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October 06, 2005

Nobel Savages: Why those who argue that the Nobel Prize in Economics should be abolished are wrong

Posted by William Coleman

On 10th October the winner of the 2005 Nobel Prize in Economics will be announced. In all likelihood, the announcement will be greeted with the now traditional call for the economics Prize's abolition. Dr William Coleman - Senior Lecturer in Economics at the Australian National University - explains why these calls are wrongs. Interestingly the calls have only become widespread since free-marketeers have started to win the Prize.

The first week of October is Nobel Prize time. And part of the annual ritual is the near inevitable protest against the existence of a Nobel Prize in economics.

In this ritual, some journalists in search of easy copy, certain members of the Nobel family, perhaps a Social Democrat politician seeking to boost their left-wing credentials, and - on occasion - even a former winner of the economics Prize, will proclaim the imperative to abolish the Prize.

All this noise has not been without some effect. Press reports claim that the since 2002 the Prize has been deemed by its awarding committee to be a prize in "social sciences", rather than economics as such. This may be incorrect, but the official web site of the Nobel Foundation site does pause to flatly inform the reader:

The Economics Prize is not a Nobel Prize.
The site notes that Alfred Nobel never endowed such a Prize. Indeed, there are grounds for believing that Nobel had about zero interest in economics. His highly varied library – from Andersen to Zola - includes only a single volume remotely concerned with economics, Robert Blatchford's Merrie England. This was a massively popular anti-market tract of Nobel’s time, and is perfect piffle.

Only in 1969 did there arrive The Bank of Sweden Prizes in Economic Science in Memory of Alfred Nobel. And it was soon licked by flames of controversy. It was not that there was a serious complaint about the conduct of Prize: the choice of winners has been elevated, sagacious and even handed. There has been nothing equivalent to the Literature Prize being awarded to Bertrand Russel (1950), Winston Churchill (1953), or (in retrospect a contentious choice), Mikhail Sholokhov (1965).

The objection is more fundamental. The most popular stroke against the Prize - provoked perhaps by the decision to award it for "ekonomisk vetenskap" (economic sciences) rather than simply "nationalekonomi" (economics) - claims that economics is not a "genuine science".

Economics is not a science, in the minds of these critics, because it does not look like science. The relations it conjures with possess a generality that seem to amount to emptiness. Or, alternatively, they possess an impossible simplicity, such as linearity. And they seem unpegged from well measured contingent facts. Overall, in the mind of the scientist critic of the Prize, enough hard work isn't done by economic theory or economic theorists. Thus the snarl of incredulity of one scientist upon the occasion of Wassily Leontief being awarded in the Prize in economics:

I invert a matrix- and I get a Nobel Prize!
The same critics will add that economics is, additionally, not a science because it does not generate the accumulation of precise and substantive knowledge ("discoveries") that one expects of science. Where is the economic equivalent of the discovery of DNA? Nobel Laureates in economics instead seek to summarise their contribution in scraps of proverbial wisdom ("Don't put all your eggs in one basket"- James Tobin 1981), or, still more disconcertingly, in terms of Yogi Berra wise-cracks about slicing up pizza (Merton Miller 1990).

These observations of the scientist critic are reasonable. The methods of economics are very simple relative to the methods of natural sciences. And economics does not accumulate the precise and substantive discoveries of science.

The truth is that economics is not a "genuine science". And it should not try to be. Economics deals with forces that are universal but plastic. The universality make scientific methods useful, but their plasticity makes them far from reliable. Scientific methods do not reveal the truth in this terrain ("discovery"), but will give a better glimpse of it ("insight") than other methods. Thus the economist will theorise with mathematical functions, but will keep them general because he appreciates that precision is impossible. (And paradoxically, that same imprecision legitimates linear functions, as a straight line always "locally" approximates any function, and some degree of approximation is unavoidable).

Economics, then, as J. S. Mill once observed, is knowledge, but is approximate knowledge. It is a bit vague, reflecting the fuzziness of the reality it investigates. For this reason economics is a "semi-science". In that respect it resembles climatology and geography, and perhaps all human studies.

But why would economics being a "semi-science" make it less deserving of a Prize? It would only do so if one took science to be the touchstone of all intellectual values, and one took intellectual value to be the sole touchstone of the Nobel Prize. But neither assumption is true. Science is not the touchstone of all intellectual values. And Alfred Nobel's testament specifically made social utility a criterion for the Prize. It was to be awarded on those who "have conferred the greatest benefit on mankind".

