Dynamite the Nobel prize in economics

October 9, 2009

Did you know that worms cause cancer? They don’t, of course, yet in 1926 Johannes Fibiger won a Nobel Prize in medicine for this “discovery.”

The Nobel committees for science prizes rarely make such amusing blunders, but those awarding the medal for economics have a long history of endorsing ideas that are useless, incorrect and even dangerous.

With the latest winner of the $1.4 million windfall due to be named on Monday, the case is stronger than ever for scrapping the prize altogether. The economics award — created in 1968 by Sweden’s central bank — has always been the odd man out.

Far from celebrating those who have “conferred the greatest benefit on mankind” as Alfred Nobel intended, the economics prize has done more harm than good.

The prize has fostered a faith in economists that is often misplaced. Friedrich Hayek, who won in 1974, said he would have advised against creating the award. The title, he said, “confers on an individual an authority which in economics no man ought to possess.”

Laureates, he suggested, should be required to take “an oath of humility … never to exceed in public pronouncements the limits of their competence.”

Sadly, economists, as a caste, have showed no such humility. The Nobel imprimatur has encouraged us to exaggerate the scientific quality of the dismal science.

Unlike their counterparts in physics, chemistry and medicine, economists have precious little predictive power. Lately, there has been much soul searching about the failure of economists to anticipate the 2008 meltdown. But given the profession’s history it would have been surprising if they had.

Over the past 20 years economists have failed to forecast any of the major twists and turns of the U.S. economy. Economists, as labor leader George Meany once grumbled, is “the only profession where a person could be considered an expert without having once been right.”

Worse still, the Nobel committee has set its seal on ideas that have been extremely toxic. Nobel Prize-winning theories were behind the biggest market meltdowns since the Great Depression.

In 1987, wide acceptance of the Black-Scholes-Merton option pricing model helped turn a market stumble into the worst one-day fall in Wall Street history, threatening the entire system. The model was rejected by traders, yet a decade later Robert Merton and Myron Scholes picked up their check from the Riksbank.

Or take Value at Risk models — backed by the Nobel Prize-winning portfolio theories of Harry Markowitz — which was culpable in both the panics of 1998 and 2008. These models helped justify skimpy capital ratios in the run-up to 2008.

“These theories have managed to transform tranquillity into turbulence, creating crises out of nowhere,” says Pablo Triana, author of “Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?” He adds: “The Nobel Prize helped give them respectability.”

And Nobel-endorsed economic theories helped justify the aversion to regulation showed by policy makers like Alan Greenspan. A long list of laureates from the Chicago school from Gary Becker to Edward Prescott helped promote the idea that governments should stand aside.

If the Swedish central bank wants to give away 10 million kronor a year, that is their business. But the prize should not be allowed to coast on the prestigious Nobel brand. Surviving relatives of Nobel are right to ask that their name be taken off the prize.

Aside from a new name, the prize should also come with a label:

WARNING: These theories should not be used by everyone. Side effects can include: financial crises, turbulent stock markets and banking collapse.

35 comments

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[…] Why again do they give out a “Nobel Prize” in economics?  (Christopher Swann) […]

Posted by Friday links: money moves Abnormal Returns | Report as abusive

They should convert it into a Nobel for Applied mathematics. That would solve all the problems.

Posted by Stefan | Report as abusive

Could not agree more Chris, they should think about getting rid of the Peace Prize as well, or change the name to the Nobel Popularity Prize

Posted by JBE7 | Report as abusive

Well done, Chris. If anyone deserves a prize, it is you for pointing this out!

Posted by MKB | Report as abusive

As someone noted Chez DeLong, the “coincidence” of many UChicago winners and the founder of the prize being an alumnus should not be undernoted.

Posted by Ken Houghton | Report as abusive

Hey Chris, you are some kind of stupid fella. Economists did predict the melt down of 2008 very accurately but morons that don’t know the first thing about economics, like yourself, were incapable of discerning those economists giving unvarnished appraisals of the economic future from those with vested interests (National Realtors Assoc. economists and investment firms). How did you get your job?

