Away with the Nobel Prize in Econ
Source Michael Perelman
Date 04/12/15/09:47

Dagens Nyheter, 10 December 2004

"The Nobel prize in economics diminishes the value of all other Nobel

A member of the Royal Swedish Academy of Sciences proposes that the
prize in economics should be broadened in scope or abolished. The prize
in economic sciences in memory of Alfred Nobel is most frequently
awarded to economists who, by using mathematics and disregarding
political views, claim that they can prove optimal ways of organizing
society. These attempts at mimicking the objectivity and methods of the
natural sciences are not acceptable. The economics prize diminishes the
value of the other Nobel prizes. If the prize is to be kept, it must be
broadened in scope and be disassociated with Nobel. This is the view of,
among others Peter Jagers,  professor of mathematics who is also a
member of the Swedish Royal Academy of Science who awards the prize.

In the early 1960s, a group of university mathematics teachers in
Gothenburg used to go to a certain café to play pinball. Surely, you
know the game? It's played on one of those machines that coughs up a
number of steel balls when you put a coin in the slot. The point of the
game is to maximize the number of points by controlling the balls with
two flippers and making the pinballs fall into holes and hit various
objects that make ringing noises as many times as possible before the
pinballs return to where they came from.

The group included both senior lecturers and professors, all extremely
talented mathematicians. But there was no clear connection between being
skilled at the game and scientific competence. In principle, it should
probably be possible to calculate the perfect trajectory for the
pinballs, but the advanced physical and physiological models this would
entail were clearly too advanced even for the professors. The matter was
rendered even more difficult because some players would attempt to
sabotage the game by casually bumping into the machine to upset the
pinballs. Anyone who would have suggested that the game of pinball
should be reserved for mathematicians, physicists and physiologists
would have been regarded as slightly deranged.

However, this is not the case in economics. In economic science, it is
claimed that it is possible to construct mathematical models that can be
used in calculating the optimum behaviour of individuals in much more
complex decision making situations than the one outlined above. And that
is not all. Economists believe that they can prove by referring to those
models that they are more suited to making political decisions than are
the politicians themselves!

Let us use the latest prize in economics (The Bank of Sweden Prize in
Economic Sciences in Memory of Alfred Nobel which is its correct name)
as an example. The prize was awarded to Finn E Kydland and Edward C
Prescott. This is an excerpt from the statement of The Royal Academy of

"Kydland and Prescott showed that economic policymakers who cannot
commit to a rule in  advance often will conduct a policy that gives rise
to high inflation, despite their stated objective of low inflation.
Already in their 1977 article, the Laureates considered the possibility
of conducting fiscal and monetary policy on the basis of long-run rules,
which are difficult to change. This work has had a far-reaching impact
on reforms carried out in many places (such as New Zealand, Sweden,
Great Britain, and in the Euro area), aimed at legislated delegation of
monetary policy decisions to independent central bankers with different
kinds of  pre-specified price-stability objectives."

So, what is in the famous 1977 article? The heart of the article is a
mathematical model, an optimization problem with side conditions. A
rational decision maker, let's call him P, knows the exact relations
between a number of economic variables, some of which are under the
control of P. Furthermore, P knows the exact outcomes of his decisions
at a certain stage in the economy when the decisions are made. P is
guided by "a widely accepted social goal function" which has such
characteristic - for example being differentiable and having the right
convexity in its graphs - that an unambiguous and optimum solution can
be calculated. Despite of this, the decisions do not lead to an
optimized solution. The reason for this is that P has "opponents" to
consider and this is not only "nature", but it also includes "rational
economic agents".

The level of abstraction in the article is extremely high. The model can
be used for economies where P represents "the politicians" as a
collective, and where the guiding variables are interest rates, monetary
assets and the national budget and where the variables of the goal
function can be inflation and unemployment rates. It can also be used if
P is a company that needs to decide which investment strategies would
maximize the profits. In both cases, the decision power is monolithic.
All conflicts of interests, be it between politicians, between political
parties or between different owners in a company, have been removed from
the model.

Of course, these types of hypothetical societies or companies may be
interesting in their own right, as utopian schemes or as points of
comparison with a more complex reality. However, the claims of those
awarding the prize go much further than this.

