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Photo: AP
Photo: AP

The Economics Nobel’s propensity to stir controversies

Grumbles over this year’s award are a bit of a surprise but several wins in the past have attracted flak

The announcement of the 2020 Nobel prize for Economics on 12 October aroused a surprising degree of controversy. Awarded to two mild-mannered and unknown (outside the academy) professors at Stanford University, Paul R. Milgrom and Robert B. Wilson, the controversy arose because the pair were awarded the prize for an apparently esoteric branch of microeconomics known as “auction theory".

Among mainstream economists, the first to be ticked off by the award was apparently Branko Milanovic, who sent out a tweet thread critical of the prize. Apart from the usual snark of critics who put “Nobel prize" in inverted commas—implying that it’s a bogus and real Nobel, not being one of the original awards—Milanovic’s substantive point was that the award should go to research dealing with big and important questions—wealth, poverty, inequality and so forth, of the type he deals with—and not to allegedly minor topics such as how to design an auction. As he wrote in the thread: “Economics is a social science. Its aim is to make us understand the world and make people’s lives (materially) richer. The work that should be singled out is the work that does that—in a big way."

In today’s social-media driven world, the reaction was equally swift. Two recent graduate students of the winning pair, now professors themselves at top universities, tweeted their own threads. Economists Mohammad Akbarpour and Shengwu Li argued persuasively that the apparently esoteric topic of auction design relates to some big questions of economics—of a type that Milanovic and other critics purport to care about. Going right back to Friedrich von Hayek, himself an early Economics Nobel laureate and doyen of the Austrian school of economics, Akbarpour and Li pointed to a central question that Hayek and other early pioneers of modern economics grappled with: How, exactly, does the (publicly observable) price system capture and convey (private) information through a market economy? And how do we know that this leads to an efficient allocation of resources?

While early pioneers of microeconomics, including Kenneth Arrow, Gerard Debreu, and Leonid Hurwicz—all Nobel laureates—showed that under certain conditions, a competitive market would achieve economic efficiency, it remained for later economists such as Milgrom and Wilson to show how a public auction could elicit private information and lead to a socially desirable outcome. Building on these insights, real world auctions, such as for broadband spectrum, have been designed in accordance with these theoretical principles. Contrary to what critics say, that’s pretty big, isn’t it?

This is not by any means the first time that the Economics Nobel prize has courted controversy.

The award to Paul Krugman in 2008, which bypassed a whole generation of international trade economists preceding him, was widely seen, fairly or not, as politically motivated. Awarded on the eve of the election of Barack Obama to the US presidency, Krugman was well known as a staunch Democrat and critic of the incumbent president, George W. Bush.

Likewise, the 1998 Economics prize awarded to Amartya Sen—so far, the only Indian to have won (last year’s co-winner, Abhijit Banerjee, was a US citizen when he won)—was widely seen, rightly or wrongly, as “atonement" for the previous year’s award to economists Robert C. Merton and Myron S. Scholes for their work on financial derivatives, closely linked to the Long Term Capital Management debacle on Wall Street that occurred as a fallout of the 1997 Asian financial crisis. Sen, whose work focused on poverty and deprivation, seemed a more wholesome choice the year after.

Sometimes, though, the Nobel committee does get its timing right.

My own great guru, Robert Mundell, won the Economics Nobel prize in 1999, the very year that the European common currency came into being (on 1 January).

Given that Mundell won, in part, for his theorization about an “optimum currency area" and as the architect of the first blueprint for a European currency going back to the 1970s, leading to his being known as the euro’s “godfather", the timing seemed eminently just. And everyone agreed that the prize was richly deserved—especially since Mundell won solo, rather than having to share it.

Meanwhile, in the early years of the prize, which was first awarded in 1969, the Nobel committee was playing catch-up, awarding it to obviously deserving winners, titans of the field such as Kenneth Arrow and Paul Samuelson, who, together, can be credited for codifying modern mathematical economic theory. Another early winner, Sir John Hicks, who shared the prize with Arrow in 1972, was a legend for codifying the Keynesian theory in the “IS/LM" (investment-savings and liquidity preference-money supply) diagrammatical analysis that we teach to this day.

Sometimes, the Nobel committee combines winners in a given year with a keen sense of irony. Thus, in 1974, the year that arch free-marketeer and opponent of big government Hayek won, he shared the prize with Swedish economist Gunnar Myrdal, an acolyte of the welfare state and of extensive government involvement in the economy.

What is without doubt is that the Nobel prize remains the gold standard for academic work in economics. That is not going to change.

Vivek Dehejia is a Mint columnist

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