MacroScope

Macroeconomics deserves a prize?

October 12, 2011

Europe on the brink. United States risks double-dip recession. Financial turmoil threatens world economy. Not the sort of headlines you would associate with a Nobel-prize-winning contribution to the progress of humanity. To their credit, recipients Christopher Sims of Princeton and Thomas Sargent of New York University did develop methods and models that are wisely used by economists around the world, including central banks. But it’s unclear what practical applications their findings have for the world’s current economic predicament.

Alfred Nobel himself was not shy about hiding his disdain for the dismal science, which was not part of the original set of awards given in his name. The Nobel prize in economics came into existence in 1968, when Sweden’s central bank decided to create it in the dynamite tycoon’s honor. As German journalist Karen Ilse Horn writes (Thanks to @RecklessMonkeys for bringing the quote to our attention):

Economics was nothing Alfred Nobel appreciated as such, even though he was himself a pretty successful businessman. Rather to the contrary: ‘I have no training in economics myself and also hate it from the bottom of my heart,’ he wrote.

The question appears worth asking: what exactly was the concrete contribution of Sims and Sargent? That answer, it seems, is a little harder to come by. Take Paul Krugman, who makes a living explaining the intricacies of economics to lay persons. This is what he had to say about the winners:

This is a statistical techniques prize — both men worked on methods for extracting insight from the data history provides us, which generally don’t offer anything like a controlled experiment.

Yet Krugman does not cite any real-life examples. The one cited most often in news coverage of the prize is the so-called rational expectations model, of which Sargent has been a key proponent. But that idea underpinned much of the moves toward deregulation and weak oversight now blamed for the financial crisis.  As Randall Wray, an economist at the University of Missouri at Kansas City, puts it:

Given all that the global economy has suffered through over the past four years, it is remarkable that the Bank of Sweden continues to reward economic theories that are not only useless for helping us to understand the world in which we actually live, but that are downright harmful when adopted by policymakers.

During a press conference Sargent and Sims were asked about what their research would prescribe to the world’s current economic morass. The response was thoroughly dissatisfying for anyone hoping economists might offer solutions to the very real problems of joblessness and overindebtedness facing the U.S. economy:

(It) requires a lot of slow work looking at data, unfortunately.

 

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