course), But it’s darkest before the dawn, and all that.

    In 2009, Olivier Blanchard famously declared the state of macro to be “good”. I think that the number of economists who disagree with that assertion has grown, and is continuing to grow. That is a hopeful sign.

    I hope that by 2058, we will have a macroeconomics that is as good as we had in 1958 … and perhaps by 2158, it will be better.

    (Off topic, it’s fascinating how many economists refer to these prizes as “Nobel prizes”. Physics envy, anyone? Were I running the Nobel Foundation, I’d be sending cease and desist letters, in order to protect the brand.)

  6. @P.M.Lawrence
    Are you wondering what less neglect of Pigou and others of his tradition might have contributed economically to the state of the planet today?

    I think an economic framework in which carbon taxes were implicitly understood and treated as being more soundly based than the heavyhanded GSTs, VATs and similar that we currently enjoy, would be at least to that extent a better framework.

  7. an interesting case of winners that disagree strongly. see Market Efficiency, Long-Term Returns, and Behavioral Finance by Fama at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=15108

    Market efficiency survives the challenge from the literature on long-term return anomalies.

    Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent over-reaction to information is about as common as under-reaction. And post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal.

    Consistent with the market efficiency prediction that apparent anomalies can also be due to methodology, the anomalies are sensitive to the techniques used to measure them, and many disappear with reasonable changes in technique.

    both theories advise invetsors to buy and hold a diversified portfolio.

    fama and others work on how you cannot beat the market lead to a complete re-organisation of financial markets through the rise of low costs, passive or index funds.

    I am sure that fama’s critics here and elsewhere put their superannuation savings where their mouths are and try to beat the market.

  8. jon frankis :
    Are you wondering what less neglect of Pigou and others of his tradition might have contributed economically to the state of the planet today?
    I think an economic framework in which carbon taxes were implicitly understood and treated as being more soundly based than the heavyhanded GSTs, VATs and similar that we currently enjoy, would be at least to that extent a better framework.

    Yes to the question, but much less so to your suggestion, since that seems to flow from the very thinking that sidelines externalities as “only” having to do with certain limited areas like pollution. I feel that we are well up on the techniques for dealing with those areas, and that we have missed out on other relevant application areas (for instance, in the past I have suggested that there could well be overlooked externalities in the labour market). On carbon taxes as such, I rather doubt that they are “more soundly based than the heavyhanded GSTs, VATs and similar”, both because we do not have the numbers to work with yet – the settings to apply – and because we do have Coasian alternatives (after all, the machinery is already there in the form of the states owning the minerals and releasing them on a royalty basis). We don’t have the numbers to work with yet because the warmist arguments really haven’t settled such details so far, and because the numbers for Australia to use unilaterally are different from ones that would really work to end any externalities (since those ipso facto don’t work out properly in just one country). To my mind, the best bet would be to abolish the carbon tax as such and never go there again, but instead apply export taxes by weight and volume rather than value. That would have the same global effects, if any, as a unilateral carbon tax but wouldn’t raise local costs uncompetitively during any hiatus while Australia might be going it alone (there would also need to be some offsetting subsidies for imported inputs to mining, perhaps only transitionally). But there are political and diplomatic obstacles to that approach.

  9. Fear not: there never was a Nobel Prize in Economics. What there has been is a guerrilla marketing campaign to ride the coat-tails of the fields that Nobel recognised in his original endowment.

  10. @Hermit
    Thanks Hermit, that’s a link that needs wider airing. No doubt the rejectionists will be sending in a flurry of submissions, as they usually do, just to bulk up the numbers on their side.

    As for economics and awards and such, I’d say that while economics is not exactly a science (in the sense of hard sciences), it can be approached with rigour. Ideas must be formulated in the first place, if a field is to advance, so the fact that a prize can be given for introducing a new idea and developing it, and another prize to someone else for demolishing the same idea, doesn’t strike me as necessarily a nonsensical outcome. After all, geology has undergone many such breaking and ebbing waves. The major fisty-cuffs over continental drift, for one. And geology doesn’t contend with the additional burden of studying a system manifestly affected by politics, as is the case for poor ol’ economics.

  11. As to whether we should even bother making a submission on carbon tax repeal I think Basil Fawlty asks the relevant question ‘what’s the bleedin’ point?’.

  12. I thought Paul Samuelson, John Hicks and Kenneth Arrow deserved awards. After that….

    I agree with John that modern economics is regressing but probably for different reasons. Too much abstraction without “practical wisdom”, too much low-thought, inconsequential empiricism. Economics has become a hurdle-jumping contest where insight plays second-fiddle to displaying technical virtuosity. Indeed disengaging the brain and powers of observation and reasoning are a pre-requisite for success.

