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October 11, 2009
David Warsh, Proprietor

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Get a Grip on It

The Nobel Prize is among the world’s most successful brands. Since 1901, the program has enabled Scandinavians to have a resonant voice in world affairs despite their relative isolation in northern latitudes. They’ve done it by taking great pains to be convincing.

The science prizes created a master narrative for one of the great stories of the age. The prizes for literature and peace, while more controversial, carry considerable cultural and moral weight.

The problem with giving this year’s Nobel Peace Prize to President Barack Obama is obvious, at least when viewed from the perspective of American politics. So far he’s done little more than get elected.

It is last year’s solo prize in economics to Paul Krugman, of Princeton University and The New York Times, which poses the more interesting question. Are Scandinavians getting carried away with the US elections?

Not that Krugman didn’t deserve a Nobel soon for his work on the “new” economics of trade – or a half-portion of the prize, anyway.

For there were several other ways to make an award for the work on trade, most obviously jointly to Elhanan Helpman, of Harvard University, who teamed up with Krugman for a few crucial years in the early 1980s to overcome resistance to what were then regarded as thoroughly unorthodox ideas. Their 1985 monograph, Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition and the International Economy, firmly established the new understanding of the strategic basis of much international trade, all but replacing a doctrine of natural “comparative advantage” that dated back 165 years to David Ricardo.

Lost in the shuffle, too, was Avinash Dixit, of Princeton University. It was Dixit, who, with co-author Joseph Stigliz (an earlier Nobel laureate, in 2001, for his work on winnowing information), developed the model of product diversity and monopolistic competition with which Krugman and Helpman quickly made their point – whereupon the Dixit-Stiglitz model became the workhorse by which several other major fields were similarly transformed. Wilfred Ethier, of the University of Pennsylvania, lost out on a plausible claim as well, as noted here last year. By giving the prize to Krugman alone, the Royal Swedish Academy of Sciences may have given a mistaken impression of his importance as a contributor to this tapestry, relative to the others.

Then, too, by stretching the prize citation to include Krugman’s widely-advertised but much less well-established contribution to economic geography, the Academy raised doubts about the extent of its ability to sell its judgment to the profession. Peter Neary, then of University College Dublin, reviewing The Spatial Economy: Cities, Regions, and International Trade, by Krugman, Masahisa Fujita and Anthony Venables, for the Journal of Economic Literature in 2001, noted the occasionally tenuous underpinnings of the volume and the tendency to hype that surrounded it. Neary wrote, “What next, the unconvinced reader may be tempted to ask. The tee shirt? The movie?” Almost no one would have guessed a piece of a Nobel Prize. (It was Neary, now at Oxford, who wrote up the award at the request of the Scandinavian Journal of Economics last summer. Nullum quod tetiget non ornavit, he quoth of Krugman – everything he has touched he has adorned – including, Neary noted, a brief early appearance in international macro and a highly visible second career as a public intellectual. But, he wrote, “putting the ‘New’ into ‘New Trade Theory’ remains his major professional achievement.”)

Most significantly, in giving the prize to Krugman in 2008, the Swedish Academy vaulted the work on international trade over developments in several others fields that, in any coherent account, was done earlier: in the economics of organizations, the organization of industries, measurement economics, public finance, auction theory, market design, environmental economics and the significance of entrepreneurs to economic growth, to mention only some of the areas that have seen significant gains in recent decades (never mind, for the moment, macroeconomics and finance!).There’s nothing that says the awards have to be chronological above all else, but the authority of the prize is diminished when its narrative aspect gets out of whack –as, for instance, with the long delay in recognizing MIT’s Robert Solow, in 1987, for his work on economic growth.

Until last week, the 2008 Swedish Central Bank Prize in Economic Sciences in Memory of Alfred Nobel (to give it its current official name), was merely an interesting anomaly. With the award to President Obama, the award to Krugman, at the height of last year’s financial panic, takes on additional interest. It was the timing, not the award itself, that arouses suspicion. Not since 1986, when James Buchanan, of George Mason University, received the economics prize by himself for his analysis of governmental failures – instead of sharing it with the late Richard Musgrave or Janos Kornai, both associated with Harvard – has a choice seemed so overtly political.

We’ll see tomorrow (October 12) what the prize awarders have in mind for economics in 2009. The Norwegian parliament, to whom Alfred Nobel assigned responsibility for the Peace Prize, has always demonstrated a bias towards hope. The Swedish Academy, whose 18 litterateurs enjoy lifetime tenure in their Stockholm salon, is as cosmopolitan and idiosyncratic in its taste as you might expect. The Karolinska Institute makes an award annually in either medicine or physiology, distinct subjects when Nobel laid down his pen which since have converged in the public mind to become biology.

But it is the the Royal Swedish Academy of Sciences, with some 600 members, 420 of them Swedes, custodian of the great prizes in physics and chemistry, which agreed to make the awards in economics, starting in 1969 – a decision that eventually will be seen as wise as it was bold. In the meantime, several more years will be required to demonstrate that the economics prize commands the respect of the Academy’s members, who are as worried about their jobs and personal savings as is everyone else. The authority of the prize depends, among other things, on not getting carried away by current events.

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