Posted by wes | Report as abusive

Actually, “worms” do cause cancer: Spirocerca lupi, for example, is a nematode parasite that causes esophageal cancer in dogs. This has been thoroughly documented.

A rather inflammatory post, and I can’t help but wonder how many other inaccuracies there are…

Posted by ABC | Report as abusive

Your Nobel sentiment, “Over the past 20 years economists have failed to forecast any of the major twists and turns of the U.S. economy” is simply begging to be challenged.

Maybe no Nobel Economics Laureates nor similarly “embedded economists” – but plenty of others worth hearing from not only could but most certainly did predict and have repeatedly predicted just about all the screw-ups of the U.S. economy’s last 20 misbegotten years. Plenty of others the mainstream media elected not to cover…

These predictions were correct, even the ones forecasting that the guilty parties would actually *get away* with some of the biggest and most vulgar crimes in American white-collar criminal history. As indeed – to date – they appear to have.

And all because – allegedly – nobody was listening, which I for one have a problem believing.

Economics aside… more Americans than meet the mainstream eye would like to have seen this year’s Nobel Peace Prize awarded to American President (& occasional economist) Ralph Nader. Then it might have meant something.

But those who run the System would rather see it explode first.

Posted by The Bell | Report as abusive

Oh Chris…. I don’t know what to do with you. You’re obviously a bright guy — but you need to think things through a bit more.

Economists are kind of like weathermen. If you hold them to 100% statistical accuracy their ALWAYS going to be wrong. Also, the extremist policies tend to be wrong (but win favor for personal/selfish/psychological reasons). A la Milton Friedman at his most radical. But that’s because they’re trying to hit accuracy with a forecast that has a very slim liklihood.

I guess I agree that the Nobel award is a bit problematic — since it looks to identify novel ideas that tend to be fringe — which pushes them into that realm of statistically unlikely.

The most success brought by economists is when they stick to more mainstream policies. But that won’t win a price

Also, mainstream in the US is defined with a bit too little regulation — since the lack of regulation is always what seems to blow things up.

Posted by NoName | Report as abusive

I couldn’t disagree with you more.

Especially with this ignorant statement: “Over the past 20 years economists have failed to forecast any of the major twists and turns of the U.S. economy.” Simply not true, but another user already mentioned that.

Then you quoted a labor leader…now that’s just a cheap shot. I can go on but i’ll stop here.

That being said, it might be true that the Nobel price could give one theory too much public exposure and ratification over others, but you did a poor job of arguing that. Instead you tried to mock all of Economics.

Posted by max | Report as abusive

A piece of what for who or is that whom?

peace? with 1.2 troops dying each day in Afganistan?

ONLY 2 weeks on the job and being nominated for works implied to be done…..hmmmm if beverybody could have a wish and it would come true. OK wheres my plaque and big funny check.

Posted by zippy | Report as abusive

CHRIS, DONT WORRY ABOUT THE NOBEL PRIZE YOU WILL NEVER MEASURE UP TO ANY OF THOSE WHO YOU DISPARAGE. CHARLES BOWEN

Posted by CHARLES BOWEN | Report as abusive

Economics is not the dismal science. From Adam Smith to Keynes and to Franco Modigliani and others there were advances in knowledge, which combined both theory and evidence. Some of their thinking can be used to explain the decline in personal savings in the US. Check this new result in consumption theory at http://knol.google.com/k/cheng-wu/saving s-and-growth/3mfkvo9c0qndy/2#

Posted by cwucnspt | Report as abusive

Economists are professionals, not a profession. Economics is a profession. And the writer doesn’t know that?

Posted by John Carroll | Report as abusive

If the Nobel Peace Prize were not so important and carry so much meaning reactionaries like you would not be writing desperate columns like this one. Get over it, President Obama has restored America’s standing in the world, and that alone merits recognition for peacemaking instead of the mindless war-mongering of his predecessor.