    US PhD programs & US-centric views of what economics and economic research is have damaged the discipline. Also made it much less fun.

  13. When even economists admit their field is pure bunkum (and many do now) that essentially seals the case. It is easy enough to read economists in a circle, each person pointing to the next person’s view and saying it is wrong. I take J.Q.’s admission as further vindication that I was correct when I blogged a little while ago that I had lost all interest in economics.

    The essential programmatic mistake was the attempt to sever economics from political economy and history. The flawed assumption was that the study of the severed economics of one particular idiosyncratic political-economy system would somehow uncover universal laws.

    The irony is that mainstream economics yearned to become scientific yet proceeded, and still proceeds, completely ignoring the laws of thermodynamics. That is to say, economic “laws” were formulated which completely ignored the dependence of the economy on material and energetic inputs. These were supposed to come free and endlessly from an environment characterised by finite stocks and flows.

    Quite some time ago, I wrote an essay in Weekend Reflections advocating economists like J.Q. pay more attention to biophysical economics. Since J.Q. has now realised his field is a failed research project, I would hope he might take a more serious look at biophysical economics and also expand his studies (further?) into economic history and political economy.

    It’s always interesting, this point of loss of faith in teaching and authority figures. One realises with great force and clarity that there are some fields so complex that there the wisest are no better than fools.

  14. Shiller says here that Fama is important

    Gene Fama once told me that he is actually sympathetic to behavioral finance and that in fact he is proud to have accepted many of the journal articles or written referee reports accepting publication for articles that are important in the field. And I believe that’s true. I think he’s an open-minded person.

    Somehow people get into certain research directions that emphasize a certain interpretation of results, but nonetheless trustworthy interpretations of data. Fama has done a lot of important things. I’m pleased to be united with both [Fama and Hansen]. I am an admirer of both of them, and it is an honor to be associated with them in this way.

  15. Ikonoclast, my colleague, John, is unlikely to ever cite it because it is ‘heterodox’ economics, which he seems to dislike, but the article below makes exactly your point about the importance of thermodynamics in economics:

    Foster, J., Energy, aesthetics and knowledge in complex economic systems, Journal of Economic Behavior & Organization, Volume 80, Issue 1, September 2011, Pages 88-100

    So you should not lose interest in all of economics – some of us are trying to change things!

  16. On the matter of economics good and bad which is what the Riksbank Prize seems to be about – anyone around Sydney in December might be interested in this:

    “Limits to Growth : Beyond the Point of Inflexion . Is economic growth forever sustainable? What impact would a stagnant or declining population have on GDP? Can mathematical models guide policy makers in answering these questions? What is the strategic plan for planet Earth? Some of the world’s leading thinkers will be converging at UNSW Australia on 11/12/13 and 12/12/13 to address these questions. The event will consist of a full day ticketed Symposium on the 11th and an invitation-only Q&A session on the evening of the 12th.”


    The price is a bit steep but I’ve decided to go anyway as it includes a swag of ‘progressive’ local mainstream economists who presumably believe there is something to be said for maintaining the environment.

    What interests me is see how they cope with or rationalise economic’s historical continuous growth paradigm – whose promotion is after all what the Riksbank prize is all about. Or maybe like the pope on a better day they are becoming ecologically born again.

    (John for the record this isn’t my department and I am incurring no benefit but if this doesn’t fit in the site rules please delete).

  17. Actually, the energy issue is fascinating. For example, people are discussing ways of extracting CO2 from the atmosphere and sequestering it, as a geo-engineering solution to the AGW problem. This form of sequestration is performed far from the big emitters, so it does not have the effectiveness of being co-located with the emitter. I guess the blind hope is that they can flog more coal, burning much of it to re-capture the released CO2, and making someone else pay for the trouble and effort, rather than the coal fired power station.

    What I’ve wondered is what the energy cost would be per giga-mol captured and sequestered, assuming it can be done on a large scale. I anticipate it being a substantial fraction of the energy originally generated at the emitter; if it is more, then it is a defective approach.^fn1 BTW, if you are wondering why no mention of the alternative solution of growing plants, such as trees, it is a matter of economics 🙂 Land is valuable for other uses.

    fn1: The whole geo-engineering thing leaves me cold: it is like waiting for nuclear fusion to arrive. It would be pretty sad if we leave everything so late that all the easier options are closed off, and, unfortunately, the mere speculation of geo-engineering encourages people to take the view it can rescue us at some date in the future, so don’t worry about what we are doing right now. That’s another example of how economics has its work cut out for it: the mere existence of an idea—geo-engineering—has the power to alter people’s behaviour, and seemingly without a reliable measure as to the likelihood of the idea becoming a reality. Altered behaviour = altered economic activity, presumably some of the time at least.

