While nearly all of the Nobel Prize categories were established in the will of the Swedish scientist Alfred Nobel, the award for economics, which this year will be announced on Monday, October 10, was not created until decades after his death. In the late 1960s, Sweden’s central bank was actively pushing for the country to pursue a more market-friendly approach, and the prize, which was established in 1968 to commemorate the bank’s 300th anniversary, became a tool with which to support this campaign.
Avner Offer, a professor of economic history at Oxford University, and Gabriel Söderberg, a researcher of economic history at Uppsala University in Sweden, document the award’s history in their new book, The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn. In doing so, the authors describe two competing doctrines. The first, which they simply term “economics,” is the study of people’s interactions with free markets, drawing heavily on abstract theory, mathematical models, and the assumption that people will act in rational self-interest. The second doctrine, which they refer to as “social democracy,” concerns how the government provides for its citizens and focuses more on the public-policy decisions they make to do so.
According to Offer and Söderberg, the Nobel Prize in Economics favors the former doctrine to the almost complete exclusion of the latter; only one laureate who has focused mainly on social democracy has won (Gunnar Myrdal, in 1974). Though both liberal and conservative economists have received the prize, the award has continually reinforced the primacy of the free market.
I spoke with Offer about these trends and what he considers some of the more notable awards and oversights. The interview that follows has been edited for length and clarity.
Jeremy Venook: Near the end of your book, you pose a question: Is the Nobel Prize in Economics more similar to the one for Physics or the one for Literature? What do you see as the ramifications of that question?
Avner Offer: I think the implication of this question is that economics does not have any form of knowledge that enjoys superior authority over other modes of discourse. It does not mean that its arguments are invalid. In a world of imperfect understanding and imperfect knowledge, economics musters a set of arguments which have a certain persuasive value, but there are other types of arguments. I think that in the absence of an agreement about what the objectives of policy should be, what we know about the real world, and how to achieve these objectives, we should listen to economists, but we should not pay them any greater respect than to other people who are making valid arguments from other premises.
In practice, we do that much of the time. We don't let economists run our society, although what central bankers are doing right now is coming dangerously close to that. I think we should listen to economists with respect. They are smart people, they have good arguments, but they don't have decisive arguments. In that respect, it's more like literature than like physics: When physicists agree, laypeople are in no position to contradict them, no position to argue. That's not the case with economists.
Venook: For the first few decades after the award was established, conservative and liberal economists both won the prize, but in the 1990s there was a shift in the awarding of the Nobel Prize to people who were of an economically conservative ideology. Could you elaborate a little bit on how that trend came to be?
Offer: We tried to designate [winners] to either on the left or the right, and what characterizes the policy is an almost mechanical balance: The liberal and conservative appointees alternate with each other. Then, from 1989 to 1997, there's an unbroken run of conservative winners. That coincides, and perhaps not accidentally, with an accentuation of political conflict in Sweden itself. The chairman of the Nobel Prize committee was himself deeply involved in Swedish politics. He'd begun as a social democrat, he'd moved to the other side, and he was arguing very strongly that the social-democratic policy of workers' rights, unionization, and so on was inimical to prosperity. This might be considered as an indirect intervention in Swedish politics.
Venook: You point to Friedrich Hayek as one of the earlier conservative winners of the award. I found it interesting to note the huge jump in citations that Hayek received after winning his award in 1974. Could you elaborate on what effect that kind of jump can have?
Offer: The first thing to be said is that it's very unusual. We’ve counted and plotted, and even modeled, the citation trajectories of Nobel Prize winners. The ordinary citation trajectory is bell-shaped, and the Nobel Prize gets awarded around the highest point. That was not the case with Hayek. Hayek was not performing very well, and was actually at the bottom of his trajectory, at the point in 1974 when he gets the prize, and the prize gets him a very large boost in citations. As one of his biographers wrote, if Hayek had not received the prize, it is an open question what his reputation would be now. In some respects, this is the most significant of all the [economics] prizes because it saved Hayek from both a personal and a reputational predicament and made him respectable. And the rest is history.
Venook: What are the consequences of not just Hayek getting the prize, but of pro-market economists winning it at a disproportionate rate?
Offer: It's not so much between the right-wing and the left-wing economists as between economics and social democracy. This doctrine is not very deeply theorized, but it's very widely and, I would argue, very successfully applied. In most of the developed world, social-democratic principles govern the allocation of about 30 percent of GDP by government for the purposes of health, education, welfare, old-age pensions, things of that sort.
Where economics differs from social democracy is in one area. Economics starts with the notion of the self-seeking individual who is also self-sufficient, always has something to sell, and gets rewarded in terms of what they have to sell. In reality, people are not self-sufficient throughout their life cycle: They go through long periods of dependency as children, as students, when they are unhealthy, when they are disabled, when they are old. Standard economics deals with this problem by expecting people to buy security in financial markets—by saving, by buying insurance when necessary. The system of social democracy is simply for producers to support dependents directly through the government by progressive taxation.
The reason that social democracy persists despite the absence of a robust intellectual foundation is that it works, and it is more efficient than markets in this particular domain. You could say that economics is deeply theorized but dubious in practical terms, and social democracy is exactly the opposite. It is very practical, and perhaps for that reason it is not very well-theorized.
Venook: You argue that the Nobel Prize tends to favor economics over social democracy, which has led to economics being more esteemed in an academic sense than social democracy.
