Thursday, October 29, 2009


Talk to University of Sydney Department of Government and International Relations
October 29, 2009

Economists often suspect that Australia’s quite extensive quarantine restrictions - against apples from New Zealand, for instance - constitute a form of disguised protection. But when Alexander Downer was Minister for Foreign Affairs he was having none of that. ‘I want to assure you,’ he once said, ‘that our quarantine laws are based strictly on science - [pause] - political science.’

I wanted to say a few words about economics but, since this is a political science function, I thought I should compromise and speak about the politics of economics. It’s not hard to meld the two disciplines because, as many of you would have heard a fortnight ago, this year’s Nobel Prize in Economics was won for the first time by a woman, Elinor Ostrom, who isn’t even an economist, but a political scientist. (Her win caused Michael Jackson some chagrin, because she’d once offered him a job, which he’d turned down.) The person Ostrom shared the prize with, Oliver Williamson, is regarded as an economist, although the person who drew his work to my attention was a sociologist, and it certainly reads as if it was written by a sociologist.

Before we go any further - and in case there are any people from the hard sciences who’ve strayed into the room - I should confess that the economics Nobel isn’t a real Nobel. It wasn’t provided for in Alfred Nobel’s will - I’ve heard he didn’t have much regard for economists, though I’m sure that can’t be true - but was established just 40 years ago under the sponsorship of the Swedish central bank, and styles itself as the Swedish Riksbank Prize in Economic Sciences in memory of Alfred Nobel. That reference to ‘economic sciences’ is sus, for a start. I’m not convinced economics is a science, let alone more than one. But it certainly implies that the sponsors saw economics as a broad church.

This year’s awards - to a political scientist and an economic sociologist - come at a critical time for economics - in both senses of the word. In the wake of the global financial crisis, economics has come under considerable criticism for its failure to foresee that trouble was brewing. There’s been a lot of soul-searching within the profession, some of it quite acrimonious. In America they’ve been arguing on blogs; in Britain they’ve been sending petitions to the Queen.

A lot of the blame is going to the unrealistic assumptions on which conventional economics is based - as epitomised by the ‘efficient-markets hypothesis’ - and on the effort economists have made over the past 40 years to make their discipline more scientifically rigorous by making it more mathematical. The two criticisms are linked because the unrealistic assumptions are needed to make the equations work. In America, last year’s Nobel Laureate, Paul Krugman, concluded that ‘the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth’. In Britain, the eminent petitioners agreed with what they said were the complaints of three Nobel laureates that ‘in recent years economics has turned virtually into a branch of applied mathematics, and has been become detached from real world institutions and events’.

The annual awarding of the Nobel prize is a bit like the Melbourne Cup for economists. It generates considerable excitement among younger academic economists and, no doubt, quite a lot of covetousness among older economists - especially in America, which has taken out two-thirds of the awards so far. There’s a lot of betting on who’ll win. This year in the betting at Ladbrokes, the odds-on favourite was the same as last year: someone from the University of Chicago, Eugene Fama.

Really? Really? The man who dreamt up the efficient-markets hypothesis was the favourite to win the Nobel in the year after the GFC? There could hardly be a better illustration of the insularity of the economics profession - truly, they don’t live in our world. Fortunately, those anonymous souls who nominate and vote on the prize - including, I suspect, a disproportionate number of Swedes - are a little more politically attune.

And so, in the aftermath of the GFC, they gave the prize to a female political scientist and an economic sociologist. That’s the first noteworthy feature of the award: it wasn’t even given to real economists. Second shock: neither Laureate made a ‘formal’ contribution. Their contributions lacked the two qualities academic economists admire most: ‘elegance’ and ‘parsimony’. Meaning? They wrote their papers in words, not equations. Wow. Third shock: neither Laureate’s work fits the conventional right/left, libertarian versus interventionist dichotomy. Rather, they drew conclusions neither side would be particularly comfortable with.

Fourth shock: Elinor Ostrom’s work in particular is essentially empirical. Rather than theorising about the world on the basis of mathematically convenient assumptions, she’s spent her career doing field studies - ranging from irrigation systems in Nepal and grazing on the grasslands of Asia to lobster fisherpersons in Maine - to disprove a favourite theory of economists about the alleged ‘tragedy of the commons’. Although Ostrom’s contribution clearly concerned an economic issue, the fact she is a political scientist means few economists have heard of her - even though her 7000 citations on Google Scholar exceed the well-known Williamson’s by 40 per cent.

My daughter told me last night that, according to her psychology lecturer at this august institution, economists are psychologists dealing with bigger numbers. I would have said economists were psychologists who hadn’t read the textbook. Economics is amazingly inward looking. Economists know little about other social - or physical - sciences, bar mathematics. In particular, they know far less psychology, sociology and ecology than they should.

It seems clear to me the Nobel selectors were sending a pretty clear message to economists, about the need for them to widen their horizons, become more multidisciplinary and more empirical. Can the Nobel Prize reform economics? Well, economists believe in incentives, and it’s a pretty powerful incentive. If it doesn’t work, it won’t be surprising to see the prize going more often to those psychologists and political scientists who do the economists’ job for them.