Posted by Richard Johnston | Report as abusive

Economists are simply the paid propagandists for the latest round of pirate capitalists. When they are wrong someone always gets a very large payday. Funny about that. The entire western economic system is founded on fraudulent assumptions that benefit a small elite. Oligarchy anyone?

Posted by Jonathan Cole | Report as abusive

This guy is crazy.

Posted by bria luntz | Report as abusive

It’s clear Reuters is truly the same as Drudge Report and Breitbart — run for your lives — it’s sicko rightwing Commentaries on a news aggregate!!!!

The pathetic, smug face of Swann’s makes me puke.

Now we cannot trust Reuters either – they are another slanted news source.

Ewwwwwww..,dynamite the GOPropoganda machine instead.

Posted by oh no | Report as abusive

Great article. When I used to work in the trading business, I was shocked to see how blindly the Black-Scholes model (which was basically the heat diffusion theory from physics) was in use by the Options Trading and other industries. I think all future mathematics models to predict the market must have a new variable called “GCOPM” – the Greed and Carelessness with Other People’s Money factor.

Posted by Kazi | Report as abusive

Chris, you forgot to mention Modern Portfolio Theory created by Nobel winner Markowitz as one of the colossal failures. The failure to recognize spiking correlations during downturns is what Wall Street does not want anyone to understand.

Posted by Brian Thomas | Report as abusive

How can you possibly think that the melt down in 1987 was caused by the black-scholes option pricing theory?!? Do you think the huge bull market that preceded the fall could have had something to do with the correction? Or perhaps the invention of portfolio insurance? And surely you’re aware that virtually all option traders, including myself, still use black-scholes or something similar to estimate fair value? And … but then I can’t be bothered correcting your knowledge of the economics profession.

Posted by David | Report as abusive

The Economist magazine had the US housing bubble on its cover in June of 2006. I think you should do a bit more research before writing an article like this.

Posted by walter | Report as abusive

Ezekiel 13:10-11 ” ‘Because they lead my people astray, saying, “Peace,” when there is no peace, and because, when a flimsy wall is built, they cover it with whitewash, 11 therefore tell those who cover it with whitewash that it is going to fall. Rain will come in torrents, and I will send hailstones hurtling down, and violent winds will burst forth.

Where’s the peace? Obama is for warmongering and abortion

Posted by just me | Report as abusive

FINALLY! Someone comes forth to publicly state the self-evident, but politically-incorrect, facts about the Nobel Prize in general, and specifically the products and value of “economists”.

Posted by Ken T | Report as abusive

Not all sciences… are perfect… so give the prize for economics… because recessions and meltdowns cannot be predicted in the same way that earthquakes can’t.

Posted by Mon T. | Report as abusive

Language was used in a troubling way here. The bulk of the post reinforces the common misperception that the “Nobel Memorial Prize in Economic Sciences” is a Nobel prize, even while, at the end, feigning criticism.

Take for example: “The Nobel committees for science prizes rarely make such amusing blunders, but those awarding the medal for economics have a long history of endorsing ideas that are useless, incorrect and even dangerous.”

The author knows full well that the committees that award the Nobel Prizes have nothing to do with the the committee that awards the Swedish Bank prize in memory of Nobel. Yet the way this is written, one is left with the impression that there are multiple committees, all within the domain of Nobel. “Those” is left vague. Failing to clearly separate the prizes at this point is dishonest; to attack a paper tiger at the end, even more so.

Strangely, wikipedia does a similar thing:

“The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is the only award that has ever been officially linked to the Nobel Foundation. The next time a similar offer was made – an offer by Jakob von Uexkull, who subsequently established the Right Livelihood Award – the offer was declined.”

What does “officially linked” mean? Even if the Nobel Foundation were to declare the Swedish bank prize a “Nobel Prize,” would it matter? Alfred Nobel certainly didn’t establish this one.

