Salerno on the Latest Winner of the Economics Nobel Prize

Praise from across the journalistic and economics worlds have been heaped upon the awarding of this years Nobel Prize in economics to Jean Tirole, a French game theorist who has specialized in finding market failure in large businesses, especially if they are vertically integrated.

In the Financial Post, economist Joseph Salerno says "Au contraire." He notes:

Tirole was awarded the Nobel Prize for concocting complex technical solutions to what Austrian School economists have long known and taught to be pseudo-problems for a dynamic market economy driven by rivalrous competition among entrepreneurs eager to earn profits by anticipating and serving ever-changing consumer demands.

Are Nobel Prizes in Economics Enough to Make One a Good Policy Maker?

Peter A. Diamond complained in Sunday's New York Times that, even though he won a Nobel Prize in economics, senate approval of his nomination to serve on the board of the Federal Reserve is being held up. In doing do, he makes the case that in order to do monetary policy right, it is important to know something about unemployment, his own area of expertise.

I, for one, am not so sure that winning the Nobel Prize in economics should be taken as prima facie evidence of sound overall economic analysis. Paul Krugman, Joseph Stiglitz, and Paul Samuelson all won Nobel Prizes and I find most of their economic analysis abysmal. Even the work of Milton Friedman, another Nobel Laurette greatly disappoints when it comes to economic method and monetary analysis.

It turns out that a main reason to maintain a healthy skepticism about the pronouncements of Nobel Prize winners is that the committee awarding the prize has demonstrated decidedly destructive biases in their awards. That is the conclusion of economist Nikolay Gertchev, a PhD economist now working for the European Commission in Brussels. In his article "The Economic Nobel Prize," Gertchev first documents the bias toward mathematical economics and the relativism that results from empirical positivism.

About research programs of Prize recipients, he notes

The vast majority of rewarded contributions, while pertaining to different fields ofscientific investigation, and hence raising different questions, share in common two basic views, which will be addressed separately in the next two sub-sections. According to the first view, the market process is inefficient. According to the second view, the failures of this inefficient market process need to be corrected, and government policies are potent and well suited for achieving this goal.

Gertchev explains the destructive practical consequences of such a bias in his conclusion:

The most fundamental problem that such a pro-government and anti-market bias is causing for a Prize that claims to be scientific is its relation to truth. The single goal of scientific research should be the discovery of new knowledge, either through correcting past errors or through the discovery of previously unknown truths. Truth, however, does not appear to be a primary concern for the Prize committee in economics.

You can watch Gertchev's presentation of his article here:


PFS 2010 - Nikolay Gertchev, Not New, Not True, Irrelevant or Evil: How Economic Nobel Prizes Are Won from Sean Gabb on Vimeo.

Given such a track record, perhaps not only is it not enough for a Fed Governor to be a Nobel Prize winner. Perhaps it is undesirable.

Nobel Prize in Economics

This year's Nobel Prize in Economics has been awarded to Peter A. Diamond, Dale T. Mortensen, and Christopher A. Pissarides for their work extending the concept of search costs to labor markets.

The press release includes the following explanation of the award winning contribututions:

This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Incidentally, that last observation is similar to something I've said on this blog before about unemployment.

Perhaps the best take I've read so far about this year's prize  is by Peter Klein:

It is said that when the Nobel Prize in economics was first established, prizes were given for using economics to teach people things they didn’t already know, e.g., that economic growth might increase inequality, that depressions are caused by central banks, that macroeconomic stabilization policy doesn’t work, etc. Now, prizes are given to economists who teach other economists things that regular people already know — politicians are self-interested, you shouldn’t put all your eggs in one basket, institutions matter, different people know different things, etc.