In about a month the winner of the so-called Nobel Prize in economics (as already has been pointed out here, it actually isn’t one) for the year 2011 will be announced. Many distinguished economists can be found among the laureates – others, no less distinguished, cannot. But when you look at the Prize’s record carefully, at what the particular laureates have stood for, you will probably have the feeling that the Swedish Royal Bank Nobel Memorial Prize in Economic Sciences is a farce. And rightly so.
Let us ignore for the moment the fact that almost all laureates of the Nobel Prize in economics (I will stick to this inaccurate name for simplicity) are “conventional economists”, that Elinor Ostrom is the only woman awarded so far (and this as late as 2009!), that almost all awards went to scholars at US-American universities and all the other biases that can be found when one looks at the Prize. Let us forget about the hostility of Alfred Nobel’s family toward the Prize, too. Shortly: let us only consider the consistency of the award, as this shall be the subject of my post. It will be enough to show that the Prize is indeed a farce.
There have been many schools of thought within economics (even within the “conventional” stream, not to mention all the “dissidents”). Since their models and conclusions often quite contradict each other, they cannot all be “right” at the same time. However, this is what the Prize Committee seems to be implicitly trying to convince us of.
Let us start with the attitude toward markets. There are generally two branches of thought – those who think that the assumption of “perfect” markets (including full and evenly distributed information, rational expectations, no externalities etc.) is a reasonable approximation to the reality, and those who think that the markets are thus full of imperfections that one must take them into account and not assume them away. Interestingly, while the award in 2004 was received by Finn Kydland and Edward Prescott, two macroeconomists clearly belonging to the first branch (“perfect markets”), in 2002 it went to George Akerlof, Michael Spence and Joseph Stiglitz “for their analyses of markets with asymmetric information” – one of the most important fields in the analysis of market failures. Last year’s laureates Christopher Pissarides, Peter Diamond and Dale Mortensen come from the second branch as well.
Another example: the rationality assumption, especially in microeconomics. Here, again, there are two main schools of thought – those assuming that economic actors are utterly selfish, utility-maximizing individuals who have rational expectations (i.e., you cannot fool them by telling them lies about your future behaviour, and they know how markets behave and build their expectations upon that), and those who question these assumptions and claim that people are not rational (and that this is not even a reasonable approximation to how they function). In 1995, Robert Lucas, Jr. got the Prize “for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy”. Three years earlier another economist from the so-called Chicago School (very “rationality-loaded”), Gary Becker, was also awarded for extending the rationality model into non-economic fields (such as partner seeking or procreation). In the meantime, in 2002 Daniel Kahnemann became a Nobel Prize laureate – he actually is a psychologist whose research has impressively shown that the rationality assumption has nothing to do with reality. Also, in 1998, my personal idol Amartya Sen was awarded – he has criticized “rationality” for years.
A highly controversial issue in economics has been for years (and probably will remain so) whether the State should actively interfere with economic activity (this position is commonly called Keynesianism, which is an oversimplification), or whether its role should be constrained to that of a “night-watchman” (more or less appropriately called neo-liberalism). Exponents of the former school were, e.g., Paul Samuelson (1970), Gunnar Myrdal (1974) or the already named Joseph Stiglitz. On the other hand we have for instance Milton Friedman (often called the god-father of neo-liberalism by its critics) awarded in 1976, or James Buchanan (1986).
These are only a few examples of how inconsistent the Nobel Prize Committee appears to be in its awarding practice. The list could well be prolonged (e.g., in the areas of finance – Merton/Scholes vs. Tobin -, or the commons – Coase vs. Ostrom). However, I think that the examples I have discussed above suffice to make clear what I mean – the Bank of Sweden Nobel Memorial Prize in Economic Sciences is a farce, and it is a pity that it has so much weight in public discussions (consider the usage of the supporting argument, “the Nobel Prize winning economist said that…”). Maybe we would be better off if there were no such Prize in economics, as suggested by, inter alia, Myrdal and Hayek.