In both cases we are seeing a crude attempt to maintain the linkage of the econ prize to the real Nobel prizes (which seem to have lost luster themselves lately). Shame on you. This is like a prostitute trying to maintain their dignity.

Perhaps you should leave the legerdemain to WPP and friends. This just makes everyone look bad — even Felix Salmon, by association. Probably doesn’t matter for him though as it appears he’s received an invitation to party with Roubini this weekend.

Posted by Uncle Billy Cunctator | Report as abusive

Mr. Chros, you present a unique view on the misappropriateness of Nobel prize in ecoomics; you certainly seem miss out some relevent details. Its the dynamics of the markets, the everchanging expetations and behaviours of individuals – economic agents, and perpetually increasing complexity of financial markets that is contributed more to financial crisis and meltdowns, far more than the theories of the laureates.

Models awarded by the Nobel have changed the way economics is applied in policy matters, provided us with vital theories such as the Nash Equilibrium, or Krugman’s works on trade theory – which have significantly contributed to increase the global wealth and provide new avenues of business and policy.

In agreement with Stefen, renaming the prize to Applied Mathematics Nobel would address your concerns to a great deal.

Posted by Asim | Report as abusive

What about Nobel-laureate Paul Krugman? He’s a pretty level-headed guy, who actually says a lot of the things you’re saying in this essay

http://www.nytimes.com/2009/09/06/magazi ne/06Economic-t.html

I think it’s fair to say that not every nobel laureate in any category has been completely deserving, but to say that the prize doesn’t have the ability to recognize talent or true intellect is going a bit too far.

Posted by Frank | Report as abusive

Before stating on economics and economicst understand the theory it stand upon,fabricated statistics can’t perform a standard requirement of a policy where by a system or a countries future is ASSESSED.so CHANGE IT TO CHANGE A SYSTEMETIC APPROCH FOR CENTRIC DEVELOPMENT OF THE WORLD CAN DESOLVE THE MAN MADE CRISIS.

Posted by subir | Report as abusive

Hi Chris Swann
The problem in market Economy is trade and balance.It is very complex algorithm than common man predict with maths and calculator of curves.it adjust with rain,flood,stroms and earth quake and tornados and hurricanes(New Orleans).Value of Economy also depends on GeoPolitical shifts.Now you are clever and you can make your guess.Ofcourse you are right …it needs a development and further research.The present scenerio in economy is not of any fault or failure…it is just vacuum due to missing in data and high manipulation(lies bu national interest groups).You ask University of Michigan for more details.Also you can approach Mr.Trichet or Alan Greenspan.I think Mr.Ben(Benjamin) Shalom Bernanke is trying with lot of hopes and trying to make US feel better…it is a hard job….even another hurricane default his efforts in 2009.
He does with considering business men of high class only,he doesnot know what to do with small industries than big Fennie Mae or Fredi mac.Small firms in Bronx,NY and in Syracuse ,NY and Colorado and Detroit auto suppliers….he has no finance and final decision…of course he forgot NASA too.

Thank you
Timothy VN

Posted by Tim | Report as abusive

Economists have pretty bright ideas, but they work only in a more ideal (close to mathematically ideal) kind of reality, from which the current economic environment is veeery veeeeery far. Poorly implemented regulation and deregulation, hidden interests and unorthodox business practices, government and corporate unclear ties lead to a very disorderly and discretionary economic environment that is but very hard to predict and surely far from what a truly competitive environment should be.

Maybe economics as a science needs to take all of the above into account and stop confining itself to macro numbers like gdp, unemployment rate, inflation and so on. Taking into account the imperfections in the system described above can lead to much more accurate predictions.

Don’t blame it on the economists though – they don’t run the system. Without some of them (e.g. Bernanke) the situation could have been much worse.