Offer: Yes. Social democracy is something that manual workers, trade unionists, were able to advocate and to think up and administer, whereas in economics only the most clever qualify. There is a contradiction there: On the one hand, I've been told only a practical economist can discuss this thing. On the other hand, economics does assume that every individual, every economic agent, is as fully equipped as economists to make decisions in a rational way.
Among the Nobel Prize winners, there's really only one straight advocate of social democracy, and that is Gunnar Myrdal, who is a Swede. There's another social democrat who is notorious for not having received the prize, and that is John Kenneth Galbraith, who on most criteria I think should have received the prize. Quite a few of the Nobel Prize recipients were inclined in terms of their values to support social democracy, but not in terms of their doctrines. So they suffered from a kind of cognitive dissonance: In general, the economics discipline, as indicated in surveys, is quite positive toward social-democratic norms. But the doctrines themselves do not leave much room for that.
Venook: You identify Galbraith and Rudolf Meidner as the two clearest examples of distinguished social-democratic thinkers who did not receive the Nobel Prize. Why did they get overlooked?
Offer: With regard to Galbraith, I actually discussed this with the long-standing chairman of the prize, Assar Lindbeck, and he said that he regarded Galbraith as a belletrist, a writer of essays. I actually beg to differ. Several literary economists, people who did not use equations, who did not use mathematics, have been awarded the prize. In terms of citations, many Nobel Prize-winning economists were much less cited than Galbraith. Galbraith wrote at least one classic, The Affluent Society; it's a book that holds its own, even today. I personally think he was simply blackballed.
Meidner's achievement was greater than Galbraith's in practical terms. He devised a model which was actually applied, very successfully, in Sweden. He was also a direct adversary of Lindbeck and his group, so I think it was very unlikely that this particular cabal, this very small group of economists who took it upon themselves to define what economics was, would give it to Meidner, although he was equally deserving.
There's another left-wing economist who was blackballed, and that's Joan Robinson. Only one woman has won the Nobel Prize in Economics, and she wasn't even an economist, and that's Elinor Ostrom. Well, there was a worthy candidate in the 1970s, and that's Joan Robinson. Businessweek thought she would get it, but she didn't, because I think at that time she was too left-wing for the prize.
Venook: In contrast to the people who were overlooked, you point to several winners who were controversial in their own right, particularly those who had a role in Augusto Pinochet's regime in Chile: Friedrich Hayek, Milton Friedman, Arnold Harberger, and James Buchanan. Could you go into the controversy there?
Offer: One of the functions of colonies is as testing grounds for ideas that are too radical to be applied at home. I think the American empire from the 1960s onward was used as a kind of testing ground for neoliberalism. Pinochet's Chile was particularly interesting in that respect: There was a group of economists who had been trained at the University of Chicago who had a ready-made plan for a radical marketization of the economy. It's not clear how important the practical advice given by these Nobel-level economists was for the administration of the regime, but it certainly gave it credibility.
So in effect, we have the global conflicts, the global issues, being played on this smaller Nobel stage. In the case of Friedman, this also took the form of demonstrations. Inside the hall where the ceremony was being given, someone made a protest. So this is one interface where real-world realities intervened, or interfered, in the orderly process of scientific recognition and anointment.
Venook: Your analysis goes up to 2005. In the years since, do you think that there's been any change in the trends in how the award is given and how it is perceived, or would you generally say that the patterns hold up to today?
Offer: I haven't seen a very large change. What I think has happened is that the reputation of economics has somewhat declined. I don't think economists are held in quite the same awe that they used to attract in the 1970s, 1980s, 1990s, largely because the doctrines have not been performing very well.
The other thing is that the practice of the committee is occasionally to award the prize to several people whose doctrines are inconsistent with each other. I think for the committee, the most important thing is to maintain the credibility of the prize, and in order to do that, they have to touch all bases. But by touching all bases, they demonstrate that economics does not hang together as one internally consistent doctrine.
Venook: You mentioned that there was a very high esteem for economics during the ‘70s, ‘80s, and ‘90s. You argue that the Nobel Prize actually played a role in making economics such a highly valued field during that time period.
Offer: If you look at this period, first we had a period of high inflation. The Chicago economists flagged high inflation as the problem. It was then beaten, not by the methods suggested by the economists of Chicago, in that their doctrine of monetarism was abandoned—to their credit, it was a testable, falsifiable doctrine, which was falsified and abandoned—and then we had two decades of the so-called Great Moderation, in which retail prices were stable and low, and asset prices rose all the time. Since there was a Nobel Prize in Economics, economists could take credit for this.
The thing about the Nobel Prize is that it conveys two messages. One is the message of reliable knowledge, of efficacy. That is what science is about. It's about justified knowledge. The other is that this knowledge is not accessible, that this is esoteric, this is not something that you and me would be able to understand. So it was easy for economists to take credit for these benign circumstances, and I think that in a way, the prize and the discipline enhanced each other.
Venook: You mentioned falsifiability. Could you go into a little bit more detail about how economics is or isn't falsifiable along similar lines to other sciences?
Offer: My criterion is more lenient, actually. All I ask for is that the doctrine should be confronted with reality. Economics in general does not perform very well on this criterion. If we think just of Nobel economics, about half of Nobel economists are pure theorists who do not even attempt to confront the theory with reality. Now, this would not wash in the other sciences, where even theoretical achievements have to receive some kind of empirical validation.