Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. This was his response to a question posed in a symposium of views in The International Economy:
“…Economics is the only field in which people can share a Nobel Prize for arriving at the complete opposite conclusion—something that arguably actually happened. Should the Nobel Prize in Economic Sciences Be Put on Hold? –”
My response:
It is true that the Prize in Economics in Memory of Alfred Nobel has been awarded in the same year to economists representing opposite viewpoints. Not just once, but three times.
In 2013, the topic was stock markets. The winners included both Eugene Fama, for his work on the Efficient Markets Hypothesis (EMH), and Robert Shiller, for his rejection of the EMH in favor of the existence of bubbles, excessive volatility, and investor behavior that departs from rational expectations.
In 1979, the topic was economic development. The Prize was awarded to both Theodore Schultz, who argued that peasants were rational and optimizing, and Sir Arthur Lewis, who originated a dual-sector model of development in which the agrarian sector is governed by social norms that pay workers above their marginal product.
In 1974, the topic was how society should be organized. One recipient was Gunnar Myrdal, who was on the Left – a critic of race relations in America and force behind the social welfare state in Sweden. The other recipient, Friedrich von Hayek, was on the Right – a leading proponent of the view that expansion of the role of the government was “the road to serfdom.”
If two economists are at odds with each other, does that mean that one or the other (or both) must be wrong? And that therefore economics is not a science worthy of having a Nobel Prize?
No. The essence of economics is that life is usually a trade-off. Consumers, for example, balance their desire for different goods and services, subject to a budget constraint. Governments trade off the environment against economic costs of regulation. Central banks balance economic expansion versus inflation. So, it is also, in balancing competing economic ideas.
Consider the three odd couplings
On the one hand, the EMH is a good antidote to the illusion that it is easy to make above-normal profits in the stock market. Index funds do tend to beat active investors. But, on the other hand, speculative bubbles capture the valid idea that market prices sometimes differ from the economic fundamentals underlying the assets. Both perspectives embody a lot of truth.
On the one hand, modeling peasants in developing countries as rational was a useful antidote to the arrogant assumption that they did not respond to incentives and that their governments or well-meaning foreign advisers knew what was best for them. On the other hand, the dual-sector model persuasively illuminates the stages of rural-urban migration and industrialization, for example in China.
Finally: On the one hand, it is impossible to formulate economic policy intelligently, without recognizing such important failures of the private market as environmental externalities or monopoly power. Thus, there is inarguably a role for the government. On the other hand, it is also impossible to proceed intelligently without recognizing the importance of government failure as well, such as rent-seeking, regulatory capture, or the political business cycle.
Awarding the Nobel Prize to pairs of economists whose work is in tension with each other can make perfect sense.
[Fourteen responded to the question in the Winter 2022 issue of The International Economy, “Should the Nobel Prize Be Put on Hold?”]
This post written by Jeffrey Frankel.
《Central banks balance economic expansion versus inflation.》
Why haven’t economists seen the obvious synthesis: since supply chains are just payment chains in reverse, why not treat inflation as just another payments system breakdown and supply liquidity as needed to make markets more efficient in allocating resources?
Asked and answered. As js the case with nearly everything you write in comments. You don’t seem to absorb anything.
Emotional or intellectual failure? Can’t tell. But failure, certainly.
md,
Indeed. He seems completely incapable of understanding any explanation given to his inane questions, so just keeps repeating them. Maybe it was him constantly asking his late brother this sort of thing that led the poor guy to blow his brains out, not just some failure in the financial markets.
https://la.utexas.edu/users/hcleaver/368/368lewistable.pdf
1954
Economic Development with Unlimited Supplies of Labour
By W. Arthur Lewis
This essay is written in the classical tradition, making the classical assumption, and asking the classical question. The classics, from Smith to Marx, all assumed, or argued, that an unlimited supply of labour was available at subsistence wages. They then enquired how production grows through time. They found the answer in capital accumulation, which they explained in terms of their analysis of the distribution of income. Classical systems thus determined simultaneously income distribution and income growth, with the relative prices of commodities as a minor by-product.
Interest in prices and in income distribution survived into the neo-classical era, but labour ceased to be unlimited in supply, and the formal model of economic analysis was no longer expected to explain the expansion of the system through time. These changes of assumption and of interest served well enough in the European parts of the world, where labour was indeed limited in supply, and where for the next half century it looked as if economic expansion could indeed be assumed to be automatic. On the other hand over the greater part of Asia labour is unlimited in supply, and economic expansion certainly cannot be taken for granted. Asia’s problems, however, attracted very few economists during the neo-classical era (even the Asian economists themselves absorbed the assumptions and preoccupations of European economics) and hardly any progress has been made for nearly a century with the kind of economics which would throw light upon the problems. of countries with surplus populations.
