Yves here. I saw the galleys for this book (and due to being too busy to finish them, missed my opportunity to endorse it) and was impressed by the rigor and evenhandedness of how it documented the way an influential Swedish economist, Assar Lindbeck, over time became more neoclassical in his policy stance, and in parallel, had major influence over the way the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel were awarded. In other words, this is yet another case example of how a strategically placed individual did considerable harm.
I wish this write-up made the case in a more straightforward manner. It appears to be part of the rules of the academy not to accuse a prominent figure of acting in bad faith, even though when the facts are laid out, Lindbeck’s conduct certainly seems to meet the “if it walks like a duck and quacks like a duck” standard.
By Avner Offer, Professor of History, University of Oxford. Originally published at the Institute for New Economic Thinking website
An award created as a concession to market-minded bankers needs to recognize the centrality of social-democratic policies to the wellbeing of industrialized economies
Avner Offer and Gabriel Söderberg, The Nobel Factor: The Prize in Economics, Social Democracy and the Market Turn (Princeton University Press, published 5 October 2016)
Neoclassical norms have acquired the halo of science from the Nobel Prize in economics, endowed by the Swedish central bank in 1968. The prize came out of the long-standing strife between Sweden’s politically dominant social democracy and the country’s business elites, a local instance of the class conflict prevailing in the West more broadly. In the 1950s and 1960s, Sweden’s central bank had clashed with government over credit policy: Government prioritized employment and housing; the bank, led by an assertive governor, worried about inflation. In compensation for restrictions on its authority, the bank was eventually allowed to endow a Nobel Prize in economics, as a vanity project for its tercentenary. And the committee awarding the prize was captured by a group of centre-right Swedish economists.
The Nobel laureates make up a high-quality sample of economists, which enhances the credibility of the prize — as does a rigid parity of awards between right and left, formalists and empiricists, Chicago and Keynes. But several surveys of economists’ opinions show them to be well to the left of the committee’s balance.
Assar Lindbeck, the Swedish professor who dominated the awards, initially adhered to social-democratic thinking, but later turned away from it. In the 1970s and 1980s, he intervened in Swedish politics, invoking microeconomics against social democracy and asserting that high taxation and full employment were leading to disaster. Along with other economists, he persuaded some of the social democratic leadership to change course, and distracted attention from the real policy error of deregulating credit in 1985. A deep financial crisis followed in the 1990s, which anticipated the global one of 2008.
Lindbeck’s doctrines tallied with those of the IMF, the World Bank, and the U.S. Treasury, which motivated the Washington Consensus. Privatisation, deregulation, and free capital movement enriched business and finance, led to acute crises and reduced welfare in client economies. Economists did not anticipate that these policies would also instigate a ‘corruption eruption’. Corruption then spilled over to the developed countries, and is now pervasive. This corruption is the unintended consequence of rational choice me-first premises, and has done a lot to harm the common good and to foster mistrust in governing elites. Swedish political scientist Bo Rothstein has petitioned the Swedish Academy (of which he is a member) to suspend the prize until the effect of economics on corruption is investigated.
Social democracy is not as deeply theorised as economics has been, and makes no pretensions to parity with physics. Yet, it has been enormously successful in keeping economic insecurity at bay. With sparse academic credentials, and in spite of relentless attacks, it remains an indispensable framework for providing social and public goods. In this task it is more efficient and more equitable than free markets. But its thin intellectual support means that even nominally Social Democratic parties to fail to grasp how well it works.
Markets reward the wealthy and successful. Social democracy is premised on civic equality, and this creates a bias for one-size-fits-all policies. But since the 1960s, social democracy has sought to incorporate an element of choice as well. Because its methods are indispensable and because economics appears to be so compelling, the two doctrines have mutated to accommodate each other, but their marriages are not happy.
Even then, economics is not left alone to set policy in most developed countries, where pragmatic and effective systems of social democracy ensure that about 30% of GDP is allocated to provide for employment, healthcare, education and pensions. Economists invoke a trade-off between equality and efficiency, despite its empirical falsification. But for economic security, the problem is not equality; it is how to support dependency over the life-cycle, i.e. in childhood, education, ill health, and old age. The social democratic solution is cross-sectional transfers from producers to dependents by means of progressive taxation, and investment in health, education and infrastructure. The neoclassical solution is to transfer entitlements over time by means of financial markets. But long-term contracts are rigid, fallible, and costly. The social Democratic alternative is cheaper, more flexible, and endorsed by voters.
In economics, the choices of self-seeking individuals trading in markets scale up to an efficient equilibrium. This model is an ambitious undertaking that has to be judged as a qualified failure, both analytically and empirically. In response, many economists have moved into laboratory and field investigations. The gain in validity is purchased at a cost in generality: localised experiments cannot replace an overarching social vision. Economics needs to accommodate social democracy. A good start would be to acknowledge this in the Nobel Prize awards, maybe reaching beyond economics — as the committee has done before.
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In economics, the igNobels are officially titled the “Gideon Gono Prize,” after the central banker who made even the humblest Zimbabweans into millionaires (in Z-dollars).
