A brief history of the Nobel Memorial Prize in Economic Sciences
The 2013 Nobel Memorial Prize in Economic Sciences was announced on October 15 and won by a trio of financial economists: Eugene Fama, Robert Shiller and Lars Peter Hansen. Fama is the mastermind behind the ‘efficient-market hypothesis’, which will be familiar to all who have taken at least a first-year finance subject, whilst Shiller is a primary critic of the hypothesis and instead espouses the idea of ‘irrational exuberance’ in markets (read: stock markets are generally overvalued as investors underestimate the risk of incurring a loss). Fama retorted that Shiller was being overly pessimistic in his views upon publication of ‘Irrational Exuberance’ in 2000, although this pessimism perhaps has some solid foundation given that the bursting of the dot-com bubble and resultant stock market crash occurred in the exact month of the book’s publication. Hansen offers a balance between the two competing views, creating dynamic models which incorporate uncertainty to better analyse asset price movements. In essence, all three built on each other’s models, and arguably none would have produced their respective works without their desire to improve on what they perceived as each other’s flawed models.
It remains a little-known fact, however, that the Nobel Prize in economics is not a ‘true’ Nobel in the sense that it was not one of the original five created under the will of Alfred Nobel. Its existence is controversial, often debated and held up as a symbol of the confusion regarding whether or not economics should be honoured in the same manner as the ‘hard’ sciences of chemistry and physics.
The Nobel Prizes were originally created under the will of Alfred Nobel, a Swedish chemist, engineer and inventor, following his death in 1896. Nobel invented dynamite and amassed a large personal fortune through this discovery. He was, however, conscious of the potential harm to society that the explosive could cause, and sought to atone for inventing the substance by donating most of his wealth (an impressive 94% of it) to establishing the Nobel Prizes. His wish was that they should go to “those who… shall have conferred the greatest benefit on mankind” through endeavours in chemistry, physics, medicine, literature and peace.
The economics prize was established almost 70 years after the original Nobel Prizes, in 1968, to mark the 300th anniversary of Sweden’s central bank. The bank made a large donation to the Nobel Foundation that year, and since 1969 a prize officially known as ‘The Prize in Economic Sciences in Memory of Alfred Nobel’ has been awarded annually to the most deserving candidate in the field of economics. Like the prizes for physics, chemistry and medicine, decision in regards to who should receive the economics Nobel is entrusted to the Royal Swedish Academy of Sciences, yet the prize money (approximately US$1.2 million) is donated by the central bank of Sweden. As with the original awards, the economics laureate receives their prize from the King of Sweden at the award ceremony held annually on the anniversary of Alfred Nobel’s death, and it is therefore generally regarded as now being a legitimate Nobel.
Friedrich Hayek famously stated, when receiving the 1974 Nobel in economics, that had he been consulted about whether to establish a Nobel Prize for economics he would have “decidedly advised against it [because] the Nobel Prize confers on an individual an authority which in economics no man ought to possess.” He went on to explain that in the natural (hard) sciences, “influence exercised by an individual is chiefly an influence on his fellow experts…. but the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally… there is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society.” Thankfully Hayek’s concerns have remained completely unfounded in the 40 years since he expressed them, and no winner of the economics prize has assumed the role of and ability to solve all of society’s problems.
Two of the most controversial Nobel Prizes in economics have been those awarded to Milton Friedman in 1976, and John Nash in 1994. Friedman won for his contribution to monetary history and the complexity of monetary stabilisation policies. However, his award incited international protest – including from four fellow Nobel laureates – as Friedman was accused of being an advisor of the military dictatorship in Chile and supporter of Augusto Pinochet, despite the abuse of human rights carried out under his regime. Friedman mostly advised on the hyperinflation problems that Chile were facing at the time, and the transition of the country to a free market economy. Whether Friedman should have more openly condemned the brutality occurring in Chile is debatable. He later defended his actions by claiming that he was merely trying to ensure economic freedom within the country, which he saw as necessary for political freedom and the eventual end of the military rule in Chile in 1990.
John Nash’s award in 1994 for his work in the field of game-theory elicited controversy for two reasons: his long history of schizophrenia and his alleged anti-Semitism. Given that one of the other Nobel Prizes is awarded for advances in the field of medicine, it seems strange that Nash should be denied the prize due to a battle with mental illness, but nonetheless some saw this as reason for him to be a poor choice. His anti-Semitism is of course harder to defend and was bound to cause controversy in light of the fact that over 20% of past Nobel laureates have been of Jewish descent. Nash did not get given the opportunity to give an acceptance speech at the presentation of the awards (for those who have seen the film ‘A Beautiful Mind’, the scene depicting this is purely fictional). the reason for this was presumably due to his mental instability. In a later speech at Princeton regarding the Nobel, he spoke of how he hoped that the award would increase his credit rating, as he really wanted to eventually get a credit card.
Perhaps the most appropriate response to the question of whether the Nobel Prize in economics is legitimate is that offered by macroeconomist David Romer: “whether economics is a science or not is irrelevant. It’s serious scholarship, and it’s great to have that recognised.”