The Nobel Prize in Economics was not part of the Nobel Prize, founded by Alfred Bernhard Nobel in 1901, to award those “who shall have conferred the greatest benefit on mankind”. This prize was initiated by Swedish Central Bank in 1969 to commemorate its 300th anniversary. It was initially restricted to economic sciences but was later expanded to include all researchers in sociology, political science and psychology from 1994. Daniel Kahneman was the first Professor in psychology to be awarded a Nobel Prize in Economic sciences in the year 2002. The award has predominantly gone to econometricians and market analysts, who try to grapple with the trilemma of our times: Growth, Human Development and Sustainable Development.
This year’s Nobel Prize to William Nordhaus and Paul Romer could not have more apt and timely, as Nordhaus has been addressing consistently on climate change, while Romer has been underscoring the importance of research and innovation in fostering long term growth.
Nordhaus strongly believes that the public policies “are lagging very very far, miles behind the science and what needs to be done”. The key insight of his work is to put a ‘price on carbon in order to hold back climate change’. The UN panel has also called upon large changes in public policy to limit catastrophic consequences of rising temperature. Nordhaus strongly believes that the government must regulate ‘polluters to pay for damage to the environment. There is basically no alternative to market solution that government policy can play’. It is unfortunate that the US President Mr. Donald Trump takes such an ostrich like approach on climate control issues.
Romer is the pioneer of long term growth economics in 1980s. He along with George Lucas believe that economics should be concerned about long term growth rather than be constrained by analyzing business cycles and monetary & fiscal policies. He was the first to incorporate R&D theories into growth by asserting that “the cost of investing a new product declines, as society accumulates more ideas”. He was convinced that a revival of R&D activities with suitable government support, through reasonable taxation regime, stable law and order, provision of proper infrastructural services, protection of IPR and regulation of trade and market are the keys to foster human productivity and long term growth. The phenomenon growth of developed countries can be linked to their R&D investments. USA increased it from 2.5% of GDP in 1970 to around 3% by 1990, contributing to 70% of the growth that America witnessed for almost 50 years. Japan increased its R&D investment from 1.7% (1970) to 2.8% (1990). Similar has been the case with Germany and France who have almost doubled their investment in R&D during (1970 to 1990). Romer strongly believes that “humans are capable of amazing accomplishment, if we set our minds to it”. One fundamental reason why India has not been able to achieve the high productivity trajectory of the developed countries, has been their low investment (0.8%) of GDP to research and innovation.
The first winner of the Nobel Prize was Jan Tinbergen, who is considered as the founding father of econometrics. He was the first to evolve the concept of ‘Tinbergen Rule’, where a single target should be handled by a single instrument. For instance, he was of the view that for controlling inflation, repo rate should be the single instrument. ‘Inflation targeting’ through control of repo rates by most countries, is a fundamental bequest from Tinbergen.
A careful analysis of the award for economic sciences during the last 49 years would reveal that it has mostly gone to advocates of ‘free market’ and analysts of the financial market. Amartya Sen in 1998, Joseph Stiglitz in 2001 and Angus Deaton in 2015 are the major exceptions to this popular trend. Prof. Amartya Sen revived welfare economics and emphasized the role of bolstering human capital as a major parameter of economic progress. UNDP brings out the global trends of these development indicators through HDI since 1990. Joseph Stiglitz disagrees with the Smithosian philosophy that “market forces, as if by an invisible hand, will promote welfare of all”. As the global economic crisis of 2007-08 demonstrated, the market forces sub-served the interests of a unscrupulous few and unleashed high unemployment and fiscal instability. He also flags the perils of globalization when there is absence of proper regulatory mechanism. Angus Deaton analyzed the nature of poverty and consumption behavior that afflict the underdeveloped countries like India.
Peter Nobel, great-great-nephew of Alfred Bernhard Nobel, was very critical about institution of Nobel Prize in economics. To quote him “my grandfather despises people who cared more about profit than about society’s wellbeing”. He called the award “a PR coup by economists to improve their reputation”. Gunnar Myrdal who received the prize in 1974 was equally acerbic about his co-winner, Friedrich von Hayek who is considered a reactionary and an unabashed supporter of unregulated capitalism. There was equal uproar when Milton Friedman was awarded the Nobel Prize in 1976, as he had supported the military dictatorship of Augusto Pinochet in Chile. His six day trip to Chile was funded by the dictator. Ironically Romer, who was nominated as the chief economist of World Bank, stepped down as he was convinced that Chile’s economic policy by the World Bank was influenced by political consideration. Award to Nash was also criticized as he suffered from mental illness and considered anti-Semitic.
A few Nobel laureates have made pioneering contribution to the society. Simon Kuznets is the father national accounting and evolved the ‘inverted U curve theory’ where he demonstrated that rising income brings down inequality. Wassily Leontief brought up an input-output model which is relevant for macro planning, W. Arthur Lewis evolved the concept of dual economy, where developing economies can benefit by shifting surplus population from the informal to formal sector. Robert Solow has made a wonderful contribution through his ‘Total Factor Productivity theory’, which flags the importance of productivity of labour and capital as the major variables for growth. Lucas underline the importance of ‘rational expectation’ in macroeconomic equilibrium.
There have been notable omissions in awarding Nobel Prize in Economics to deserving economists. Most prominent among them is Joan Robinson, who was a very firm votary of the underdog. The committee should have also awarded Thomas Piketty for his seminal contribution to finding pathways for reducing acute income inequality.
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