When Kevnes’ General Theory appeared, it was thought at first that this was the book which would illuminate the problems of countries with surplus labour, since it assumed an unlimited supply of labour at the current price, and also, in its final pages, made a few remarks on secular economic expansion. Further reflection, however, revealed that Keynes’s book assumed not only that labour is unlimited in supply, but also, and more fundamentally, that land and capital are unlimited in supply-more fundamentally both in the short run sense that once the monetary tap is turned the real limit to expansion is not physical resources but the limited supply of labour, and also in the long run sense that secular expansion is embarrassed not by a shortage but by a superfluity of saving. Given the Keynesian remedies the neoclassical system comes into its own again. Hence, from the point of view of countries with surplus labour, Keynesianism is only a footnote to neoclassicism-albeit a long, important and fascinating footnote. The student of such economies has therefore to work right back to the classical economists before he finds an analytical framework into which he can relevantly fit his problems.
The purpose of this essay is thus to see what can be made of the classical framework in solving problems of distribution, accumulation, and growth, first in a closed and then in an open economy. It is not primarily an essay in the history of economic doctrine, and will not therefore spend time on individual writers, enquiring what they meant, or assessing its validity or truth. Our purpose is rather to bring their framework up-to-date, in the light of modern knowledge, and to see how far it then helps us to understand the contemporary problems of large areas of the earth.
https://www.nobelprize.org/prizes/economic-sciences/1979/schultz/lecture/
December 8, 1979
The Economics of Being Poor
By Theodore W. Schultz
Most of the people in the world are poor, so if we knew the economics of being poor, we would know much of the economics that really matters. Most of the world’s poor people earn their living from agriculture, so if we knew the economics of agriculture, we would know much of the economics of being poor.
People who are rich find it hard to understand the behaviour of poor people. Economists are no exception, for they too find it difficult to comprehend the preferences and scarcity constraints that determine the choices that poor people make. We all know that most of the world’s people are poor, that they earn a pittance for their labor, that half and more of their meager income is spent on food, that they reside predominantly in low income countries and that most of them are earning their livelihood in agriculture. What many economists fail to understand is that poor people are no less concerned about improving their lot and that of their children than rich people are.
What we have learned in recent decades about the economics of agriculture will appear to most reasonably well informed people to be paradoxical. We have learned that agriculture in many low income countries has the potential economic capacity to produce enough food for the still growing population and in so doing can improve significantly the income and welfare of poor people. The decisive factors of production in improving the welfare of poor people are not space, energy and cropland; the decisive factor is the improvement in population quality….
On the one hand, modeling peasants in developing countries as rational was a useful antidote to the arrogant assumption that they did not respond to incentives and that their governments or well-meaning foreign advisers knew what was best for them. On the other hand, the dual-sector model persuasively illuminates the stages of rural-urban migration and industrialization, for example in China….
— Dani Rodrik
[ Critically important, and essential to understanding the dramatic development of China through more than 4 decades and continuing. Chinese development is remarkably misunderstood by a range of influential Western economists. ]
Scientists try to make sense of reality by simplifying it. We would expect that they rarely would come up with rules/models that are without exceptions or are only applicable when a number of circumstances apply. It is not uncommon for scientist to propose models with a full description of all their limitations and the assumptions they are based on – just to see all of those caveats being ignored by those using them (especially if used for political purposes). It should not surprise us that high quality science can produce products that at first appears to contradict each other.
You have in mind, perhaps, the pretense that rationality, perfect competition, informational symmetry (or perfect information) can simply be taken for granted?
At least if the model is build on that pretense, then we should not be surprised that it breaks down when that pretense breaks down. It may even be the starting point for trying to build better models that uses somewhat more realistic pretenses and, therefore, are more robust to a brush with reality.
Frankel’s point seems apt for this comments section and economic discussion generally. Many participants cling tenaciously to one side of any issue, insisting on simplistic answers built on bias, often politically motivated bias.
Frankel is broad-minded enough to see things otherwise and to make clear his broader view.