As can be seen in the academy's motivation, the laureates are supposed
to have shown that part of economic policy-making should be removed from
the sphere of the general public and their elected representatives.
Instead, the decision-making power should be transferred to experts, who
should be protected by law from being directed by their politically
elected supervisors.

There may of course be reasons for why there should be central banks
directed by experts, just as there may be reasons why this shouldn't be
the case. There has been a heated debate on this matter both among
politicians and among economists. However, the reasons cannot, even with
the best intensions, be derived from the sort of abstract reasoning that
is now rewarded with the prize in economics.

The basic problem is that economic science cannot be compared to natural
sciences. Especially physics and chemistry are universal in the sense
that their findings are equally valid in the U.S. as they are in China
or Germany. They are independent of politics and economic systems. The
equations governing the construction and durability of a concrete bridge
are the same irrespective of country. If you use one particular method
for building the bridge it will collapse. If you use another method it
will stand. Medicine is not equally universal, as there are
controversies between different schools of thought. However, compared to
the social sciences there is an astounding degree of agreement on how to
assess the quality of different research findings.

In the mid 1960s the world economy was fairly stable. Herbert Tingsten
declared the demise of ideologies. This was also the time when the
belief that economists could draw up laws governing economies, not very
different from Newton's laws of gravity, was at its peak. It was in this
intellectual climate that the idea for a an economics prize in the wake
of the Nobel prize was born in the Swedish central bank. In 1969, the
first prize was awarded to Paul A Samuelson and Jan Tinbergen, both
symbols for a mathematically oriented and purportedly politically
neutral discipline of economics.

The true art of the natural sciences is the ability of simplifying
matter in a manner that allows mathematics to be used while still
producing meaningful results. Economists, however, do not have the same
favorable conditions. The assumptions that have to be made about human
behaviour to be able to solve the equations are simplified to the extent
that they become meaningless. Political science, sociology, history,
social anthropology and even business economics are all, on average,
more careful in their use of mathematical models. We find it hard to
believe that a political scientist would dare to claim that it would be
possible to 'prove' that certain ways of organising a society are
optimal, solely based on mathematics and with disregard of any kind of
political value assumptions.

One could perhaps argue that this may not really matter, but it does and
it does so for a number of reasons. It is true that the prize in
economics has been awarded to broad non mathematically-oriented
economists such as Gunnar Myrdal and Friedrich von Hayek. This joint
prize illustrates, by the way, how awkward it all becomes when one tries
to neutralise the political dynamite inherent in the prize.

The tendency, however, has been to award the prize to a special kind of
economics, which tries to mimic the methods and claims of objectivity
found in the natural sciences. This is, in our view, deeply unfortunate
since the prestige of the prize will make it dictate the direction of
tomorrow's research.

It is not reasonable to claim that the economics prize has been awarded
for such great insights into the workings of society that it is on par
with the findings in physics when it comes to the understanding of the
structure and nature of matter. The prize in economics devalues all the
other Nobel prizes.

So, what should be done? We see that the three responsible authorities -
the Bank of Sweden, the Nobel foundation and The Royal Academy of
Science - have four alternatives:

1. Nothing is done. All the Nobel prizes gradually diminish in value.

2. The prize in economics is abolished.

3. Keep the prize, but completely remove the association with the Nobel
prize. Award the prize on a different day.

4. Try to gradually make the prize more in line with how the broad array
of modern social sciences understand how the economy works in different
types of societies. Thus, the prize could be awarded to a historian or a
political scientist who have furthered our understanding of the economy
in a social perspective, just as well as an economists, mathematician or
statistician. This would be challenging, however, since it would
probably be much more difficult to agree. On the other hand, the Swedish
academy has succeeded in finding worthy laureates for the prize in
literature, so it should not be completely impossible.

We would argue for the fourth alternative. But, on the other hand, now
that the Bank of Sweden's need for independence has been mathematically
proved through this year's prize, it would only be fair to make up for
this by an initiative that once and for all would remove any association
between the economics prize and the Nobel Prize.

Johan Lönnroth
Senior lecturer in economics, former member of parliament (left)
Måns Lönnroth
Senior lecturer in technology and social change, director-general
Peter Jagers
Professor of mathematical statistics, Chalmers

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