What is the Nobel Prize for Economics really about?

Professors Robert B Wilson and Paul R Milgrom of Stanford University react to winning the 2020 Nobel Prize in Economics, in Stanford, California, US, October 12, 2020 [File: Kate Munsch/Reuters]
Professors Robert B Wilson and Paul R Milgrom of Stanford University react to winning the 2020 Nobel Prize in Economics, in Stanford, California, US, October 12, 2020 [File: Kate Munsch/Reuters]

“Nobel Prize in Economics” for 2020 has been awarded for advances in auction theory!

It is truly a “you must be joking” moment.

With COVID-19, the economy of the whole world is on the verge of a meltdown. Are there solutions? What are the good ones? The bad ones? In the United States, we are having a V-shaped recovery for the rich and flat-lining – at best – for the rest.

The failures of capitalism to deliver its benefits broadly is a major cause for the political discontent that has brought about the return of authoritarianism in Eastern Europe, far-right parties in Western Europe, the rise of Donald Trump in the US, and Brexit in the United Kingdom.

Could the committee have given the prize for anything more trivial?

The phrase “Nobel Prize in Economics” is in quotes because it really is not a Nobel Prize. It actually is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

It should be acknowledged that a lot of sources say that this is a distinction without a difference. “The winner attends the same ceremony, receives a diploma and a gold medal from the Swedish monarch, and banks the same cash prize. It’s listed on the official website, Nobelprize.org. But it is not the same. Alfred Nobel set up the other prizes to recognise accomplishments that had “conferred the greatest benefits to mankind”. This one was set up by a bank. The intent was not merely different, it was to get out of any obligation to consider “benefits to mankind”.

For that prize, the selection is absolutely perfect.

Way, way back, in 1932, the Swedish Social Democratic Party came to power. It remained so until 1976. They instituted “the Swedish way”, creating a model that has since become a cliche in the popular imagination: capitalist but very egalitarian, business-friendly but with a strong welfare state, accommodating powerful unions and the interests of large companies. Denmark and Norway did similar things. Collectively their model is referred to as the “Nordic way”.

The Swedish National Bank (Sveriges Riksbank) was part of the government. The “Swedish way” meant that the bankers were answerable for social issues as well as financial ones. Bankers do not like such obligations. In the 1960s, the bank was trying to get out of democratic accountability and, to do that, “it needed to claim scientific credibility not grounded in political support”.

The connection of free market, laissez-faire, classical and neo-classical economics to the Wall Street Crash of 1929 and the Great Depression was still a living memory. The general consensus was that those events had unleashed fascism and led to World War II. The Swedish bankers could not go back to that.

They had to come up with something more subtle and more acceptable.

It was to promote an economics that was purely mechanical, that had an existence like the Platonic Forms – out there, beyond human creation – in supernature, like the laws of physics.

It is a notion that economists love. When economics first became a field of study in the 18th century, “Physics was unequivocally the discipline enjoying the highest respect, mathematics was its preferred language, and Isaac Newton was England’s intellectual saint.” Just as Pinocchio yearned to be “a real boy”, economists yearned to be “real scientists”. They still do.

Thus, Sveriges Riksbank created a prize in 1968 whose sole purpose was to exalt the Pinocchio economists. In 1969, the first time it was given away, the prize went to Ragnar Frisch and Jan Tinbergen. Frisch argued that “economics should follow the same path towards theoretical and empirical quantisation that other sciences, especially physics, had followed”. Tinbergen “was a pioneer in changing economics from a science formulated in words to one based on mathematics”. The next recipient, Paul Samuelson, wanted to make economics “a hard science”. Some of his most significant work was inspired by thermodynamics.

The problem is that economics is not physics. The physical universe exists with or without us. It is there for us to discover. Economies are different. They are invented by humans. They are products of technologies, politics, and social orders.

Here is a simple example. From the start of human history until the 18th century, no society rose above a subsistence level. There were spectacular elites from time to time. But they necessarily rested on slaves, serfs, peons, and the like. Economics did not change that. The Industrial Revolution did.

When people argue about the politics of this particular prize, it is always in terms of simplistic ideas of left and right. The prize has gone to enough on either side to make it seem like there is no problem. But there is.

An examination of the awards, in toto, reveals that they promote the pseudo-physics notion of economics and that has distinct and powerful consequences. It means that whoever gets money, should get it because it is like the laws of physics. Whatever they do with it, they should do with it because they are operating under those laws. It takes power, politics, and social order out of the equations altogether.

Many recipients would deny – and genuinely believe their denial – that their prizes endorse such things. That is how successful the campaign to separate economics from society has been.

It is quite brilliant. It is in the nature of the media – of everyone – to shorten the name. Not to “Sveriges Riksbank Prize” or to the “in Memory of” prize, but to the Nobel Prize in Economics. There are other prizes in economics, but none that anyone knows about. Whenever one of the recipients is quoted, the Nobel Prize is noted with their name. The winners are top of the heap. Everyone gravitates to what they have done. It has helped pull the whole field into doing models and math instead of looking at reality.

The new study of auction theory is a nifty little Lego block in Economics-World of Math-Models. It is, apparently, of real use to companies and governments rich enough to employ professionals to help them buy and sell through auctions. Otherwise, it bears roughly the same relationship to the real societies and the real conditions that make successful auctions possible or turn them into farces as Legoland constructions do to real buildings, trucks, animals, and people.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.

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