April 14, 2022 — Question from The International Economy: Economics is the only field in which people can share a Nobel Prize for arriving at the complete opposite conclusion, something that arguably actually happened. Should the Nobel Prize in Economic Sciences Be Put on Hold? —
My response:
It is true that the Prize in Economics in Memory of Alfred Nobel has been awarded in the same year to economists representing opposite viewpoints. Not just once, but three times.
In 2013, the topic was stock markets. The winners included both Eugene Fama, for his work on the Efficient Markets Hypothesis (EMH), and Robert Shiller, for his rejection of the EMH in favor of the existence of bubbles, excessive volatility, and investor behavior that departs from rational expectations.
In 1979, the topic was economic development. The Prize was awarded to both Theodore Schultz, who argued that peasants were rational and optimizing, and Sir Arthur Lewis, who originated a dual-sector model of development in which the agrarian sector is governed by social norms that pay workers above their marginal product.
In 1974, the topic was how society should be organized. One recipient was Gunnar Myrdal, who was on the Left – a critic of race relations in America and force behind the social welfare state in Sweden. The other recipient, Friedrich von Hayek, was on the Right – a leading proponent of the view that expansion of the role of the government was “the road to serfdom.”
If two economists are at odds with each other, does that mean that one or the other (or both) must be wrong? And that therefore economics is not a science worthy of having a Nobel Prize?
No. The essence of economics is that life is usually a trade-off. Consumers, for example, balance their desire for different goods and services, subject to a budget constraint. Governments trade off the environment against economic costs of regulation. Central banks balance economic expansion versus inflation. So, it is also, in balancing competing economic ideas.
Consider the three odd couplings
On the one hand, the EMH is a good antidote to the illusion that it is easy to make above-normal profits in the stock market. Index funds do tend to beat active investors. But, on the other hand, speculative bubbles capture the valid idea that market prices sometimes differ from the economic fundamentals underlying the assets. Both perspectives embody a lot of truth.
On the one hand, modeling peasants in developing countries as rational was a useful antidote to the arrogant assumption that they did not respond to incentives and that their governments or well-meaning foreign advisers knew what was best for them. On the other hand, the dual-sector model persuasively illuminates the stages of rural-urban migration and industrialization, for example in China.
Finally: On the one hand, it is impossible to formulate economic policy intelligently, without recognizing such important failures of the private market as environmental externalities or monopoly power. Thus, there is inarguably a role for the government. On the other hand, it is also impossible to proceed intelligently without recognizing the importance of government failure as well, such as rent-seeking, regulatory capture, or the political business cycle.
Awarding the Nobel Prize to pairs of economists whose work is in tension with each other can make perfect sense.
[Comments can be posted at Econbrowser.]
Fourteen responded to the question in the winter 2022 issue of The International Economy, “Should the Nobel Prize be Put on Hold?”