This year, it’s really no contest: Venezuela’s central bank president Nelson Merentes has sent inflation soaring to hundreds of percent, while GDP collapses and a hungry populace scrounges for food.
Who would have thought that “money for nothing” buys nothing? :-(
I really do wonder what comes first, inflation or a crashed exchange rate…
There’s a difference between “fixed v. floating” exchange rates, which come down to policy (fiscal AND monetary) wiggle room…
I really do wonder what comes first, renouncing otiose and extravagant privilege or pitchforks and guillotines…
If production is absent, so that there is nothing to buy, which can cause hyperinflation.
I genuinely want to know what your deal is. Give us some facts, evidence, to back up your position. Because all I’m seeing is one side, the Keynesians/MMTers, with a mountain of historical and anthropological data to back up their claims. And then you on the other side constantly sneering. But that’s all you ever do, and when pressed for something substantive, your only response is silence.
Facts? Try these on for size:
South American countries that are considerably poorer than Venezuela — Bolivia, Paraguay, to name a couple — have no such dire shortages of consumer goods.
This is a regulatory and monetary policy screw-up, for which the feckless Venezuelan clowngov richly deserves ridicule.
So by your own account its a trade shock….
Disheveled Marsupial…. so the next question is what created it….
Debt currency.
Money is debt, prattling on about markers is redundant.
Disheveled Marsupial…. getting the treatment for not playing the Chicago boys game is as old as united fruit and bond holders.
So too much money chasing after too few goods. Wow, just like MMT says. Imagine that.
Two concerns:
1. This might get fleshed out more in the book, but from just reading the article I do not see a turn toward neo-liberalism in the award. Offer paints a dichotomy between “social democracy” (Swedish gov’t) and “economics” (Swedish central bank), and says that the nobel prize was given to the bank as a vanity project. So would it not have been neo-liberal/neo-classical from the outset? Was there a change at some point? It’s not clear from the article but it might be in the book. (Offer does indicate a right-ward change in philosophy of Assar Lindbeck, but again this is not fleshed out in the article– maybe this is why “neo-liberalism” is not in the article’s original title.)
2. I’m very uncomfortable with Offer’s dichotomy between “social democracy” and “economics”. It makes it sound as if there is a face off between rational neo-clacissists who believe in markets on one hand, versus bleeding-heart leftists on the other hand who believe in helping people despite what the hard science says. Here’s Offer:
So this makes two assumptions that are completely off-base: First, that neoliberalism is somehow more grounded in classical theory– which it isn’t by any means: it’s a radical (albeit widespread) religious-based belief system with scant evedentiary backing, as compared to theorists like Michael Hudson or David Graeber, who have concrete historical evidence to back-up their findings. And the second assumption is that Neo-liberals believe in “free markets”, which is laughable. Even if such a fairytale as “free markets” exist, the neo-liberal playbook inevitably calls for fleeing from them, running to the nanny state for corporate welfare and handouts. Even Von Mises made clear that this was inevitable.
At least in this article, Offer seems to be taking the Chicago School’s rhetoric on face-value, when it needs to be unmasked for the radical religious hocus-pocus that it is.
Better wait to read the book. It is relies on a great deal of evidence. In the blog, the difference between economics and social democracy is drawn quite crisply:
‘Economists invoke a trade-off between equality and efficiency, despite its empirical falsification. But for economic security, the problem is not equality; it is how to support dependency over the life-cycle, i.e. in childhood, education, ill health, and old age. The social democratic solution is cross-sectional transfers from producers to dependents by means of progressive taxation, and investment in health, education and infrastructure. The neoclassical solution is to transfer entitlements over time by means of financial markets. But long-term contracts are rigid, fallible, and costly. The social Democratic alternative is cheaper, more flexible, and endorsed by voters.’
Nothing here about bleeding hearts. And the book does not say that economic theory is valid. Its thrust is in the opposite direction.
Read the book. It is based on ample evidence. In the blog, the difference between social democracy and economics is spelled out crisply:
‘Economists invoke a trade-off between equality and efficiency, despite its empirical falsification. But for economic security, the problem is not equality; it is how to support dependency over the life-cycle, i.e. in childhood, education, ill health, and old age. The social democratic solution is cross-sectional transfers from producers to dependents by means of progressive taxation, and investment in health, education and infrastructure. The neoclassical solution is to transfer entitlements over time by means of financial markets. But long-term contracts are rigid, fallible, and costly. The social Democratic alternative is cheaper, more flexible, and endorsed by voters.’
No bleeding hearts here. The thrust of the book is to question the validity of economic theory.
I’ve put the book on my wish list, and I appreciate you taking the time to answer. With all respect (especially since we seem to be arguing from similar positions), I still take issue with how you are using the term “economics”: placing it in contradistinction to social democracy. While you have indeed made a crisp delineation, I disagree with your dichotomy– or at least your terms for the dichotomy.
