Economics Nobel must acknowledge the global financial crisis

Just don’t ask economists for the solution. Dominic Lipinski/PA

The 2013 winners have now been announced. David Spencer responds in a postscript at the bottom of this article.

What are economists for? Well, one obvious answer is to “do economics”, defined in the academic discipline sense. That is, to publish papers and advance knowledge. But there is another view, one that sees economics as a tool for resolving pressing economic and social issues. Half a decade into a severe global financial crisis, this latter view ought to be more relevant than ever. But it does not seem to be shared by those awarding the Nobel Prize in Economics.

Economics should not be about “advancing economic knowledge” for its own sake; it should be about changing the world for the better. And economics deserves a prize that reflects contribution to society, rather than just to the profession.

The Nobel Prize in Economics, awarded today, is not even an official Nobel, being awarded by a Swedish Bank “in Memory of Alfred Nobel”. Nonetheless, its award signifies the contribution of a leading name or names in the economics profession.

But for wider society, the gains from the award are not altogether clear. Relative to other Nobels, the economics prize has a tougher time demonstrating its contribution to broader progress in society. Given the obvious link between economics, the economy and social progress, this is a real problem. Even a creative and novel solution to the current crisis is not something that would guarantee a nomination – indeed, in some senses this form of rupture with orthodox thinking would be the opposite of what is required.

Economists have generally been rewarded for a slavish devotion to a particular set of theories and methods. Mainstream economics is based on ideas of efficiency, equilibrium and utility maximising agents. Even newer developments in the mainstream, including trendy fields like behavioural economics and neuroeconomics, still retain these core ideas.

The mainstream methodology, new and old, is that of formalism and individualism. Economics has become a science defined by the construction of complex mathematical models that outsiders will find tough to grasp. Winning the Nobel requires conforming to these set standards.

Even those few winners who have achieved a degree of public recognition for their critical commentary on the global situation, such as Paul Krugman or Joseph Stiglitz, tend to revert back to the mainstream in their academic work.

As the ideas conform, so do the winners themselves, fitting a particular mould. They are mostly white, male, and American. Elinor Ostrom, who won in 2009, remains the only female recipient of the award. Over half of the winners have been of US origin, and only three winners have come from outside North America or Western Europe. The University of Chicago, a bastion of mainstream economics and home to the likes of Milton Friedman, has 26 economic laureates alone.

Despite its influence over policy, the economics discipline is not open to public scrutiny. This is, in part, the product of the formal nature of economics that has prevented a meaningful dialogue with the public at large. Economists, as a result, have been allowed to pursue their own research without reference to the real world.

The magnitude of the current crisis – not foreseen by most economists, of course – forced the real world to get in touch with economics. The public could be forgiven for thinking that things would have changed as a result, but if people knew more about how economics research continues to be conducted they would doubtless be shocked. The fact that much economics research does not engage with the current crisis would be a cause of real concern to the public. They would be more horrified if they knew that those being nominated for and ultimately receiving the Nobel Prize in Economics were not undertaking serious study of the causes of and solutions to the crisis.

Dissent remains in economics, but only on the margins. These non-mainstream approaches, known as heterodox economics, build on the tradition of classical political economists such as Adam Smith and Karl Marx. They include diverse perspectives from contemporary Marxist political economy and post-Keynesian economics through to feminist and ecological approaches. These perspectives challenge the theory and method of mainstream economics and offer analysis of and solutions to real-world problems including the current crisis.

But years of marginalisation have meant that the heterodox economics community has diminished in size and influence. Despite its worth in understanding and resolving pressing problems, there is zero prospect of any heterodox economist winning the Nobel.

Yet, in spite of the ongoing crisis, there is talk of awarding the prize to economists whose research is far from helping to understand and resolve our global problems. This is bad for the reputation of economics. It is also bad for the public who continue to suffer the negative effects of the crisis.

We need a revolution in economic thinking, and a prize for leading this radical change would be a great step forward. Without such a revolution, we face the prospect of the Nobel continuing to be awarded for contributions to an esoteric, make-believe economics that few outside of the profession would see as relevant or important. Economists can, and must, do better than this.

Postscript

So three economists won the 2013 Nobel – Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Schiller of Yale University. This is an odd mix. Fama is famous for advocating the “efficient market hypothesis”, a key plank of free-market economics and ideology. Shiller is known for his contribution to “behavioural” economics (more directly “behavioural finance”) that challenges the perfect rationality postulate that Fama’s theory upholds. Hansen’s contribution comes in the area of statistical methods.

A cynic would see the selection of these three economists as a compromise. By awarding it to Shiller the award committee is able to say it is rewarding a real-world economics that is able to deal with the current crisis. By awarding it to Fama and Hansen the committee is able to demonstrate conformity to the established theories and methods of mainstream economics.

Despite the award of the Nobel to Shiller, the key argument above remains – there is no Nobel for contributing to the development and promotion of an economics that helps to resolve pressing real-world problems. To the contrary, the standard for winning remains that of progressing economic thinking largely for its own sake.

Shiller’s behavioural economics offers no theory of systemic crisis. Fama’s efficiency market theory justifies a free market approach that got us into crisis.

As the Guardian puts it, this is a Nobel for the right. It is also an award for an economics discipline that remains impervious to real dissent and real reform.