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Noble_Prize_Economics_at_First_38_years2

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Noble_Prize_Economics_at_First_38_years2

    The Sveriges Riksbank Prize in

    Economic Sciences in Memory of Alfred Nobel 1969-2007

    by Assar Lindbeck错误?未指定书签。*

    18 April 1999 (updated in December 2007)

    Introduction

    In conjunction with its tercentenary celebrations in 1968, Sveriges Riksbank (the central bank of Sweden) instituted a new award, "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" on the basis of an economic commitment by the bank in perpetuity. The award is given by the Royal Swedish Academy of Sciences according to the same principles as for the Nobel Prizes that have been awarded since 1901.

    The procedures for selecting the Laureates are also the same. Each year the Academy receives some 200-300 nominations, usually covering a little more than one hundred nominees. (Unsolicited suggestions from persons who have not been asked to submit nominations are not considered.) The Economics Prize Selection Committee of the Academy (with five to eight members) commis?sions expert studies

    of the most prominent candidates, sometimes by Swedish experts but usually by foreigners. The Prize Committee presents its award proposal to the Social Science Class of the Academy (Class IX) in the form of a report, with an extensive survey of the main candidates that are considered for a Prize. The report motivates the proposal and includes all the solicited expert studies. On the basis of this material the class suggests a Laureate (or a shared Prize between two or, at most, three Laureates) regularly following the com?mittee's proposal. Finally the

    entire Academy meets to take the final award decision, usually in October. What criteria have guided the awards so far? And what have been the main problems when selecting the Laureates?

    It is useful to start a discussion of these issues with a rough classification of the various types of economics prize awards given so far. It should be kept in mind, however, that all such classifications are rather arbitrary since the multidimen?sional nature of scientific contributions makes it difficult in avoid overlaps.

    A Classification of Prizes for the First 38 years

    General Equilibrium Theory

    错误?未指定书签。Paul Samuelson (1970) for having "developed static and

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    dynamic economic theory;"

    Obvious examples of this type of award are the Prizes to 错误?未指定书签。

    Paul Samuelson (1970) for having "developed static and dynamic economic theory;" to 错误?未指定书签。Kenneth Arrow and John Hicks (1972) for "their pioneering contributions to general economic equilibrium theory and welfare theory;" to

    误?未指定书签。Gerard Debreu (1983) for "his rigorous reformulation of the theory of general equilibrium;" and to 错误?未指定书签。Maurice Allais (1988) "for his

    pioneering contributions to the theory of markets and efficient utilization of resources." (See the 错误?未指定书签。table from a link at the end of the article

    for an attempt to classify the awards into various fields of research.) Contributions in this category have dealt largely with the analytical structures of theoretical economic models, often highlighting the formal similarity of these structures, and clarifying the conditions for consistency, equilibrium, stability and efficiency of the economic system. Often, these contributions also have included important comparative static experiments, i.e., analyses of how equilibrium positions change in response to changes in various exogenous factors (parameters).

    It is largely due to the above-mentioned theorists that general equilibrium theory has become the basic approach in theoretical economic analysis. For instance, Hicks formulated conditions for multimarket stability, and extended the applicability of the static method of analysis to several periods. He also initiated rigorous dynamic analysis of capital accumulation. Because it was deeply anchored in microeconomic theories of the behavior of individual consumers and firms, the models developed by Hicks offered far better ways to study the consequences of changes in various parameters than did earlier general equilibrium models (such as Léon Walras' general equilibrium system of equations). Hicks also presented a celebrated aggregate general equilibrium model with four markets - commodities, labor, credit and money - the so-called IS-LM model. Samuelson's work was not only a continuation of the contributions by Hicks; it also represented a discontinuity, i.e., a break-through, in terms of analytical sophistication. This is recognized in the Prize citation, which declares that Samuelson "actively contributed to raising the level of analysis in economic science". It is hardly an exaggeration to say that he single-handedly rewrote considerable parts of central economic theory: microeconomic theory, static and dynamic, partial and general equilibrium theory, as well as welfare-economics. By extracting interesting inferences from simple mathematically formulated models, exploiting effectively the second-order conditions of maximization procedures, he derived results which still today rank among the classical theorems of economics.

    Arrow's and Debreu's main contributions to general equilibrium theory were to achieve greater generality by applying more powerful mathematical methods, such as the theory of convex sets. The generality allowed them to define the concept of a good so broadly that the same theory may be used not only in static equilibrium

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    analysis but also in analysis of the spatial distribution of production and consumption activities, intertemporal analysis and the analysis of decision-making under uncertainty. Arrow also highlighted the difficulties of deriving social welfare functions from individual preferences Arrow's so

    called "impossibility theorem".

    Maurice Allais' contributions, made largely in the 1940s, have great similarities both with Paul Samuelson's (contemporaneous) work and Arrow's and Debreu's (later) contributions. A special feature of Allais' work is that he describes the economy's path to equilibrium as a process by which competition removes all "surpluses" in firms. Allais' analysis also covers the case where returns to scale in production give rise to natural monopolies. His contributions thereby laid the foundation for a school of Post-War French economists who analyzed the con?ditions for an efficient use of resources in large public monopolies (such as Electricité de France and SNCF, the state railway system,).

    Allais also antici?pated parts of the modern theory of economic growth.

    Macroeconomics

    Numerous prices has been given to macroeconomics, i.e., that branch of economic analysis that explains the behavior of the national economy as a whole in terms of a number of broad aggregates, such as private consumption, investment, exports, imports, government spending of goods and services, etc. Some of the awarded contributions in this field concern sectors ("submodels") of national economies, while others deal with an entire national economy.

    An award in macroeconomics that refers both to special sectors and to the entire national economy is the 1976 Prize to 错误?未指定书签。Milton Friedman. The Prize

    citation referred to his contributions to "consumption analysis, monetary history and theory." Milton Friedman's book A Theory of the Consumption Function in 1957 is a successful attempt to combine formal theory and its empirical applica?tion for a specific sector of the economy. His extensive empirical study of the monetary history of the United States (together with Anna Schwartz) may be regarded as an example of rather "pure" empirical research, even though the study clearly was based on a theoretical framework emphasizing a monetary interpretation of macroeconomic fluctuations.

    错误?未指定书签。Franco Modigliani (awarded in 1985) developed two important building blocks in macroeconomic models, namely submodels of private consumption and the financial sector. In particular, in his life-cycle theory of saving Modigliani studied the consequences for household saving of changes in demography and economic growth. Together with 错误?未指定书签。Merton Miller he also laid

    the foundation for the field "corporate finance". The Modigliani-Miller theorem states the condi?tions under which the value of a firm in the stock market is influenced (or not influenced) by the dividend policy of the firm, and the way the firm finances its investment, e.g., via equity capital or borrowing.

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    The Prize to 错误?未指定书签。James Tobin (1981) is another example of an award for theoretical contributions concerning specific sectors of a national economy - the award being given for his analysis of "financial markets and their relation to expendi?ture decisions, employment, production and prices." Tobin's way of modeling interactions between financial and real sectors quickly became an integrated part of macroeconomic models for national economies, with an important role played by the relation between the market value of a capital asset and its reproduction costs the so-called "Tobin's q". Adding the stock of real assets - land, buildings, inventories and claims on raw materials - Tobin's portfolio model also becomes the natural analytical tool with which to analyze direct effects on product prices of changes in the supply of money.

    The shared Prize to 错误?未指定书签。James Meade and Bertil Ohlin (1977) for

    their contribution to "the theory of international trade and international capital movement" is another example of a contribution concerning a specific sector of a national economy: the sector of foreign transactions. In the case of Ohlin, the award referred to his development of a theory of international and interregional trade, designed to explain both the causes and the consequences of trade known as the Heckscher-Ohlin model. Ohlin showed that the trade patterns of individual countries depend on their proportions of available factors of production (capital and labor), and that international trade tends to equalize the returns to these factors among countries. James Meade analyzed trade policy in a world with various market distortions, hence anticipating the theory of "second best" allocations of resources. He was also a pioneer in the field the theory of open-economy macroeconomics. Of particular importance was Meade's analysis of the relation between internal and external balance, and the relation between targets and instruments of economic policy.

    However, the foundations for today's theory of open-economy macroeconomics were constructed by 错误?未指定书签。Robert Mundell, the so-called Mundell-Fleming

    model. We may say that Mundell introduced foreign trade and capital movements into Hick's IS-LM model for a closed economy. He showed that the effects of monetary and fiscal policy hinge crucially on the degree of international capital mobility. He also demonstrated the far-reaching importance of the exchange rate regime: under a floating exchange rate, monetary policy becomes powerful and fiscal policy tends to become rather powerless, whereas the opposite is true under a fixed exchange rate. The analysis was inspired by David Hume's classic mechanism of international price adjustment focusing on monetary factors and changes in stock variables. Mundell is also pioneer in the analysis of optimum currency areas, which deals with the advantages and disadvantages for countries of relinquishing their monetary sovereignty in favor of a common currency.

    错误?未指定书签。Lawrence Klein (awarded in 1980) also made important

    contributions to macro?economic research in this case for entire national

    economies and even the interaction among several national economies. The Prize citation emphasized "the creation of econometric models and their application

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    to the analysis of economic fluctuations and economic policies." One of Klein's main achieve?ments was to analyze the effects of economic policies by way of statistical model simulation. He also made important contributions in developing fore?casting techniques. His analysis originally ran in the framework of

    type macro-theories, but his models tended to become more eclectic over Keynesian-

    time. They also became more and more detailed, ultimately covering more than one hundred estimated equations.

    错误?未指定书签。Robert Lucas, awarded the Prize in 1995, has also furthered macroeconomic model building in a fundamental way. In particular, he has emphasized the role of expectations in macroeconomic analysis. He is particularly renowned for developing the consequences of "rational expectations" among economic agents, according to which these exploit all available information and do not make systematic expectational mistakes. Lucas also analyzed the consequences for the macroeconomy of changes in the "economic policy regime", i.e., the way government and central bank policies respond to changes in the economy. In particular, he has shown how conventionally statistically estimated macro?economic behavior functions for the private sector may become unreliable after a change in the policy regime - the so-called "Lucas Critique" of traditional macroeconometric estimations. He has also suggested ways of avoiding this problem.

    While the awards to macroeconomics discussed above referred to contributions concerning short-term macroeconomic fluctuations, 错误?未指定书签。Robert Solow

    was rewarded (in 1987) for his contributions to the theory of long-term macro?economic growth. His main contribution was to build a mathematical model (in the form of a simple differential equation) describing how the process of capital accumulation generates rising productivity. The capital intensity of production the volume of capital per worker - is determined by the prices of capital and labor. Due to diminishing return to capital, the economy in this model will in the long run approach a situation where labor-productivity growth is driven only by technological progress. Solow also developed a model of economic growth in which new technology was embedded in newly produced capital goods, the so-called "vintage model" of economic growth. Based on his theoretical models, Solow also pioneered in empirical research on the determinants of economic growth

    so-called "growth accounting".

    The shared Prize to 错误?未指定书签。Arthur Lewis and Theodore Schultz (in

    1979) also referred to economic growth, though at a less abstract level than the work by Solow. The Prize citation referred to their research on "economic development with parti?cular consideration of the problems of developing

    countries". The award to Lewis recognized particularly his two long-term growth models for less developed countries - emphasizing the consequences for economic growth of an elastic supply of labor, and the determinants of the terms of trade for countries that export tropical products. The award to Schultz honored his analysis of the role of investment in human capital for economic development,

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    particularly in agriculture. Both Lewis and Schultz were concerned with combining their theoretical reasoning with empirical data, though they used the traditional expository techniques of economic history rather than formalized statistical or econometric testing techniques. Schultz emphasized the apparent efficiency in the agricultural sector in less developed countries, considering existing constraints with respect to resources and knowledge available in these countries. Lewis instead focused on the tensions between a large and stagnant agricultural sector, with a low marginal product of labor, and a dynamic industrial ("capitalist") sector, which is sometimes in the nature of an economic enclave. 错误?未指定书签。Finn Kydland and 错误?未指定书签。Edward Prescott, awarded

    the economics price in 2004, further developed the insights of Robert Lucas and Robert Solow. In particular, they showed that economic policies are often plagued by problems of time consistency. More specifically, if economic policy makers are not able to com?mit their policy measures in advance to a specific policy rule, later on they will often, in fact, not pursue the policy which they initially regarded as the best one. For instance, national economies may become trapped in high inflation even though price stability is the stated objective of monetary policy. Kydland and Prescott's contribution has made the issue of the credibility and political feasi?bility of economic policy a main issue in economic research. Another result of this contribution is a shift of the discussion of economic policy away from isolated policy measures towards the institutional setup of policy making. Kydland and Prescott have also combined the analysis of short-term macro?economic fluctua?tions with analysis of long-term economic growth two

    research areas that were earlier regarded as separate fields. In particular, they emphasized the role of productivity disturbances ("supply shocks") not only when analyzing econo?mic growth, but also in studies of short-term macro?economic

    fluctuations. Sub?sequent studies by other scholars have integrated this insight with the role of shifts in aggregate demand, and price- and wage-rigidities, when explaining short-term and long-term economic development.

    In 2006, 错误?未指定书签。Edmund Phelps was awarded another Prize in

    macroeconomics. We may say that he supplied a number of important, previous missing pieces to the macroeconomic puzzle. In particular, he deepened our understanding of the relation between short-run and long-run effects of economic policy. Phelps was the first economists who in a rigorous way challenged the view that there was a stable tradeoff between inflation and unemployment, the so-called Phillips curve. He showed that the long-run rate of unemployment is not affected by aggregate demand management and inflation but only by the structure, and hence the functioning of the labor market.

    Phelps also highlighted inter-temporal trade-offs in the case of policies determining the rate of capital formation. However, he also showed under what circumstances all generation may gain from changes in the saving rate. In this context, Phelps clarified the importance of human capital for the diffusion of new technology and, hence, for economic growth.

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Microeconomics

    A number of awards have also been given for contributions in microeconomic theory, dealing with decision-making by individual households and firms, and the allocation of resources among different uses and production sectors in the economy. One example is the Prize to 错误?未指定书签。George Stigler (1982) for

    his studies of "industrial structures, functioning of markets and causes and effects of public regulation" He also analyzed how economic regulations, in reality, are con?ducted by politicians and public-sector administrators. He showed, for instance, that regulators often become dominated by those that are supposed to be regulated so called "regulatory capture". In a similar vein

    as Friedman, Stigler represents a pronounced positivist tradition, emphasizing analytical simplicity and the importance of empirical application. Stigler was also one of the pioneers in the field of "information economics", introducing information costs explicitly in his analysis. Other Prizes have also been given to this field. 错误?未指定书签。James Mirrlees and William Vickrey

    (award in 1996) made pioneering work about the consequences of various limitations in information of individuals, including "information asymmetries" among economic agents. It turns out that such information asymmetries are of great importance for the functioning of markets such as insurance and credit markets. Mirrlees also did fundamental work on the consequences for taxation of asymmetric information between the government and private agents. Vickrey's clarified the properties of various types of auctions. His insights have been crucial for developing efficiently functioning auctions of rights to broadcast, landing permits at airports, television rights as well as sales of government assets ("privatization").

    A more general theory of asymmetric information was developed by 错误?未指

    定书签。George Akerlof, 错误?未指定书签。Michael Spence and 错误?未指定书签。

    Joseph Stiglitz. George Akerlof studied markets where sellers of products have more information than buyers about product quality. He showed that low-quality products may squeeze out high-quality products in such markets, and that prices of high-quality products may suffer as a result. The analysis helps explain, for instance, extremely high borrowing rates in poor countries and the difficulties for broad markets for health-care insurance to emerge. Michael Spence and Joseph Stiglitz analyzed various types of spontaneous adjustment mechanisms in such markets. Spence showed how better informed agents may improve the market outcome by taking costly actions for the purpose of transmitting information to poorly informed agents. Important examples of such "signaling" are education as a signal of individual producti?vity in labor markets, and dividend payments to signal high profitability of individual firms. Stiglitz instead analyzed the role of "screening" in markets with asymmetric information. Important examples are attempts by insurance companies to partition contracts into risk classes, hence offering different types of contracts among which customers can choose. Stiglitz

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    has also shown how a number of market phenomena may be explained by the theory of asymmetric information, important examples being unemployment, credit rationing and sharecropping contracts in the agricultural section in some developing countries.

    The role of information asymmetries has been further analyzed by theorists studying alternative allocation mechanisms. This approach has several roots. One is 错误?未指定书签。Leonid Hurwicz, who defined allocation mechanisms as a game in which the participants act as if they send messages to each other, or to a hypothetical "message center". Hurwicz also emphasized the importance that an allocation mechanism is "incentive compatible" in the sense that the predicted, or desired, outcome is consistent with all agents' economic incentives to act. Other important roots of the theory of mechanism design are James Mirrlees' optimization analysis and William Vickrey's analysis of auction markets. A number of authors, in particular, 错误?未指定书签。Roger Myerson and Eric

    Maskin, have generalized and developed the insights of Hurwicz, Mirrlees and Vickrey. Through a calculation algorithm denoted the "revelation principle", they have simplified the analysis of alternative allocation mechanisms. Generally speaking, this mechanism states that the researcher can restrict the attention to a subset of hypothetical mechanisms, denoted "direct mechanisms" that satisfy the condition of incentive compatibility. Roger Myerson has applied the method, for instance, to auction markets and regulation. Since one and the same mechanism in some cases turns out to generate several different equilibria ("multiple equilibria"), the task remains to develop methods to find an optimum equlibrium. Eric Maskin has developed analytic tools for this purpose, what he calls "implementation theory". He has also clarified the importance of monotonicity of the preference ordering among individuals when trying to generate efficient allocation mechanisms. These various contributions to the theory of allocation mechanisms by Hurwicz, Myerson and Maskin are the background for their joint reward in 2007.

    Though financial economics relies on similar analytical techniques as traditional microeconomics, over time it has become a field of its own, with a huge expan?sion during the last two decades. As mentioned above, Tobin and Modigliani constructed important financial building blocks to macroeconomic theory. However, the field financial economics is today build mainly on foundations laid in the 1950s and 1960s by 错误?未指定书签。Harry Markowitz,

    Merton Miller and William Sharpe (jointly awarded in 1990). While Markowitz' contribution was to construct a microtheory of portfolio management of individual wealth holders, Merton and Sharpe developed equilibrium analysis in financial markets. More specifically, Sharpe developed a general theory for the pricing of financial assets. Miller made important contributions in the field of corporate finance (to begin with, partly in cooperation with Frances Modigliani). In particular, Miller clarified which factors determine share prices and capital costs of firms.

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Subsequently, 错误?未指定书签。Robert Merton and Myron Scholes were given the

    Prize (in 1997) for their analysis of price formation of so-called derivative instruments such as options, which are claims on underlying financial instruments including shares and foreign exchange. (The late Fisher Black, cooperating with Scholes, was also instrumental for this achievement.) These contributions were a necessary condition for the sub?sequent development of today's huge markets

    for various types of derivative instruments. These markets have increased the possibility for individual agents to choose adequate risk levels according to their own preference, regardless of whether they choose low or high exposure to risk.

    Interdisciplinary Research

    Several Prizes have also been awarded economists who have widened the domain of economic analysis to new areas. 错误?未指定书签。James Buchanan got his Prize

    (in 1986) for his research on the boundary between economics and political science, or more specifically, "for his development of the contractual and constitutional basis for the theory of economic and political decision-making". This research made him one of the founding fathers of the "public choice" school, which analyzes the driving forces behind political decisions and tries to endogenize political behavior in models of national economies. Rather than looking at politicians as individuals that are supposed to take care of the "general good" in society, the public choice school assumes that politicians are motivated by considerations similar to those explaining the behavior of other agents, including the strive for personal benefit and a desire for power.

    错误?未指定书签。Gary Becker (awarded in 1992) has instead worked on the borderline between economics and sociology, in particular in his research about the family. For instance, he has studied the household's role as a combined producer and consumer of goods and services. He has, however, not only analyzed the "economic" behavior of families labor supply, consumption, household

    production and household saving but also behavior that has not earlier been

    much considered by economists, such as education, marriage, childbirth, and divorce. He has both shown how economic considera?tions influence choice in these

    areas, and analyzed "social interaction" between individuals outside the market system, reflected in the Prize citation: "for having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior". Becker's influence today extends far outside economies, in particular to the so-called "rational choice" school in sociology. 错误?未指定书签。Ronald Coase (awarded in 1991) has instead made important contributions on the borderline between economics, law and organization. In particular, he showed which factors determine the size of firms. He also clarified the con?dition under which voluntary contracts between private agents can resolve problems with "external effects" of production, an important example being pollution. These contributions are reflected in the Prize citation: "for his

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    discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy". Coase's concept of transaction costs has become an important foundation for the theory of contracts and for the whole field "law and economics".

    The Prize to 错误?未指定书签。Herbert Simon (in 1978) may also be regarded

    as an inter?disci?plinary award. The Prize citation referred to his research on "the decision-making process within economic organizations." In particular, Simon challenged some basic building blocks of microeconomic theory, in particular, the maximization principle and the assumption about full ("unbounded") rationality. On the basis of both empirical evidence and psychological theory, Simon argues that decision-makers usually do not try to choose a "best" alternative, as assumed in traditional microeconomic theory, but that they are content with a "satisfactory" outcome, i.e. they try to find acceptable solutions to acute problems. This has made Herbert Simon a main contributor in the field administrative (management) science.

    错误?未指定书签。Simon Kuznets (1971) has instead made empirical research on the borderline between economics and history, reflected in the Prize citation "for his empiri?cally founded interpretation of economic growth." This prize is an example of an award for inductive rather than deductive analysis. Kuznets' ambition was to make empirical generalizations from data interpreted with a minimum of formal models and without relying on complex statistical techniques. Important examples include the celebrated "Kuznets's curve" of the U-shaped relation between GDP and income inequality, as well as his findings that the long-run average propensity to consume out of income tends to be constant in time-series data, whereas it tends to be fall in cross-section data. More generally, Kuznets has exploited data for very long periods of time to extract regularities, in particular, by characterizing economic growth and the distribution of income in different nations at different times. The Prize to 错误?未指定书签。Robert Fogel and Douglass North (in 1993) is

    another award on the boundary between economics and history. The Academy cited them "for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change". Fogel's main contributions have been to clarify the role of the railways for the development of the national economy in the United States, and the economic role of slavery. By comparing the factual development with a counterfactual benchmark, Fogel concluded that previous studies of economic growth in the United States had vastly overestimated the importance of railways. He also concluded that slavery was not abolished because of falling profitability of the slave system, but rather because of humanitarian considerations. Douglass North has shed new light on the economic development in Europe and the United States before and in connection with the industrial revolution, including the roles of sea transport and changes in the pattern of regional specialization and interregional trade. He has also been a pioneer in analyzing the role of institutions, such as property

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