“Hominem unius libri timeo.”
https://www.msn.com/en-us/news/world/bodies-of-more-than-900-civilians-discovered-in-kyiv-region-after-russian-pullback-authorities-say/ar-AAWgx3H?ocid=msedgdhp&pc=U531&cvid=5f7324046fc3469e9071e83ff926db5f
900 citizens in Kyiv found dead – executed by the war criminals Putin sent in. Of course JohnH will excuse this grotesque group slaughter by someone claiming it is the fault of America.
Ah, yes. There’s nothing like a little centrist “bothsidesism”. “Can’t we all just get along?”
First, there’s Hayek, who helped prolong the misery of the Great Depression in opposition to Keynes. He then promoted Thatcherism with a helping of anti-immigrant and anti-semitism as a bonus.
Following in that tradition was Fama whose Efficient Market Hypothesis provided Alan Greenspan with the assurance that a housing bubble was impossible. Fama then followed it up in the aftermath of the preventable disaster with his high-school-level understanding of macroeconomics to provide cover for the austerians and the misery of a decade long recovery.
And let’s throw in the mix Milton Friedman, “brilliant economist” who just happened to indulge in a little Third World fascism on the side.
It’s all fun and games for the academics, intellectual amusement, but it’s life and death for those living in the real world.
No, both sides aren’t the same and no, both sides don’t have to be admired. These are bad people who caused real pain and misery to millions of people.
Those of us not indoctrinated into the cult of economics are not obliged to honor these people.
@ joseph
This strikes me as a little on the harsh side. Yet, as a confessed bleeding heart liberal, I have to say there’s very little in your comment I take strong issue (disagreement) with.
I have always admired Fama’s intelligence. But he is kind of a callous bastard.
joseph,
You make some vaiid points here, but kind of lost it when you made a dumb charge of anti-Semitism against Hayek. Careful reading of the record, most definitively done by Melvin Reder in a 2000 paper in the History of Political Economy, with Paul samuelson backing him up, not a big fan of Hayek generally, found that both Keynes and Scumpeter were almost certainly much bigger and worse anti-Semites than Hayek was. This is not the hobby horse to ride when going after Hayek.
Ah, well then, in Hayek’s favor, not all Jews. Just immigrant Jews.
joseph,
Still full of crap you are on this. Hayek noted that there were people in Vienna upset about immigrant Jews. In doing this he was describing the anti-Semitism of other people, not indulging in it himself.
I published in JEBO one of the last papers written by the late Paul Samuelson, who was himself a victim of anti-Semitism early in his career. It was about his relations with and views of Hayek. He praised Hayek for his theory of information and said he deserved the Nobel Prize for it that he got. He then criticized Hsyek for his discussion of “slippery slopes” in the The Road to Serfdom and on a few other points of economic theory and policy. He then concluded by discussing Reder’s discussion of the matter of anti-Semitism and Keynes, Schumpeter, and Hayek. Keep in mind that Samuelson was a strong Keynesian and also was personally close to Schumpeter, his great defender at Harvard. But he agreed that Hayek was clearly much less of an anti-Semite than either of them and really not one at all.
“Fama then followed it up in the aftermath of the preventable disaster with his high-school-level understanding of macroeconomics to provide cover for the austerians and the misery of a decade long recovery.”
Fama is not the only financial economist who dabbles in macroeconomics. Now Modligliani was great at both but most of these financial economists are stuck in the New Classical view that markets always work perfectly. So when the Great Recession hit – they had little to offer.
Barkley Rosser: “Hayek noted that there were people in Vienna upset about immigrant Jews. In doing this he was describing the anti-Semitism of other people, not indulging in it himself.”
You should recognize that old trope “I’m not a racist against immigrants. I’m just worried about how the other racists will react to immigrants.” It’s one of the oldest racist cliches in the book.
So let’s let Hayek speak for himself in a 1983 interview”
“I don’t have many strong dislikes. I admit that as a teacher—I have no racial prejudices in general—but there were certain types, and conspicuous among them the Near Eastern populations, which I still dislike because they are fundamentally dishonest. And I must say dishonesty is a thing I intensely dislike. It was a type which, in my childhood in Austria, was described as Levantine, typical of the people of the eastern Mediterranean. But I encountered it later, and I have a profound dislike for the typical Indian students at the London School of Economics, which I admit are all one type—Bengali moneylender sons. They are to me a detestable type, I admit, but not with any racial feeling. I have found a little of the same amongst the Egyptians —basically a lack of honesty in them.”
Sure sounds like he was indulging in it himself. And we all know what “Levantine” immigrants he was referring to in 1900s Austria.