THE DECLINE AND FALL OF NOBLE ECONOMICS

This blog post was published on October 14, 2011 at 05:19 pm GMT

Teaching is a noble profession but given the damaged reputation of economics, following the financial crisis and the world economy teetering in the brink of  another Great Depression, should there continue be a Nobel Prize for Economics?

Strictly speaking, there is no prize for economics by the Nobel Committee.  Alfred Nobel established the original prize in 1895, with the first winners  being awarded in 1901. In 1969, the the Sveriges Riksbank  (the Swedish central bank) set up the Sveriges Riksbank Prize in Economic Sciences in Memory of  Alfred Nobel.  Although officially not part of the Nobel competition, the award for economics takes place alongside it.

Like the dismal or dangerous science it represents, the economics prize has not been without controversy with the rather ignoble associations of a number of winners. The 1974 joint winner Gunnar Myrdal stated that the prize should be abolished, giving the record of awarding it to reactionaries, for example Friedrich von Hayek  in 1974 (his co-winner) and Milton Friedman in 1976. Nine of the winners have been drawn from the Chicago School, whose reputation was damaged by its association with the Pinochet dictatorship in Chile .

Apart from past winners like Myrdal, Amartya Sen and Paul Krugman, and perhaps one or  two others, most of the recipients have been steeped in orthodoxy, both by training and formation. The same applies to the awarding committee that is made up exclusively of Scandinavian economists. Moreover, there has only  been one woman  (40 years after it was established) and only one non-white recipient.

The criticism of the current winners, Thomas Sargent and Christopher Sims, is that the prize committee is returning to an orthodoxy, the  application of which  has been complicit in the causes of the 2007 financial crisis and found wanting.  The 2011 recipients  won for their work on “for their empirical research on cause and effect in the macroeconomy” drawing on the statistical technique of Vector Auto Regression (VAR).  Unfortunately, they  have  also been rather agnostic on whether their work can address the current global crisis.

The major influence on their work comes from another former winner, Robert Lucas Jr, and his hypothesis of rational expectations (RE).   This hypothesis assumes that individual economic agents engage in forward looking contracts, based upon the assumption that there is a unique equilibrium in the future around which they form their expectations.  The RE approach also  assumes that people do not make systematic errors when predicting the future, and that deviations from perfect foresight are only random. Thus in this view of the economic universe, economic and financial crises, particularly caused by “Black Swan” moments, are not possible.

The criticisms of the 2011 winners are somewhat misplaced in that in the abstract universe of RE  it is being modelled using statistical methods to evaluate relationships between macroeconomic variables. There is a contradiction here, however,  because the RE hypotheses assumes that individuals’ preferences can be summed to represent the economy as a whole. Yet, what is called the aggregation problem of how the macroeconomy becomes greater  than the sum (because of scale, scope and externalities, etc) of its parts is ruled out within this perspectives  .

But, as John Parr of Glasgow University notes “theory set you free”. The essential problem is not abstraction but  the empirical application and the acceptance of the underlying ideology of rational efficient markets.  A similar problem has come to light recently in the  physical sciences,  with evidence derived from the Hadron Collider at the CERN project in Switzerland,   challenging Einstein’s theorisation of the cosmos. The evidence from the CERN team suggests that particles can travel faster than the speed of light, something that challenges the theory of relativity.

The point about the orthodoxy around the prize for economics is its hegemony in academic, policy and practice. In these circles, an American imperialism prevails which reinforces the ideology underlying this orthodoxy. The journalist John Gapper recently pointed out in the Financial Times that the hegemony of the US in the Nobel science prizes may be coming to an end, as the budgetary commitment to sustaining a globally-leading research culture in the US begins to weaken.  He includes economics in his analysis , although it is arguable that the (proper) Nobel winners  in the natural sciences have contributed much more to the human condition, as well as society.

The financial crisis brought Adam Smith, Karl Marx and John  Maynard Keynes back into public view and debates about its causes and effects. Yet, their  insights and enormous intellectual contribution are often opaque to the contemporary economics graduate and economist. Moreover, much of the discussion of their intellectual contributions borders on the caricatured by many, whose absolute rejection of anything heterodox borders on the messianic.

According to Keynes an economist should be an anthropologist, historian, mathematician, philosopher, and  political scientist pursuing ‘disciplined eclecticism’, in the words of his biographer, Robert Skildelsky. Unhappily, most of these classical disciplines are missing from the economics curriculum in contemporary higher education in the majority of the advanced economies.

The late economist  Lionel Robbins, who dominated the British   economics landscape for a large part of the 20^th century, asserted that ‘economics was an engine for discovering concrete truth’. The problem is that the orthodox engine rests on rear-view mirror models whose construction prevents it from gaining forward momentum.

As for truth, Paul Krugman’s comment that  the RE School “mistook beauty for truth”appears apposite at first sight. The beauty of theoretical abstraction should be encouraged in all academic disciplines. If  teaching of economics, however,  is to become noble again  a commitment to truth seeking is imperative. But the continuing fixation with physics envy,  by  which reducing economics to the methods of physics  somehow makes its equivalent to this physical  science, will only hasten the decline and fall of this miserable endeavour.

By re-asserting the triumph of thought over technique, beauty and truth may be combined but don’t expect the Sveriges Riksbank Prize in Economic Sciences in Memory of  Alfred Nobel to be in the forefront of this noble  proposal.