Some thoughts on the Nobel Prize in economics
Last week the Royal Swedish Academy of Sciences awarded its 2007 Nobel Prize in economics to three American economists. The choice demonstrates how much the emphasis of academic research has changed since Paul Samuelson, the oldest living recipient of the economics prize, received his award in 1970.
The new laureates – Leonid Hurwicz, a professor emeritus at the University of Minnesota; Roger Myerson of the University of Chicago; and Eric Maskin at the Institute for Advanced Study in Princeton, N.J. – won "for having laid the foundations of mechanism design theory." It deals with the interactions among individuals, markets, and institutions.
Dr. Samuelson, of the Massachusetts Institute of Technology, Cambridge, was honored for "the scientific work through which he has developed static and dynamic economic theory." In other words, his heavily mathematical work concerned the national economy.
Samuelson calls himself the "last generalist" in economics. Many of his fellow laureates of recent years, including the latest trio, deal with more specific issues, often ones that border such disciplines as political science, finance and derivatives, nonmarket behavior, and so on.
Professor Maskin, for instance, co-wrote a paper, "On the Robustness of Majority Rule and Rule by Consensus." It asks how a nation should choose a president and how a legislature should select bills to enact, and concludes that majority rule "works well." The paper includes a look at the George W. Bush-Al Gore election of 2000.
Robert Solow, another MIT professor who won a Nobel in economics in 1987, says mechanism design theory involves how decisions are made by a group too small to form a standard market. (In a standard market, competition and the law of supply and demand often govern.) The goal is to design a protocol, rules of the game, and institutions that enable the players to make decisions reflecting their self-interest but also produce outcomes that benefit society.
It is the "visible hand" helping determine good, efficient results, rather than the "invisible hand" of self-interest and competition written about by Adam Smith, the 18th-century Scottish professor who is regarded as the father of capitalism, says Professor Solow.
The goal is to design a system that aligns private incentives with public goals. It has been useful in helping provide the design of government auctions for radio and TV spectra and for gas and oil leases in offshore waters.
Economics, says Samuelson in a telephone interview, "is, and remains, an inexact science." This hints at a frequent criticism of the economics prize: that it's not sufficiently "scientific" or tied to "human advancement" enough to deserve the prestige of a Nobel Prize. The original Nobels were first granted in 1901. The Nobel Prize for economics was added in 1969.
There's been another change since 1970: Samuelson didn't have to pay income tax on his $72,000 award. But the United States tax code was altered: Solow paid taxes. The three latest recipients, sharing about $1.56 million, will pay taxes, too.
Though he was never poor, Samuelson lived through the Depression and the economic boom of World War II. He was very interested in what makes an economy tick and in the federal government's economic policy. He still is.
Speaking of the Bush administration's efforts to end what it calls the "death tax," Samuelson said: "It will be awful if I pay no estate tax at all. That would be a formula for stratifying society." Much bothered by the growing inequality of income in the nation, he calls the Bush tax cuts "extremely bad policy," providing "giveaways" for the wealthy.
Having "chosen" prosperous parents, invested well, and authored a highly popular college economics textbook, Samuelson is far from poor. "Money never had any influence on my career or my life," he says.
Samuelson gave some advice to Sweden's central bank when it was considering launching the economics prize, including a list of potential recipients. But he has not joined the group of economists who nominate potential recipients. The Nobel Academy makes the final choices. Both Samuelson and Solow agree that the Academy's selections over the decades have been appropriate.
In regard to fiscal and monetary policy, Samuelson regards himself as a "centrist … an eclectic" who recognizes the importance of the money supply but does not regard it as a dominant factor in the twists of the economy. (That is a polite poke at Milton Friedman, another Nobel laureate, who died last year.)
Americans dominate the Nobel economists list – 58 out of 95. Some of these laureates, though, were born and trained in other countries, including Hurwicz this year. Britain is next with seven prizes, then Norway (three), Sweden (two), and France, Germany, India, Israel, the Netherlands, and the Soviet Union (one each). University faculties receiving the most awards include Chicago (eight), Harvard and Cambridge (four each). MIT, Princeton, Stanford, and the University of California, Berkeley, have three each.
