One-handed economists, Nobels and economics as a science
"Give me a one-handed economist! All my economists say, 'On the one hand' and 'On the other,'" Harry Truman, US president 1945-1953, once said, and Monday's announcement of what is commonly called the Nobel Prize in Economics raises a perennial question on the claim of economics to be a science. For a start, the announcement on Monday was not on the winner of a Nobel Prize.
Alfred Nobel (1833-1896), the Swedish businessman and inventor of dynamite, in his last will gave the largest share of his fortune — to the displeasure of his family — for a series of prizes in Physics, Chemistry, Physiology or Medicine, Literature and Peace — the Nobel Prizes.
Sveriges Riksbank’s Prize in Economic Sciences in Memory of Alfred Nobel, was established in connection with the 300th anniversary of the Riksbank, Sweden's central bank, in 1968. The prize is awarded every year to a person or persons in the field of economic sciences who have produced work of outstanding importance. The Royal Swedish Academy of Sciences appoints the prize-winner(s) according to the same principles as for the Nobel Prizes. The prize amount is also the same as for the Nobel Prizes, at SEK 8m (€860,000), and is paid by the Riksbank — only a Swedish institution could effectively have added an additional prize.
The first prize was awarded in 1969. There have been 76 winners including 1 woman.
On Monday, the Royal Swedish Academy of Sciences awarded the economics prize to Angus Deaton, professor of economics at Princeton University, USA, "for his analysis of consumption, poverty, and welfare." He is a UK and US citizen. Born 1945 in Edinburgh. PhD 1974 from the University of Cambridge.
The reputation of mainstream economists was damaged by the financial crisis and Queen Elizabeth in Nov 2008 at the London School of Economics (LSE) where she cut the tape on the new academic building, famously asked: "Why did nobody notice it?"
Prof Luis Garicano explained to journalists: "She was asking me if these things were so large how come everyone missed it." He told the Queen: "At every stage, someone was relying on somebody else and everyone thought they were doing the right thing."
"Awful," she had replied.
Following a roundtable discussion at the British Academy for the Humanities and Social Sciences in June 2009, leading academics wrote to the Queen addressing her question.
Although many people did foresee the crisis, wrote Tim Besley, a professor at LSE and a then member of the Bank of England's monetary policy committee, and Professor Peter Hennessy, a political historian, "most were convinced that banks knew what they were doing and believed that the financial wizards had found new and clever ways of managing risks...It is difficult to recall a greater example of wishful thinking combined with hubris."
Besley and Hennessy added:
"There were many warnings about imbalances in financial markets and in the global economy... Our own Bank of England issued many warnings about this in their bi-annual Financial Stability Reports. Risk management was considered an important part of financial markets...But the difficulty was seeing the risk to the system as a whole rather than to any specific financial instrument or loan. Risk calculations were most often confined to slices of financial activity, using some of the best mathematical minds in our country and abroad. But they frequently lost sight of the bigger picture."
In Oct 2008 Alan Greenspan, former Federal Reserve chairman, said that he “made a mistake” in believing banks and others would protect their shareholders and own firms’ equity. He was “shocked” to learn of the breakdown in lending standards and risk management at the firms that led to the credit crunch. Greenspan admitted that he “found a flaw” in his ideology and “that’s precisely the reason I was shocked.”
Gillian Tett, Financial Times US managing editor, and author of a new book 'The Silo Effect' says the genesis of the book was the Great Financial Crisis of 2008.
But it is not a book about finance. Far from it. Instead, it asks a basic question: Why do humans working in modern institutions collectively act in ways that sometimes seem stupid? Why do normally clever people fail to see risks and opportunities that are subsequently blindingly obvious? Why, as Daniel Kahneman, the psychologist, put it, are we sometimes so 'blind to our own blindness?'
Tett says research in Tajikistan while at university has helped her to understand what happens on Wall Street:
"I did a PhD in the field of cultural anthropology, or the study of human culture, at Cambridge University. As part of this academic work, I conducted fieldwork, first in Tibet, and then down on the southern rim of the former Soviet Union, in Soviet Tajikistan, where I partly lived between 1989 and 1991 in a small village. My research was focused on marriage practices, which I studied as a tool to understand how the Tajik had retained their Islamic identity in a (supposedly atheist) communist state."
John Nash (1928-2015) who inspired the Oscar-winning film 'A Beautiful Mind,' and died in a car accident last May, caused controversy for the Swedish Academy in 1994 when he was among the three awarded the economics prize for game theory.
Sir Samuel Brittan, who was an FT economic commentator for over 50 years, wrote in a 2003 column that John Nash was a mathematician not an economist. He added:
"Some members of the Swedish Academy were doubtful if economics was a genuine science and disliked the whole idea of awarding the prize...A former Swedish finance minister, Kjell Olof Feldt, who himself subsequently became head of the Riksbank, has advocated abolishing the economics prize."