I take this to mean the work of a Nobel Laureate should have a widespread address. To articulate that notion, let me register four different levels of writing of the scholar, scientist or artist:

writing for your "inferiors";
writing for your friends;
writing for your peers;
and writing for your "superiors".
These distinctions contrast, at one extreme, writing for persons who are part of your world, with, at the other extreme, writing for persons whose world you are part of. "Inferiors" are students, and children. "Superiors" are politicians, and other players on the world stage. Each level involves an extension in audience of the work, and the worldly significance of the work.

The Nobel Prize properly deals with the fourth level of work. If the Nobel Prize is to have any social function, it is to raise in public consciousness work that has worldly address. This consciousness probably does not consist so much of actual communication of specific ideas, but more in affording dignity to those ideas and their originators. For an unphilosophic mankind will appreciate its philosophers if they are endowed with some dignity. And it is dignity that the Swedish Academy, the Norwegian monarchy, and Bank of Sweden succeed in bestowing on their winners; the glory of each institution enhanced by the glory of the Laureates they name. The whole relation of Prize winners and Prize givers is a nice illustration of "dignified" and "efficient" parts of humanity serving each other in mutual support.

So; to put the question: does the Nobel Prize in economics have that worldly address a Nobel Prize warrants? It would seem evident that it does. The feasibility of central planning, the possibility of the "democratic" decision of economic priorities, the utility of 20th century style social security schemes, the role of institutions in formation of the modern economic world. These are just some of the contribution areas of the Nobel Laureates in economics, and they are fairly big stuff.

The sceptic might ask in retort if the Prize actually made any difference to public action on economic matters? Did, for example, the honouring of James Buchanan in 1986 make governments across the world less deficit hungry? It would seem not. But, on the other hand, we cannot know counter-factuals.

The critic might also observe that the criterion that this column has used to justify a Prize in economics would justify one in social sciences. Indeed it does. Certain branches of social sciences (physical anthropology?) may (or may yet) have the same wide address.

Of course, "abolitionists" do not want to bring social sciences up to a Prize, but have every concern to bring economics down. And the germ of that aspiration lies not in debates over the possibility of "economic science", but in far more concrete matters, located in the origins of the Prize in Sweden.

Economists have long been conspicuous actors in Swedish public policy. Since the 1930s commentators have noted [quoted in Keith Jakee, Economists in the Streets: An Analysis of the Swedish Economic Debate]:

the influence that the professional economist seem to have politicians both of left and right, on banking and business people as well as the lay public.
The Left was content with this influence during the 44 year stretch of Social Democrat rule after 1932, as, in the wake of the Depression, the "Stockholm School" of Swedish Keynesianism largely prevailed in Swedish economics. It was in these years of consensus that "the Swedish model" flourished. This model apparently demonstrated that socialism could exist without serfdom. In truth, Sweden was not as socialist as it was perceived: it was committed to open borders in foreign trade and foreign ownership. Even its rates of taxation, contrary to mythology, was not as burdensome as those of France or the Benelux countries. But no matter: the dream charmed many.

The dream was directly assailed by the liberal revival of the post-war world. This liberal revival was symbolised by Milton Friedman winning the Nobel Prize in 1976, the very year Social Democrats lost power in Sweden for the first time in a generation. It was that award to Friedman that provoked the first attack on the Prize, when Gunnar Myrdal, the sole Swedish, and – alas- least deserving winner, demanded the abolition of an institution that could so honour the abominable Friedman.

Noise for abolition surged again in the early 1990s when Sweden fell into a deep recession, one deeper than that experienced at the time by any other significant economy . (Real GDP fell 6 percent). The validity of the Swedish model now appeared to be in serious doubt. Economists were conspicuous in tracing Sweden's travails to an obsolete Swedish model. The economists critique provoked a holy wrath among certain Swedish sociologists, scandalised by the prospect that "the model" might be changed [see Jakee]. And the object of their wrath was not so much the economists' proposals, but economics. To these sociologists, Sweden's Nobel Prize constituted an acute provocation.

The sociologists might have held their peace about economists. In the follow years privatisations of many state companies, (phone, postal service and nursing homes) did occur. But they were organised by Swedish Social Democratic Party, back in power from 1996. And the leading light in these actions was the Social Democrat finance minister and central bank governor Kjell-Olof Feldt, who had himself once gained a certain amount of publicity by proposing the abolition of the Prize.

Dr William Coleman is Senior Lecturer in Economics at the Australian National University and the author of Economics and its Enemies: Two Centuries of Anti-Economics, (Palgrave Macmillan, 2002).

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