Market ideology behind the economics prize?

'The Nobel Factor' fails in its efforts to show how the economics prize contributed to the larger ideological turn towards free-markets during these years

The award of the Nobel Prize in economics to Oliver Hart and Bengt Holmström has been widely welcomed. Numerous articles have been written in the past week explaining their work in contract theory. Some of these also remind us that the economics prize isn’t really a “Nobel Prize", but “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel". The economics prize was given by the Swedish central bank in 1969. Alfred Nobel himself was unlikely to have set up a prize for economics. The extraordinarily successful businessman confessed that he “hated business with all (his) heart" and regarded himself as a social democrat. Why then was an economics prize instituted almost 70 years after the other prizes had begun to be awarded?

This question is tackled by Avner Offer and Gabriel Söderberg in a new book, The Nobel Factor: The Prize In Economics, Social Democracy And The Market Turn. Offer is a highly regarded economic historian and the book is typically fizzing with ideas. The economics prize, the book argues, was the outcome of differences between Swedish social democratic and business elites. The latter regarded the prize as part of a campaign to promote market-oriented economic policy. By conferring the aura of a “science" on market-liberalism, they sought to overturn the intellectual and political consensus behind social democracy. This fit well with the wider ideological turn towards markets.

The most interesting part of the book is the account of the Swedish context. After World War II, the ruling Social Democratic Party accorded the highest priority to providing housing and maintaining full employment. This policy was resisted by the central bank, which sought to privilege price stability. Matters came to a head in July 1957 when the governor of the central bank, Per Åsbrink, increased the interest rate by 100 basis points without consulting the government. The governor was harshly chastened and leashed in the kennel.

As part of his efforts to claw back autonomy, Åsbrink—on the advice of leading businessmen and pro-market economists—offered to establish the prize on the occasion of the bank’s tercentenary in 1968. Assar Lindbeck, the director of Stockholm University Institute of International Economic Studies and an early defector from the social democratic consensus, dominated the economics prize committee during its first 25 years. During his tenure as chair of the committee (1980-94), the economics prize came to fulfil the mandate envisioned by its pro-market backers.

Offer and Söderberg argue that while the prize committee superficially maintained a balance between market-liberals and social democrats, it actually favoured the former. They use several indices of citation to argue that social democratic ideas had much greater traction within the profession of economics and that the committee’s alleged pluralism effectively elevated market-liberal ideas to an unwarranted eminence.

The problem with such an exercise is, of course, in coding some economists as “market-liberal" or “social democratic"—as leaning to the right or left. Policy preferences or political leanings cannot automatically be deduced from methodological approaches. For instance, Thomas Schelling is slotted by them as left-leaning because he is a self-identified Democrat and because his work shows that individual choice does not converge on equilibrium—an article of faith for market-liberals. But Schelling also played an important role in conceptualizing and rationalizing the Lyndon Johnson administration’s bombing of North Vietnam as an exercise in tacit bargaining. Not exactly the kind of policy you would expect left-leaning economists to endorse.

Take another example. Offer and Söderberg write that the 1993 laureate, Robert Fogel, was “a communist youth organizer, but ended up as a Chicago economist". They also note that Fogel’s work on American slavery was not welcomed by left-leaning economists and that subsequently he had supported privatizing social security. So they slot him on the right. Now, Fogel’s work on slavery was controversial because he claimed to have shown that the Southern plantation economy was an economically efficient capitalist system. Critics assumed that this was a normative judgement on Southern slavery. But Fogel’s point was subtler. He believed that such a functioning system could only be overthrown by state action of a very different kind—the war waged by the North. As with all good scholarships, Fogel’s work is not amenable to easy ideological stereotyping. The authors perfunctorily nod at this problem, but do not confront its implications.

The book also fails to show how the economics prize contributed to the larger ideological turn towards free-markets during these years. Any such attempt will have to take seriously the massive shock administered to the post-war Keynesian intellectual and policy edifices from the mid-1970s. Their inability to cope with the challenges of that decade was crucial to their subsequent displacement. Without squarely accounting for this global context, Offer and Söderberg’s argument leaves behind a whiff of conspiracy theory.

Had the authors spent more time refining their arguments, they might have written a much better book. Their digressive style also cries out for a sterner editorial hand. The book appears to have been fast-tracked into publication ahead of this year’s prize announcement. Alas, even social democratic historians seem unable to resist market forces.

Srinath Raghavan is senior fellow at the Centre for Policy Research, New Delhi.

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