Raj Chetty, a Harvard economist, who likely would hope to be called a Nobel laureate, wrote in The New York Times in 2013:
"As is the case with epidemiologists, the fundamental challenge faced by economists — and a root cause of many disagreements in the field — is our limited ability to run experiments. If we could randomize policy decisions and then observe what happens to the economy and people’s lives, we would be able to get a precise understanding of how the economy works and how to improve policy. But the practical and ethical costs of such experiments preclude this sort of approach. (Surely we don’t want to create more financial crises just to understand how they work.)"
Robert Shiller of Yale wrote on economics as a science weeks after being selected as one of the three Americans awarded the economics prize in 2013:
"My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles. People can just change their minds and behave completely differently. They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes. But all the mathematics in economics is not, as Taleb suggests, charlatanism. Economics has an important quantitative side, which cannot be escaped. The challenge has been to combine its mathematical insights with the kinds of adjustments that are needed to make its models fit the economy's irreducibly human element."
Philip Mirowski, a professor at the University of Notre Dame says the “Bank of Sweden was trying to become more independent of democratic accountability in the late 60s, and there was a big political dispute in Sweden as to whether the bank could have effective political independence. In order to support that position, the bank needed to claim that it had a kind of scientific credibility that was not grounded in political support.”
Americans by birth or naturalisation account for 40 of the 76 economics prizes and the University of Chicago claims that 28 of the 76 have associations with it as either students or faculty.
Milton Friedman (1912-2006), the US monetarist economist and winner of the 1976 economics prize, is the most renowned Chicago economist. He was an inspiration for Margaret Thatcher and Ronald Reagan.
We assume that the Swedish Academy is impressed by the beauty of the research rather than the ideology it may underpin. As some technological innovation precedes science, even the most brilliant research may validate what people in other disciplines are applying in the real world.
What does apply is that it's economists who work at leading universities have the chance to get a phone call from Stockholm not the likes of a maverick such as Hyman Minsky (1919-1996).
Finley Peter Dunne’s (1867-1936) Irish comic character Mr Dooley’s comment from his saloon bar perch in Chicago: “No matther whether th’ constitution follows h’ flag or not, th’ Supreme Coort follows th’ election returns,” applies in many areas of life.
Daniel Kahneman, an Israeli-American psychologist, was a co-winner of the 2002 economics prize and Prof Mirowski has noted that the honorarium 'Nobel Laureate' gives economists the status of being spokespersons for their professions and a path to wealth, while the other social sciences may struggle.
Friedrich Hayek, the Austrian-born economist who was a co-winner of the prize in 1974 in his acceptance speech said:
"I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past. I am therefore almost inclined to suggest that you require from your laureates an oath of humility, a sort of hippocratic oath, never to exceed in public pronouncements the limits of their competence. Or you ought at least, on confering the prize, remind the recipient of the sage counsel of one of the great men in our subject, Alfred Marshall, who wrote: “Students of social science, must fear popular approval: Evil is with them when all men speak well of them.”"
Whether economics is a science or not, Joris Luyendijk, the author of 'Swimming with Sharks: My Journey Into the World of the Bankers' who like Gillian Tett also looked at the world of finance from an anthropological perspective, argues for an extension of the economics prize to the other social sciences:
"Think of how frequently the Nobel prize for literature elevates little-known writers or poets to the global stage, or how the peace prize stirs up a vital global conversation."
— Michael Hennigan, Master of Economic Science (NUI, 1978)!
In 1968, Sveriges Riksbank (Sweden's central bank) established this Prize in memory of Alfred Nobel, founder of the Nobel Prize. Here are some facts and figures regarding The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, awarded from 1969 to 2015.
47 Prizes in Economic Sciences have been awarded every year since 1969.
24 Prizes in Economic Sciences have been given to one Laureate only.
17 Prizes in Economic Sciences have been shared by two Laureates.
6 Prizes in Economic Sciences have been shared between three Laureates.
76 individuals have been awarded 1969-2015.
List of all Laureates in Economic Sciences
Elinor Ostrom was the first female Laureate in Economic Sciences. Elinor Ostrom was awarded the Prize in 2009.
Alfred Nobel left most of his estate, more than SEK 31m (today approximately SEK 1,702m (€183m) to be converted into a fund and invested in "safe securities." The income from the investments was to be "distributed annually in the form of prizes to those who during the preceding year have conferred the greatest benefit to mankind."
The Prize amount for 2015 is set at Swedish kronor (SEK) 8.0m per full Prize.
Why are the individuals awarded a Prize in Economic Sciences called Laureates?
The word "Laureate" refers to being signified by the laurel wreath. In Greek mythology, the god Apollo is represented wearing a laurel wreath on his head. A laurel wreath is a circular crown made of branches and leaves of the bay laurel (in Latin: Laurus nobilis). In Ancient Greece, laurel wreaths were awarded to victors as a sign of honour - both in athletic competitions and in poetic meets.
Pic on top: Angus Deaton illustration by Johan Jarnestad for the The Royal Swedish Academy of Sciences
Angus Deaton, winner of this year’s Nobel Prize for economics, has never feared to tread on the research of others — even that of previous laureates. The FT’s Martin Sandbu and Ferdinando Giugliano discuss his landmark work: