The Nobel Prize in Economic Sciences should be renamed the Nobel Prize in Human Sciences
Like every year, the Nobel Prize in Economics will be announced at the beginning of October. The fact that the global economy was hit so hard by the financial crisis ten years ago is still stirring controversy here and there when it comes to awarding the prize. Do economists deserve the prize? Simply abolishing the prize would be one step too far. However, considering the growth in interdisciplinary research, it would be better to replace it by a prize for Human Sciences.
Since the outbreak of the financial crisis in 2008, there has been controversy over whether economists deserve the Nobel Prize. Quite a few economists won the prize in the past for their contribution to ‘modern financial theory’, specifically with regard to the development and valuation of new, harmful financial products, which later contributed to the credit crisis in the US. Their theories had not yet stood the test of time when the prize was awarded. It only became evident later that the financial and economic risks had been systematically underestimated in their proposed models. The result was that the risks were also seriously underestimated when the models were put into practice.
So, it seems the economists in question were awarded the Nobel Prize too soon. The fact that Robert Merton and Myron Scholes, two of the driving forces behind modern financial economics, were relatively young when they won the Nobel Prize in 1997 partially reflects this. Merton was 53 and Scholes was 56. In general, the Royal Swedish Academy of Sciences, which awards the prize, is reluctant to honour recent economic theories. More than in other disciplines, the prize for economics has been awarded to people already past the height of their career. The average age of all laureates at the time of being awarded the prize is 67, compared with that of, for instance, laureates of the prize for physics, whose average age is 52. This is probably due to the special nature of economics as a social science, where the value of a theory can often only be properly assessed after a period of many years. Progress in economic sciences is slower and requires constant review.
Although the value of their scientific contribution may be disputed, the prize was not only awarded too soon to the above-mentioned financial economists, but was also probably unjustified. In fact, based on what we know today, their contribution is not really in line with Alfred Nobel’s wish that each laureate should demonstrate social or scientific achievements which have contributed significantly to human wellbeing. It is therefore essential to test the added value to society, in addition to the academic value.
When Alfred Nobel decided to reward such achievements annually, he did not consider economics as a field. At the end of the nineteenth century, economics had barely any university status. Economics gradually gained recognition as a science in the 1930s and, following World War II, faculties in economics were set up at universities around the world. It was only in 1969 that the Nobel Prize for economics was established by the Swedish Central Bank on the occasion of its 300th anniversary. The official name is ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’, but it is popularly referred to as the Nobel Prize in Economics.
Despite the late recognition, the prize is in the spirit of Nobel’s will. Although the contribution of some economist-laureates may be disputed, many others have been rewarded for long-lasting fundamental theories important to mankind. Many laureates also held political mandates or key positions in international organisations and were thus able to have a direct or indirect impact on economic policy. Even without actively participating in policymaking, certain laureates were able to see their theories put into practice. One example is the US government’s application of 1992 laureate Gary Becker’s analysis on crime, which led to a spectacular reduction in crime.
That is why it still makes sense to award the prize. The exclusion of other human sciences that would also meet Nobel’s criteria, such as sociology, psychology and political science, is probably linked to the multifaceted nature of economics. In recent years, the prize for economics has more often been awarded for interdisciplinary work with other (human) sciences, which indicates that the Academy is interpreting the field of economics in a broader sense. In fact, economists should not deserve the privilege of the prize alone, and it would make more sense to rename the award the Nobel Prize in Human Sciences.
Even then, the prize would still be surrounded by much controversy. The derivation of general, undisputed laws is inherently more difficult in human sciences than in exact sciences, such as physics. This is due to several factors, i.e. that the human scientist is generally unable to experiment, that the element to be investigated (‘mankind’) often behaves irrationally against its own inclinations and interests in reality, and that expectations also exert an influence on socio-economic variables. As a matter of fact, several economists were awarded the Nobel Prize for their insights in such areas, yes, even in financial economics. Examples include Daniel Kahneman in 2002 for his behavioural finance theory and Eugene Fama, Lars Hansen and Robert Shiller in 2013 for their empirical analysis of asset prices and the emergence of economic bubbles.
2018 Nobel Prize winner
The question that still remains is who will win the prize this year? I am rooting for Raghuram Rajan. The Chicago Business School professor’s research focuses on ... financial market crises. He belongs to a select group of economists who detected the credit and debt crisis early on. While he was IMF Chief Economist, Rajan wrote a controversial paper in 2005 entitled ‘Has financial development made the world riskier?’ in honour of Alan Greenspan’s departure from the US Federal Reserve. In the paper, he warned of a serious crisis which, in hindsight, was spot on.
Perhaps 55-year-old Rajan is still a little too green to be a candidate? Or what about macro-economist and Harvard professor Robert Barro, a perpetual candidate and, at 74, far older than the average age of previous winners? Barro is one of the founders of ‘new classical macro-economics’ and is best known for the Ricardian Equivalence Theorem. According to this theory, an expansionary fiscal policy will have no effect since households will save more (consume less) to absorb future tax increases. However, due to the large number of assumptions, the theory has often been rejected in empirical studies.
The effectiveness of fiscal policy remains a controversial topic to this day. 61-year-old Alberto Alesina, also a Harvard professor and often cited as a candidate for the Nobel Prize, has likewise gotten into hot water in this respect. According to Alesina’s research, austerity measures often lead to higher rather than lower economic growth. On the other hand, Olivier Blanchard (70), a French professor and another former IMF Chief Economist, takes a more nuanced approach, which - in my opinion - makes him a more qualified candidate to win this year’s prize. In 2013, Blanchard figured out that the fiscal multiplier that had generally been used in Western countries before the financial crisis has been grossly underestimated since the crisis. The severe negative impact of austerity measures on economic growth in many countries has likely contributed to their failure to meet their deficit and debt reduction targets. Blanchard’s analysis has even led the IMF to openly question the desirability of further austerity at a time when the economy is still not fully recovered.