Question: When is a Nobel Prize not a Nobel Prize?
Answer: When it's the one awarded in economics.
The "Nobel Prize in Economics" that you've been hearing about this past week is not a Nobel Prize at all. The real Nobel Prizes were established by the will of Alfred Nobel. Nobel was the fellow who invented dynamite, among other things. He was a shrewd businessman, too. He owned over ninety factories to produce his explosives and created an effective network to market them.
When Alfred Nobel died, in 1896, he left the bulk of his considerable fortune to establish the Nobel Prizes. There were five of them originally: physics, chemistry, physiology or medicine, literature and peace. All were supposed to be awarded to "those who during the preceding year, shall have conferred the greatest benefit on mankind." The Nobel Foundation later modified the "preceding year" part because it was impossible to assess scientific value in such a timeframe.
That's how things stood until 1968. That year the Bank of Sweden was celebrating its three hundredth anniversary. As part of the celebration they instituted a new prize, "The Central Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel." The first such prize was awarded in 1969. Money from the bank funds the prize in perpetuity.
The idea, it seems, was to put the economists on a par with the scientists. That fits well with the way economics has developed since the end of the Second World War.
There has been economic thought among humans for about as long as there has been trade among us. The classical Greeks, for example, had some good things to say, a very long time ago. But there was no discipline of economics until 1776.
That's the year that Adam Smith's book, An Inquiry into the Nature and Causes of the Wealth of Nations was published. From then on, through the next century, economics was something studied by rich folks who had lots of time on their hands.
The 19th Century gave us David Ricardo and Karl Marx and the beginning of several "schools" of economics. Theories and arguments abounded. Marx's theories got wide following because the basics were easy to understand without much thinking. They also sounded good, as long as you ignored the fact that they violated human nature.
Sometime around the turn of the 20th Century, governments got interested in economics and economists. Government is still a pretty good place for an economist to work. The US today has some 70,000 employed economists and the Bureau of Labor Statistics tells us that the ones in government make about 20% more than the ones in business.
In the1930s, the theories of John Maynard Keynes rose to prominence. When I went to college, it was Keynesian stuff that we got under the heading of economics, especially macroeconomics.
One thing that struck me right off is that the Keynesian system is static. Time is not a factor. Things don't seem to change. I was working at a management job when I was studying economics. At night I'd study up on theory of a stable, static system. Then I'd hit my day job where the world was anything but static.
By that time, too, the stuff that they gave us undergrads as economics was not at all what folks were getting when they pursued an economics degree. They were getting lots of mathematics. They were developing complex computer models.
The discipline of economics had gone the route of many social sciences. They had contracted "Physics Envy." That's the disease that gets you thinking that the only way to be respectably scientific is to do things the way the physical sciences, especially physics, do them.
As Jared Diamond has pointed out in his magnificent book, Guns, Germs, and Steel, social sciences cannot use the same experimental methodology that physical sciences use. Social sciences deal with human systems which are messy in the extreme and often not susceptible to double-blind, controlled experiments.
Diamond suggests several ways that social sciences can be scientific without succumbing to Physics Envy. We might apply them to economics, except that economics is not a science at all. Instead, it's philosophy, using mathematics to dress itself in the clothes of science.
Today's economics either regurgitates the obvious with a few equations thrown in or falls back on reasoning to replace experiment. Also with a few equations thrown in.
As an example, let's consider the work that won George Akerlof his Nobel last week. The Academy said that he won for work that "demonstrated how a market where sellers have more information than buyers about product quality can contract into an adverse selection of low-quality products. He also pointed out that informational problems are commonplace and important." The jargon term for these problems is "asymmetric information."
"Asymmetric information" means that some folks in the market have better information than others. Guess what, they can use that to their advantage. Did you need an economist to tell you that?
Well, you're probably thinking, this economist probably conducted an empirical analysis of a market. Since Akerlof's seminal paper dealt with the buying and selling of used cars, you might reasonably assume that part of his method was a rigorous analysis of the market for used cars. Nope.
What Akerlof did was to begin with some assumptions. Philosophers would call them axioms. Then he reasons out his conclusions. This is philosophy, not science.
Does this distinction matter? I think it does. Economists aren't just given to pronouncements that are quoted in the press. They do not stop at preparing papers on obscure topics for journals that only other economists read. Instead, they are often involved in making and shaping policy.
Economists in general treat the economy as if it is some kind of magnificent clockwork. This year's Nobel winners, for example, talk about "imperfections" in markets. That implies the possibility of perfection and the need for someone, probably government to fix the imperfection.
The economy is not a clockwork or any kind of machine. Those imperfections are there because economies are giant, natural, human systems. That makes them messy and hard to manage.
In fact, the economy is a lot like the weather. Both are giant, complex systems, with multiple, interacting causes. In both cases, the system is far easier to predict than it is to manage.
Economists aren't even very good at that. It was no lesser light than John Kenneth Galbraith, the world's best six-foot-seven economist, who said that "The only function of economic forecasting is to make astrology look respectable."
What economists often give us these days is what Peter Drucker described years ago as "the illusion of false concreteness." This is believing that a result or recommendation presented with figures showing multiple decimal places is somehow more accurate than a judgment call presented in words alone.
Sometimes that's true, but often it's not. Often, the numbers and computer models and decimal places give us an assurance of accuracy that simply isn't warranted.
Face it, if economists understood the economy all that well, we wouldn't be worrying about heading into a recession. We'd fix things. But we can't. When we try, getting the government to make policy based on economic reasoning, we're often surprised by what happens.
The watchword, then, is "be skeptical, be very, very skeptical." Look behind the pronouncements to find the reasoning and the data, if any. Base your own economic decisions on your informed intuition and analysis. Pay attention to the economists, but don't depend on them.
This feature appeared on 15 October 2001
