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Intellectual Capital: Forty Years of the Nobel Prize in Economics
Published by EH.Net (March 2011)
Thomas Karier, Intellectual Capital: Forty Years of the Nobel Prize in Economics. New York: Cambridge University Press, 2010. xiii + 351 pp. $35 (hardback), ISBN: 978-0-521-76326-4.
Reviewed for EH.Net by Donald E. Frey, Department of Economics, Wake Forest University.
Thomas Karier, an academic economist, has written a very readable history of the first forty years of the Nobel Prize in economics, succinctly summarizing the winning work and placing the ideas in a larger context. He also tells a little about the lives of the winners. Some are people one would love to have met and others -- well, maybe not. Rather than proceeding chronologically, the book classifies the winners according to the school of thought they best represent, thus providing a synopsis of economic thought during much of the twentieth century.
But Karier does not limit himself simply to summarizing prize-winning work. He also looks at the concept and role of the prize itself. Although the prize claims to recognize those economists “who have during the previous year rendered the greatest service to mankind,” Karier questions whether many winners have. He wonders whether prize-winning mathematical theorems, which he believes are often divorced from economic reality, have rendered much service to mankind at all. But providing little service is not the same as being without influence. Karier notes the influence, for good and ill, that certain prize-certified theories have had on policy -- e.g., types of monetary policy, auctions of broadcast bands, or deregulation of financial markets.
When ideas rooted in orthodoxy, but barely in reality, gain influence, the results are likely to be for the worst. Karier notes how this was starkly apparent in the near-collapse of the hedge fund Long Term Capital Management, whose board included Nobel winners in the field of finance. Indeed, Karier makes the case (and quotes prominent economists to the effect) that financial theorems based on assuming efficient markets are bound to be misleading in practice -- sometimes with disastrous results. In general, Karier is critical of work starting with assumptions of perfect markets and perfect “rationality.” And, he is critical of the role of the Nobel Prize in giving extra credibility to policy prescriptions based on such theory, for prescriptions such as market deregulation have had bad results (e.g., the deregulated California electric market lent itself to manipulation, and unregulated/deregulated Wall Street barely avoided complete collapse in 2008). Karier names non-winners of the prize whose work would have alerted everyone to the likelihood of these kinds of outcomes.
The economics Nobel Prize has often failed to honor service to mankind because it has another, inconsistent goal: it is a prize honoring economic sciences. Karier makes that case the use of the prize to bolster economics’ claim to being a science has undercut the goal of recognizing service to humanity. Karier also notes that rewarding those who have made economics appear to be a science has diminished the significance of a prize as recognition for economics as such. More than one winner has had only a tenuous connection to economics.
Karier raises further questions about the prize in economics, or at least its selection process, when he examines those prominent economists who were not chosen. In the first forty years, no woman was awarded the prize (one was in the following year). Karier suggests that rationalizations as to why Joan Robinson was excluded are questionable. Similarly, he finds it difficult to understand the exclusion of the non-neoclassical giant John Kenneth Galbraith. Finally, he asks why the economist-winner of the Nobel Peace Prize, Mohammed Yunus, founder of micro-credit, did not receive the economics prize. He paraphrases the answer that Yunus himself provided in his Peace Prize lecture: traditional economics “paints a one-dimensional picture of human beings that ignores the ‘political, emotional, social, spiritual, environmental dimensions of their lives’” (p. 302). In their mission to paint economics as science, the economics-prize committee has failed to understand that “economics is about human nature.”
Karier’s favorites are the few winners of the economics prize who have 1) invented tools to measure the workings of the real economy (e.g., national income and product accounts or input-output tables), 2) engaged in true experimental, behavioral, or institutional research, or 3) have defined humanity more fully than in the narrow neoclassical definition. Karier contrasts the rich understanding of humanity of prize-winner Amartya Sen with the hard-line neoclassical position expressed in the 1930s by Lionel Robbins: “every mind is inscrutable to every other mind and no common denominator of feelings is possible.” Robbins’ statement starkly reveals the impoverished view of humanity embedded in such neoclassical doctrines as the “no interpersonal comparisons of utility” doctrine. This is the doctrine that assured the failure of “welfare economics” to reach significant conclusions beyond the desirability of “efficiency.” Further, this view aligns neoclassical thought against much moral thought (i.e., “do unto others” presumes a “common denominator” among humans). Karier recognizes that Sen, among prize winners, speaks for many in directly challenging the highly biased view of humanity embedded in neoclassical economics. (It should also be noted that some economics, say Keynesian macroeconomics, does not rely on such objectionable neoclassical “foundations” -- but then is attacked by the neoclassical “orthodox” for that very reason!)
Thomas Karier has provided a double service with this book. First, he has provided a very useful and readable summary of the work and lives of major prize-winner economists, a reference that will prove very helpful to economists who are non-experts in the fields recognized by the prize. His exposition reflects his own view that economics does not require dense mathematics to makes its points. But as important, he has subjected the goals and roles of the Nobel Prize in economics to critical analysis, something that he has convinced me is needed. He ends with a positive note: in the last several years, the prize has begun to recognize behavioral, psychological and institutional work in economics. Those who seek a larger, more eclectic and more fully human definition of economics will find this book refreshing. Others, at a minimum, will find this book a very useful reference and guide.
Donald E. Frey is author of America’s Economic Moralists: A History of Rival Ethics and Economics (SUNY Press, 2009).
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