PRESTOPUNDIT -- "It's a team sport, baby!"

Samuel Brittan -- should there be a Nobel Prize in Economics? Quotable:

The dispute about the value of the prize is still running. A former Swedish finance minister, Kjell Olof Feldt, who himself subsequently became head of the Riksbank, has advocated abolishing the economics prize. Some members of the present generation of the Nobel family have done the same. One is reminded of the disputes among the descendants of the composer Richard Wagner, who still claim the right to decide the future of the Festival Theatre he established in Bayreuth.

Indeed a few of the economics prize winners themselves expressed reservations, Friedrich Hayek, the free market political economist who won the prize jointly with the Swedish socialist Gunnar Myrdal in 1974, was grateful that the prize rescued him from a long period of personal depression and had relaunched his ideas - well before Margaret Thatcher started to publicise his name. Yet he admitted that if he had been consulted on whether to establish the prize he would "have decidedly advised against it." Myrdal rather less graciously wanted the prize abolished because it had been given to such reactionaries as Hayek (and afterwards Milton Friedman).

How does the matter look now? A glance at the correspondence columns for the FT will show that mainstream academic economics is far from being the only source of ideas on the subject. Business school theorists, contemporary historians, engineers with an interest in policy and opinionated businessmen all weigh in. It is the Nobel Prize which gives some kind of imprimatur to mainstream academic ideas, which combine an emphasis on individual utility maximisation and the role of markets, with advanced statistical techniques. It has not however in the least increased the willingness of policy makers to accept international free trade or reject the "lump of labour" fallacy - matters on which most academic theorists are agreed.

An insight indeed comes from comparing two very recent books on Hayek. The first by Alan Ebenstein is simply called Friedrich Hayek, a Biography(Palgrave 2001). The second is Bruce Caldwell's Hayek's Challenge, (University of Chicago Press, 2003.) While both books are sympathetic their interpretations are very different. Ebenstein follows Milton Friedman in treating Hayek as a distinguished political philosopher whose views on economic methods were antediluvian. He accepts Friedman's view of economics as science like any other and thus implicitly endorses the Nobel Prize.

Caldwell on the other hand steers as clear as he can of the political debate but shares Hayek's own scepticism about modern economics and its ability to make specific refutable predictions. (Hayek's Nobel Lecture was entitled The Pretence of Knowledge.) He asks whether there really has been steady cumulative progress as economic laws are discovered and improved empirical methods introduced. His own work on micro economics makes him extremely doubtful. And I would endorse this from the macro side. We know that an excess of purchasing power will lead to runaway inflation and that a deficiency will induce deflation and unemployment. We also know that a country cannot have an independent monetary policy if it is on a rigidly fixed exchange rate. But beyond such basics, forecasts are mainly ways of encapsulating what is already happening. The real drivers are so-called "shocks" which by definition are unpredictable.

Caldwell echoes Hayek in believing that the most that economists, like other social scientists, can hope to achieve is pattern predictions. Such consensus as exists among economists - for instance that demand curves slope downwards - is based much more on the way they have been brought up to think than any decisive empirical tests. If Caldwell is right then the Nobel Prize for economics was a mistake as the subject could not expect the kind of steady incremental progress achievable in the physical sciences - or for that matter in ancillary studies such as statistical theory. But having the Prize we are now stuck with it. To abolish would simply increase the influence of the kind of anti-economics which embraces for instance rent controls, minimum wages and arms promotion "for the sake of jobs". The best way forward would be to follow the tentative gropings of the Swedish Academy of the mid-1990s and extend the Prize to the social sciences in general and really mean it.

Posted by Greg Ransom | TrackBack