    Better finish this coffee break 🙂

  18. but doesn’t awarding such a well known prize in this subject draw attention to the ideas of people who have enormous influence who otherwise would not come to the attention of people like me.
    i had never heard of any of these men.
    and certainly didn’t know who was the author/proponent of the “efficient(wah haha)markets”scam.

    outside of an area of expertise so many discussions,controversy and debates are dished up by the broadcasting industry as a superficial insert between sensational eye grabbers and subsequently we fly completely blind.

    re carbon capture.

    i’ve not come across any reference to the loss of carbon capture caused by soil collapse engendered by the use of oil based fertilisers.

    my experience (on a very small scale) with the remediation of collapsed soil is when aeration is introduced in a manner that increases the depth of aeration the plant and micro fauna followed that depth.

    this took a couple of years.
    starting with compacted soil the first depth was less than 10 cm and depending on season and moisture the depth was increased to the point where after that time the soil depth was 30 cm.
    the changes included increased moisture retention,release of locked up nutrients,change in PH,return of fungi and elimination of soil loss through run off.
    the carbon content went from next to none to heaps.
    not very scientific but i was really pleased.

    i wonder if any scientific types have done trials on this?

    there is lots of anecdotal stuff,Yeomans’ keyline and such that have been around for yonks but the fert industry which funds the rural broadcasters seem to have a lock on what gets accepted as “sensible”.

    mind you,any one who has a biodynamic cert(and it ain’t easy to get)not only doesn’t have to worry about soil collapse but can’t keep up with the orders,pricey or not.people who have the money to spend generally have enough information at their disposal to be aware that eating food sans “safe levels”of poisons,anti biotics and grown in soil in good heart*,pays off in all sorts of ways.

    even georgieporgie w bush knows that.

    *soil in good heart?
    look it up.

  19. maybe Robert Gordon is right about pre-1978 Keynesian macroeconomics being better. Krugman may be well on the money too about pre-1978.

    Nelson and Schwartz specially addressed this point in their response to his carping at the time of Milton Friedman’s death.
    • Krugman (2007d) said: “The key thing is that good Keynesianism, as embodied even in undergrad textbooks of the time, was perfectly OK: Dornbusch and Fischer, 1978 edition, offered a description of what disinflation would look like that matches the experience of the ’80s reasonably well, and the textbook does not seem all that dated even now.”

    • Nelson and Schwartz going on to say that “a major reason why Dornbusch and Fischer (1978) “does not seem all that dated even now” is because it incorporates many monetarist ideas.” Dornbusch and Fisher (1978, p. 520) observe ‘Much of the analysis of this book would, a few years ago, have been considered monetarist.”
    See http://www.nber.org/papers/w13546.pdf pp. 18-19.

    Tom Sargent pointed out that Keynesians such as in the renditions of Berkley story of macroeconomics say that the natural rate hypothesis was well accepted in the very early 1970s.

    If the rot started with the discovery of the Phillips curve in 1958, the rot started much earlier. See THE EARLY HISTORY OF THE PHILLIPS CURVE by Thomas M. Humphrey 1985.
    Prototypal Phillips curve analysis is in the writings of David Hume (1752), Henry Thornton (1801), and John Stuart Mill

    Irving Fisher’s 1926 statistical analysis was republished as ‘I discovered the Phillips curve’ in 1973. Jan Tinbergen estimated the wage-change version in 1936

    Phillips was seen as the discoverer because, Humphrey concluded, because “by providing a ready-made justification for discretionary intervention and activist fine tuning, this interpretation helped make the Phillips curve immensely popular among Keynesian policy advisors.”

    The 100-years stable Phillips curve trade-off disappeared for the reasons provided by Lucas. People anticipated the interventions.

  20. What do we mean when we say economics isnt scientific ? If it is evidence and logic based and proceeds by making testable hypothesis then it is scientific . Failure to find universal laws doesnt make a field unscientific in its methodology.
    My random musing ;- One problem in finding universal laws where human behaviour is involved may be that in an attempt to gain advantage over each other competing people and nations will undermine any successful model once they have it .In this way human activity prevents the formulation of universal laws ,once enough people take the laws into account in an attempt to make money the laws break down as predictors .
    Also, maybe its because I have no training in macro-economics that it usually seems to make most sense to me when put in psycho/social terms ;but maybe not .

  21. In furthering sunshine’s comment, I’d point out that advances such as general relativitiy, by their necessity, started out as theoretical exercises well before strong evidence existed. All Einstein had to work with were tantalising hints, and a strong intuition. Oh, and a decade of persistence at figuring out how Riemann’s “pure” mathematics on curved manifolds could be used as a basis for a geometric approach to spacetime. Hard slog, and it could have collapsed on the very next discovery of the astronomy community.

    The willingness of academics to stick to their guns on theoretical work that fails the data isn’t confined to economics, not by a long shot. Perhaps economics is approaching a moment of truth, the one where it either jumps the shark, or it finds within itself a whole new direction of research that’s more in tune with measured reality, a Kuhnian revolution, perhaps?

  22. Modiglani considers the Keynesian vision of macroeconomic policy to be:

    a market economy is subject to fluctuations which need to be corrected, can be corrected, and therefore should be corrected.

    Friedman’s vision of central banking is far more circumspect:

    The central problem is not designing a highly sensitive [monetary] instrument that offsets instability introduced by other factors[in the economy], but preventing monetary arrangements becoming a primary source of instability

  23. @hc nails it. Though Harry is a tad harsh in his list of the deserving – I think Friedman, for all his errors, deserved a prize. I’d also seriously think about giving it to a handful of microeconomists – say Akerlof. If we chose to define “economics” really broadly then maybe you’d also think about the odd statistician like Hansen or philosopher like Rawls.

    I’ve always thought the economics “Nobel” should not be given every year but reserved for occasional use for people who have made truly big advances and whose advances have stood the test of time. Such advances happens much less than once a year.

  24. #27 Jim Rose mentions Modigliani. Could someone please explain what is new in Fama that Modigliani & Miller and their commentators missed?

  25. “the rise of behavioral economics has the promise of improved realism in the description of economic decisions.”

    I’ve noticed that a recent Economics Nobel Laureate isn’t, in fact, an economist, this is a very positive development indeed.

  26. If success rates from treatments was the only benchmark psychology wouldnt be considered a science .

  27. @derrida derider

    Friedman was a charlatan through and through. He made stuff up. He ignored empirical evidence. He kept repeating assertions and prescriptions after he knew they had been falsified. He was in the pay of the plutocrats and working solely for them.

    Actually, it’s interesting in the history of thought, just how often charlatans gain an immense following and garner much success and wealth. Humans are such a credulous bunch when it comes to believing invented nonense and so hard to convince with extensive empirical evidence. I think it has something do with the fact that blind belief is easy, requiring almost no thought or effort at all, whereas assessing truth on real evidence is quite a painstaking process.

  28. @sunshine
    From what of seen of psychology, it is deeply affected by fads, wave after wave of them; I’m referring to psychology as a clinical practice here, not as a research discipline. Furthermore, the same presenting symptoms can conjure up entirely different “explanations” from different psychologists, explanations that are mutually exclusive, and explanations that are impossible to refute (or to prove are true, for that matter). Such is the nature of the mysteries of the mind.

    The current practice seems to be to largely ignore the patient’s symptoms, while pushing the favoured treatment upon them. Aside from being patronising in the fashion of the doctors of old, where a diagnosis and treatment was pronounced by the voice of authority, uncontested, it raises the question as to how a treatment can be applied without great consideration of the symptoms and the underlying condition. That’s not to say that the current treatments are useless: there is nothing wrong with learning mindfulness therapy or cognitive behavioural therapy, for example; it just seems rather strange and arbitrary for so many conditions to be lumped in as requiring a single treatment type. It is a bit like seeing a group of patients, one with a grazed knee, another with a bump on the head from fainting for some unknown reason, a compound fracture, and another with an arrow through their chest, and then applying bandages and leeches to all of them. The bandages can’t hurt, the leeches are benign, but it is rather missing the point. Something just doesn’t seem to sit right with that.

  29. @Ikonoclast speaking of charlatons and false dawns, Mises explained the youthful allure of socialism thus:

    It promises a Paradise on earth, a Land of Heart’s Desire full of happiness and enjoyment, and—sweeter still to the losers in life’s game—humiliation of all who are stronger and better than the multitude.

    Logic and reasoning, which might show the absurdity of such dreams of bliss and revenge, are to be thrust aside. Marxism is thus the most radical of all reactions against the reign of scientific thought over life and action, established by Rationalism.

    It is against Logic, against Science and against the activity of thought itself—its outstanding principle is the prohibition of thought and inquiry, especially as applied to the institutions and workings of a socialist economy.

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