THERE’S AN OLD saying: keep economists on tap but never on top. More simply: always keep them for counsel, but never let them decide what you want. But for many, economists have far too much voice in policy and decision-making for the good of the world. In this view, the world has plenty of problems but too few solutions. And in any case, the ‘solutions’ have made the situation worse. From recurring economic and financial crises to poverty and inequality, too often economists advocate a hands-off approach. Their common refrain that government intervention in an economy creates more problems has few takers these days. There are plenty of commentators who say that behind political ‘problems’ like Brexit and the Donald Trump phenomenon lie ideas like free trade, unregulated capital markets and, in general, globalisation.
If economists are mistrusted today politically, intellectual comeuppance is now at hand as well. Since the global economic and financial crisis of 2008, there has been plenty of commentary and analysis of how and why economists— especially that elite of Nobel Prize winners—have got so many things wrong. Many assumptions have been found wanting and their theories are now dubbed as almost partisan by well- known voices such as Joseph Stiglitz and Paul Krugman. But for the most part, writing on the subject has been driven by some event or the other, and little work of depth and scholarship exists, except in the specialised literature.
Two scholars, Avner Offer and Gabriel Söderberg, have plugged this gap to some extent. Their book, The Nobel Factor: The Prize in Economics, Social Democracy, and The Market Turn, is an interesting take on the origin, history and politics of the Economics Nobel Prize, known more formally as the Bank of Sweden Prize in Economics.
It is a story worth re-telling. In their narrative, Offer and Söderberg show that what began as a quest for independence by Sweden’s Central Bank from the government of the day in 1957 finally turned into an intellectual juggernaut that few governments dare defy. Once established, the Prize—those who select the winners, the winners themselves and the entire intellectual climate around it—has steadily moved in a conservative direction. The drift towards markets instead of social democracy, pronounced almost from the start, has accelerated since the early 1990s. This happened when an allegedly conservative Swedish economist, Assar Lindbeck, was the chairman of the selection committee from 1980 to 1994.
The reality, however, is more complex. If only for the sake of its credibility, the selection committee has picked a mix of conservative and liberal winners. Further, when it comes to the reputation of laureates, which the authors elaborate with care, the balance over time is seen tipping in favour of conservative economists. Offer and Söderberg make use of the ‘Arrow index’ as a benchmark to compare the winners with each other, allowing them to size up economists of various hues—conservative versus liberal, empirically oriented economists versus theoreticians, etcetera. The ‘Arrow index’ is named after Kenneth Arrow, probably one of the most influential Prize winners.
The results are interesting and are summed up in a table and a chart (pages 111 and 113). Cumulatively, it is conservative economists Milton Friedman, Gary Becker and George Stigler (all from the University of Chicago, known for its ‘pro-market’ bent) who are amongst the highest ranked ones. But interestingly, some of the best-known economic theoreticians— whom Offer and Söderberg blame for much that is wrong with Economics—rank pretty low on the Arrow index. Game Theorists Thomas Schelling, John F Nash Jr, Reinhard Selten, John Harsanyi and Robert Aumann rank quite low. At the bottom of the heap are names that few people will remember. One such example is that of Maurice Allais, the French economist who received the Prize in 1988. Allais was instrumental in puncturing many of the claims made in Microeconomics, something that makes him a strange ideological creature from the perspective of the authors. He was a quintessential insider who remained anchored in mainstream economic traditions that he did much to undermine.
THERE ARE PLENTY of examples like Allais who have carried on with work in the usual fashion: discovering something to refute an existing idea. But these are exceptions according to Offer and Söderberg, who argue that on the whole it is conservative theoreticians that have called the shots globally.
That may or may not be true. For the world does not move according to the advice and wishes of Nobel Prize winners, however much they may want. If the world has moved towards markets since 1990, it is because the socialist alternative was tried out and found wanting. If socialism does become popular at some stage, it will be largely due to economic developments and not the wishes of economists. On the whole, both sets— socialists and conservative economists— have produced interesting theories, but only one kind have gained traction. The authors of The Nobel Factor allude to ideology as an answer. Again, the reality is more complex. Between ideas and the setting of policy lie electorates across the world who have a much greater bearing on policymaking than economists. The latter only provide a recipe for what people want. The real action lies with politicians and voters.
There is much to be commended in The Nobel Factor. The close attention to the history of the Prize in Economics, the careful collection—and correlation—of data on the winners with broader intellectual and political trends makes the book a valuable guide. But what is not surprising is that it recapitulates a broader theme in the history of ideas: looking to another discipline as a lodestar in charting unknown intellectual waters.
Some years ago, the philosopher Richard Rorty described the ferment in biological thinking, especially Sociobiology— the branch of the subject that claims a biological basis for social behaviour—as ‘Philosophy-envy’. By that he meant the quest to put Biology as a discipline on the path of intellectual respectability. The way Philosophy poses—and answers—‘hard’ questions, so too for Biology.
Might the Economics that Offer and Söderberg seek be in a similar position? In their case, the exemplary discipline is Physics, where theory is subject to tough empirical verification. Theories that don’t find support in data are discarded. That is what happened to the Physics of Aristotle, the theories of ether and a whole lot of pre-19th century ideas. In a way, the authors of The Nobel Factor are guilty—if that word can be used at all for them—of ‘Physics-envy’.
There’s something about the appeal of data to economists who are attracted to social democracy. The wretched condition of the poor, the growing inequality between the rich and the poor, and the perilous existence of Western middle classes is there for everyone to see. Who in her right mind will deny these facts? If only economists were to theorise keeping in mind these facts, then maybe, just maybe, the world will be a better place. The trouble is that this kind of thinking will only replace intellectual backing for unsavoury developments—allegedly the ‘Washington Consensus’ and the ‘market turn’—for a certain kind of socialism. At its best, it will push for an egalitarian political climate. What’s more likely is an exchange of intellectual respectability of the Economics Prize for political respectability. Will that trade-off be worth the trouble? There’s plenty to doubt on that score.