Nobel causes

A compelling book suggests that the Nobel Prize in Economics may not be a true measure of merit

This is a rather mean book to read. Not unless you are one of those who has little faith in the gobbledygook that economists mouth — then it is a cathartic experience. Written by Avner Offer, Chichele Professor Emeritus of Economic History at the University of Oxford, and Gabriel Soderberg, a researcher in the Department of Economic History at Uppasal University in Sweden, the book is the story of how the so-called Nobel Prize for Economics came into existence and how it, according to the authors, was corrupted by political biases and ended up turning in favour of the “market”. 

But the back story about the Nobel Prize, the details of intricate machinations, and the profile of the key accused (who compromised, as it were, the Nobel Prize) are just vehicles to repeatedly puncture holes in the mainstream economics framework. The book pits economics against Social Democracy, a political ideology that involves heavy regulation of the economy and believes in running an extensive welfare state. In other words, the authors attempt an elaborate defence of the Swedish welfare state. Or more precisely, defend the Swedish welfare state in 1969, when it at its peak. 

That year is relevant also because the first Nobel Prize in economics or, more correctly, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was awarded then. But this award, the money for which comes from Sweden’s central bank, was something of a “Trojan Horse”, according to the authors: It was the central bank’s, and in particular its governor, Per Asbrink’s way of challenging Swedish Social Democracy. Why would a central bank governor do that? That is because under the Social Democracy construct the government decided almost all the relevant rates in the economy. Most crucially, it told the central bank what interest rate to charge. This was significant because a low interest rate, that is lower than the rate at which the markets clear, would allow the government to go about achieving welfare targets such as providing housing for all. 

At the start of his tenure in 1955, Asbrink tried to assert his independence as the governor of the central bank. In fact, for a brief initial phase he did succeed in annoying Prime Minister Tage Erlander by demanding tighter credit norms. However, this was a time when Social Democracy was attaining new heights of approval; even the right-of-centre parties would not think of moving too far away from the set pattern. By 1958, the PM and parliament wrested control and showed Asbrink his place. For many years afterwards, there were no interest rate hikes. By 1968, Asbrink found a way to reassert influence. He used the 300th anniversary celebration as an occasion to turn into a patron of sciences. In this gambit, he lent heavily on a young economic advisor, Assar Lindbeck, who later became the most influential figure to decide who received the Nobel Prize in Economics. He is also the key culprit, as it were, in the Nobel Prize favouring the economists who put their faith in the working of the market.

In 1974, Gunnar Myrdal (left), the epitome of Social Democracy, had to share his Nobel Prize with Friedrich August von Hayek (right), whose theoretical framework was the antithesis of the Social Democracy approach.

In successive chapters, the authors build a case to show that the committee to decide the Nobel for Economics favoured businesses and chose several economists who perhaps did not merit being honoured by a Nobel; more precisely, the economists who leaned “right” in their political approach and could be classified as “formalists”, that is, those who take their cue from mathematics and logic and derive theories and results deductively, with little basis in reality. The whole bunch of Nobel winners such as Paul Samuelson and Milton Friedman, who broadly agree with the neoclassical macroeconomic assumptions, fall in this group. In this process, the selection also left out many who should have been deserving winners such as J K Galbraith and Joan Robinson.

The odd thing is that no matter how you splice the data regarding the Nobel winners — formalists vs empirics (who draw on the natural sciences and treat the observable world as their subject) or pro-market vs pro-social democracy, left-leaning versus right-leaning — the numbers are fairly evenly matched. But the authors’ point is that this balance is fake and could only be achieved because a certain Lindbeck tilted the scales in the market’s favour time and again. To prove this, they have relied on several surveys across US and Europe and over several decades that suggest that economists as a whole are a left-leaning bunch who believe in social insurance and a role for government spending. This is true even for those economists who otherwise prescribe a market solution in their theories. The Nobel Prize winners list, then, does not do justice to this natural left-leaning opinion of the economists themselves. 

The best example of this bias is the 1974 award to Friedrich August von Hayek. Hayek’s theoretical framework was the antithesis of the Social Democracy approach. If one goes by citations, Hayek would have been forgotten had it not been for the Nobel prize. Hayek’s promising view that markets are the ultimate source of information and give rise to “spontaneous order” in the economy was the most abiding lesson for Lindbeck. And as if to rub it into the social democrats, Gunnar Myrdal, the epitome of Social Democracy, had to share his Nobel with Hayek. 

Right through the book, the authors present a scathing critique of the dominant neoclassical paradigm. They constantly point out all the Nobel Prize winning theories that ran into a dismal record. Side by side, they also try to portray how Social Democracy is the only way to run the economy. While most of the criticisms of the mainstream economics are justified, the book, rather obviously, does not do justice to all the criticism levied against the Swedish welfare state experience. 

The truth is, Sweden grew rapidly at the back of private enterprise and innovators, such as Alfred Nobel, using free market capitalism from the mid-19th century up to World War II. In fact, it even avoided participating in the wars and by 1950s, it was among the world’s richest countries. The government-heavy approach of high taxation and heavy subsidies worked for a while. Then around the 1970s and 1980s, as in the rest of Europe and the US, this approach unravelled. Sweden today is nothing like what it was in the 1960s and it was the invisible hand of the market that pulled the country out of high inflation and low growth.

Publisher: Princeton
Pages: 322
Price: $35