I’m still stunned and disappointed by the fact that the 2011 Nobel prize in economics goes to Thomas Sargent and Christopher Sims. I think this decision is detrimental to the reputation of the Nobel prize in Economics as well as bad for the discipline in a broader sense. As an influential economist told me confidentially last night at a drinks reception here in London: “This is completely ridiculous.”
The prize goes to contemporary macro – a field that is rightly blamed for paving the way to the biggest financial and economic crisis since the Great Depression. It is a price for a school of economics that generally assumes unfettered markets always perform smoothly and the financial system is so efficient that macro economists don’t have to bother looking at it.
Hence, there are no banks (and by definition: no banking crises) whatsoever in the mainstream macro models. There usually is one stable equilibrium, and every economic agent behaves perfectly rational and selfishly. Consumers as well as firms are building “rational expectations” about the future and rightly assume any future consequence of a government intervention. Additionally, mainstream macro economists quite often assume that all consumers and all companies are identical. All those assumptions make it much easier to solve the models. And all those assumptions are at odds with the world we live in.
Those models usually lead to the conclusion that fiscal and monetary policy can’t achieve a lot and that government interventions are doing more harm than good. The experience of the last for years teaches us otherwise. Without the ultra-aggressive monetary policy and the large fiscal stimulus the world economy would have fallen into a second Great Depression.
Mainstream macro economists devised elegant mathematical models and methods that are widely used in the profession. In a telephone interview, Tom Sargent said yesterday:
“We try to experiment in our models before we wreck the world”.
This is precisely the problem. They use models that were based on wrong assumptions and delivered wrong conclusion. (This criticism applys to Sargent more to Sims, who received the prize for an econometrical method for the analysis of economic time series.) Neoclassical macroeconomists like Sargent lead their discipline into an illusionary world and dangerous policy advice. (Some economists defend Sargent and argue that he always insisted that macro models should be empirically tested and that he did this. I think it says a lot about the state of macro that such an approach cannot be taken for granted.)
This branch of macro economics turned out to be utterly useless, as Willem Buiter argued back in 2009 in his wonderful piece entitled “The unfortunate uselessness of most ’state of the art’ academic monetary economics”. Buiter wrote:
“Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best.
Research tended to be motivated by the internal logic, intellectual sunk capital and aesthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck.”
The helpless answers Sargent and Sims gave on questions regarding the financial crisis were the latest evidence supporting this view. “There is no easy solution, we have to look at data”, Sims told the world. Sargent said in a telephone interview: “We are just bookish types that look at data and try to figure out what’s going on.”
We are in the fourth year of the most severe financial crisis since the Great Depression and this is all that two of the allegedly leading macroeconomists have to offer? My goddess, maybe I really should start to buy gold after all.
Without any question, all those economists made important contributions. However, economics as a discipline is much more diverse than the decisions made in Stockholm suggest. Take Muhammad Yunus, for example. He invented the concept of microcredits that are a very effective tool in the fight against poverty. However, it took the Nobel peace prize committee to acknowledge his work. What an embarrassment for the economists!
This years decision to give the prize to neoclassical macroeconomists is particularly bizarre. It is like honouring the engineer who designed the Titanic after the ship sunk.
Some interesting observations but the ensuing notes by blog readers show how difficult it is for the public to accept a reporter’s comments on an academia