Posted by Econ MA | Report as abusive

The Nobel prize is funny. Henry Kissinger won one for peace, Obama just won one for peace. Sigh. It’s a game-show. Economists under the umbrella of financial companies, insurance agencies, hedge fund managers etc are real economists. And apparently we’re out of our recession, I guess banks are lending to each other again! It’s funny. Derivatives must have evaporated and 600 trillion dollars, in back room betting, have somehow found themselves on the books. It’s hysterical. Look, the dollar is under attack, and the worlds economies are being consolidated by the same guys who’ve grown fat from short-selling. So there you have it. I don’t need a degree in economy to know what up. This Prize is far from credible. It’s closer to satire.

Posted by owen | Report as abusive

Hey NoName,
You seem smart too, but you’re sorely wanting for real data. the whole economic system is a Ponzi Scheme. Listen son, does Greenspan understand the effect he’ll have on the dollar when he travels to Saudi Arabia instructing foreign governments to dump the dollar? What would you think if you were an investor hearing Greenspan speak? Would you loose confidence in savings? Would you buy up commodities after that speech, invest a little more in China maybe? Do you think it’s fine that the Federal Reserve has never been audited, that they have easy access to the Treasury? And is it understandable that the Federal Reserve has authorized 23 trillion dollars to fly out of the Treasury to revalue toxic derivatives? Is that all just missing the mark? Hard to hit that target? Hard to forecast that stuff hey? Not for me, as soon as you get that some people out there have the keys to your vault and they’re not good and honest like you are, as soon as you get that they love to help out their friends and hand you the bill? Soon as you understand what economics really is, you’ll find it much easier to predict the future. NoName, people profit from collapsing economies. Is it so hard to believe that these same people would work hard to make their profits materialize? Really?

Posted by owen | Report as abusive

[…] Scholes, Harry Markowitz and Merton Miller, Christopher Swann has had enough of these blunders: Dynamite the Nobel prize in economics [T]hose awarding the medal for economics have a long history of endorsing ideas that are useless, […]

Posted by Your Saturday Breakfast Read: Nobel Prize Edition « The Confluence | Report as abusive

i’m sorry if someone else posted this already (i haven’t read all of the comments), but does anyone else think its funny this guy uses a quote from hayek ultimately opposed to intervention in the market AGAINST gary becker who is also opposed to intervention? either you have to say economics is unable to predict what happened, meaning economists don’t fully understand just how dynamic the market can be, and therefore they/politicians/government shouldn’t try to intervene OR economists do know the economy well enough to intervene without causing problems. you can’t say both. considering how much government intervenes and how often things get screwed up in some way or other, i think hayek and becker seem to know what they’re talking about.

Posted by hutch | Report as abusive

[…] cu câteva zile de anunţarea Nobelului pentru economie, unul din bloggerii Reuters, Cristopher Swan, făcea un inventar al Nobelurilor eronate pentru economie. Între acestea, trioul […]

Posted by O premieră Nobel: laureat femeie pentru economie | | Report as abusive

I think Christopher Swann should win the Nobel Prize for Sexy

Posted by Collin Hughes | Report as abusive

What an intriguing article. This Nobel obsession certainly can lend unwarranted weight, or at the very least confuse the true intent of certain works and market interpretations. It appears that many continue to search for easy answers to complex problems.

Posted by Rob Boston | Report as abusive

[…] prognoze infailibile inseamna ca esti debil. Una din limitele economiei tine de stiinta in sine. Pana si Reuters si-a pus problema “abolirii” Nobelului in economie.  “The Guardian” la […]

Posted by Cu cat mai destept poti fi decat un laureat Nobel ? | Ziare net – Stiri din presa | Report as abusive

[…] prognoze infailibile inseamna ca esti debil. Una din limitele economiei tine de stiinta in sine. Pana si Reuters si-a pus problema “abolirii” Nobelului in economie.  “The Guardian” la […]

Posted by Cu cat mai destept poti fi decat un laureat Nobel ? | Reverse24.info | Report as abusive