Approaching a Fork in the Road

The committee that awards the Nobel Memorial Prize in Economic Sciences has a decision to make

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It was a substantial responsibility the government of Sweden licensed when, in the 1960s, it gave its blessing to the creation of a prize in economic sciences in memory of Alfred Nobel, to be administered by Nobel Foundation and awarded by the Royal Swedish Academy of Sciences. That bold action wasn’t easy, but it was as easy as it would get.

The Cold War smoldered ominously between two very different systems, “capitalist” and “communist.” In the West, the prestige of the Keynesian revolution was at its height, compared by some historians of science to the Darwinian, Einsteinian, Freudian, and quantum revolutions. And the Science Academy possessed seventy-five years of experience as administrators of the physics and chemistry awards that were among the five prizes mandated by Nobel’s handwritten will.

Since 1969, when the first economics prize was awarded, the committee that oversees it has done pretty well, at least in the judgment of those who have followed the program closely.  The Nobel system has imposed a narrative order on various developments since the 1940s in an otherwise fractious profession, often by recognizing its close neighbors. Goodness knows where we in the audience would be without it – still reading The Worldly Philosophers, perhaps, first published in 1953, as though nothing since had happened.

Now, however, the Nobel Prize in economic sciences is facing a crucial test. The authorities need to give a prize to clarify understanding inside and outside the profession of the events of 2008, when emergency lending and institutional restructuring by the world’s central banks halted a severe financial panic. What might have turned into a second Great Depression was thus averted. Governments’ responsibilities as lenders of last resort were the heart of the issue over which Keynesians and Monetarists jousted for seventy-five years after 1932.

Either the Swedes have something to say about what happened in 2008, not necessarily this year, but soon, or else they don’t. Their discussions are well underway. The credibility of the prize is at stake.

The Nobel committees that administered the prizes in physics and chemistry faced similar problems in their early years.  When the first prizes were awarded, in 1901, well-established discoveries dating from the 1890s made the decisions relatively non-controversial – the discovery of x-rays, radioactivity, the presence of inert gases in the atmosphere, and the electron. Foreign scientists were invited to make nominations; Swedish experts on the small committees, several of them quite cosmopolitan, made the decisions. The members of the much larger academy customarily accepted their recommendations.

But a pair of scientific revolutions, in quantum mechanics and relativity theory, soon generated “problem candidacies” that took several years to resolve.  Max Planck, first seriously considered in 1908 for his discovery of energy quanta, was final recognized in 1918. Albert Einstein, first nominated in 1910 for his special relativity theory, was recognized only in 1921, and then for his less important work on the photo-voltaic effect.

It is thanks to Elisabeth Crawford, the Swedish historian of science who first won permission to study the Nobel archive, that we know something about behind-the-scenes campaigns among rival scientists that underlay these decisions. Overlooked altogether may have been the significance of the work of Ludwig Boltzmann, who committed suicide in 1906.

The economics committee has what it needs to make a decision about 2008. The Swedish banking system suffered a similar crisis in the early Nineties and dealt with it in a similar way. Fifteen years later, Swedish economists paid close attention to what was happening in New York and Washington,

In 2017, in cooperation with the Swedish House of Finance, the committee organized a symposium on money and banking, at which the leading interpreters of the 2008 crisis contributed discussions. (You can see here for yourself some of the sessions from that two-and-half day affair, but good luck making sense of the program.  That’s what the committee exists to do – after the fact.)

A previous symposium, in 1999, considered economics of transition from planned economies, and wisely steered off.  No such inquiry was required to arrive the sequence of prizes that interpreted the  disinflation that  followed the Volcker stabilization – Robert Lucas (1995), Finn Kydland and Edward Prescott (2004),Thomas Sargent and Christopher Sims (2012) – a process that unfolded more slowly and less certainly than the intervention of 2008.

The money and banking prize should be understood as fundamentally a prize for theory. For all the talk in the last few years about the rise of applied economics, the Nobel narrative, at least as I understand it, has emphasized mainly surprises of various sorts that have emerged from fresh applications of theory, in keeping with Einstein’s dictum that it is the theory that determines what we can observe.

Some of these applications may have reached dead ends, leading to new twists and turns.  The advent of cheap, powerful computer and designer software in the Nineties handed economists a power new tool, and two recent prizes have reflected the uses to which the tools have been put – devising randomized controlled tests of economic policies, and drawing conclusion from carefully-studied “natural experiments.” But otherwise “the age of the applied economist” may be mainly a marketing campaign for a generation of young economists eager to advance their careers. It won’t be an age in economic science until the Nobel timeline says it is.

As a journalist, I’ve covered the field for forty years.  My impression is that many exciting developments have occurred in that time that have not yet been recognized, some of them quite surprising, many of them reassuring. As the Nobel view of the evolution of the field is revealed in successive Octobers, the effect may be to buttress confidence in the field and diminish skepticism about its roots – or not. As for natural experiments, it is hard to beat the events of 2008. The Swedes have many nominations.  What they must do now is decide.