I would argue that history shows that economics properly studied and implemented inevitably leads to social democracy. Unfortunately, the field of economics has been usurped by charlatans and witch doctors pushing their neo-liberal religion. But that should be no reason for us to cede the term “economics” to them, because it only feeds their argument that radical new theories like Friedman’s or Mankiw’s are somehow classical and scientific, which they most certainly are not.
Again, I imagine your argument is elaborated in greater detail in the book, so I’ll look forward to reading it.
Several days ago, a motion was made and seconded in the comments that we all chip in to establish the Naked Capitalism Prize in Economic Sciences in Memory of Alfred Nobel. All in favor say aye. All opposed nay.
Aye.
Aye2. Maybe the prize would be a basket of Lamberts vegetables and a photo of a cute puppy.
Aye.
Nay. I see no point in a prize for dogma.
What dogma?
Anyway, name is terrible. Economics isn’t a science.
or photos of lambert’s vegetables. let them eat spinach.
Aye!
Any thoughts on the physical nature of the prize?
Virginal – ????
Disheveled Marsupial…. just a thought…. how could you say no…
A gold medallion with a picture of Alfred Nobel on a blue ribbon would be the most effective parody, and that would give the press something to write about.
An awards ceremony in Oslo would be fun, but someplace near Wall Street could be more effective, e.g., Zuccotti park.
p.s.
“Up to 1980 the “Swedish” medals, each weighing approximately 200 g and with a diameter of 66 mm, were made of 23 carat gold. Since then they have been made of 18 carat recycled gold. The weight is set to 175 g for all medals, except for the Medal for the Prize in Economic Sciences. Its weight is set to 185 g.”
http://www.nobelprize.org/nobel_prizes/about/medals/
At today’s price, 185 g of 18 carat gold would cost $5,645.78.
http://www.midstatesrecycling.com/karat_kalc
All the Nobel Prize committee would need to go is go back to the fantastic Gunnar Myrdal, the Swedish development economist who won the award in 1974. IMO, he embodied the set of criteria the decision committee would need to return to if the prize were to ever subsume economics under principles of social democracy. Myrdal was never afraid to admit bias, in fact, he encouraged it as a matter of intellectual honesty. Along with Nicholas Kaldor, he developed heterodox conceptual frameworks like circular and cumulative causation, which sought to incorporate social factors into short and long-run economic analysis. And he was deeply involved with the United Nations, seeing the consensus-based institution as indispensable.
His call on the barriers to growth in South Asia was wrong, but only because of the influence caste systems held in his imagination. “Economic Theory and Underdeveloped Regions”, “Objectivity in Social Research”, and the first chapter in “Asian Drama” are some of his great reads.
On a sidenote: the Nobel prize is not just compromised by the artificial influence of neoclassical economic theory but is also heavily bias on the basis of gender. Elinor Ostrom was the first woman to win it and had to share it. Diedre McCloskey should have won the prize for her work on econometrics and estimation, and still could, but economists are the most cosmopolitan bunch when it comes to transsexuality.
A bit more about this award
http://exiledonline.com/the-nobel-prize-in-economics-there-is-no-nobel-prize-in-economics/
That contains an interesting history of how libertarians such as Hyack and Friedman came to power…OMG! The Libertarian Party is just a front group hiding the fact that libertarians are already running the country. So the terms neoliberal and neoconservative are really just other words for libertarian. Well played evil ones, but your secret is out now.
Economics is a science? That’s a hot one.
“The success of mathematical physics led the social scientist to be jealous of its power, without quite understanding the intellectual attitudes that had contributed to this power. The use of mathematical formulae had accompanied the development of the natural sciences and became the mode in the social sciences… so the economists have developed the habit of dressing up their rather imprecise ideas in the language of the infinitesimal calculus.”
– Norbert Wiener, “God and Golem, Inc: A Comment on Certain Points Where
Cybernetics Impinges Upon Religion”
More on the fake “Nobel prize in Economics”
Philip Mirowski – Why Is There a Nobel Memorial Prize in Economics?
https://www.youtube.com/watch?v=dLtEo8lplwg
https://rwer.wordpress.com/2010/10/22/the-nobel-family-dissociates-itself-from-the-economics-prize/
I discovered this book on Amazon yesterday and am very happy Yves is bringing it to the NK community. I don’t know since I haven’t received it yet but there was an episode in the late (?) 2000s that put the issue of the ideological agenda of the Bank of Sweden in bright light. A number of Nobel winners and the selection committees at the Karolinska Institute who choose the scientific (Physics, Chemistry, Medicine) winners laid down a private demarche to the bank: either reform their ways and the naked ideology of the bank’s selection committee or the other Nobel Prize committees would demand the Nobel foundation withdraw the bank’s right to use the Nobel name. THe bank got the message and the next year (IIRC) they awarded the prize to Amartya Sen at Columbia for his work on development economics, which is anything but laissez-fairist. Since then we’ve had Paul Krugman and Robert Shiller awarded the prize. Nonetheless, the weight of the past awards is so overwhelming that the baleful influence of this benighted prize will continue for decades if not centuries (and Shiller ended up sharing his prize with Eugene Fama, a man so blinkered by ideology that he denies the existence of bubbles and crashes, and who is endorsing Donald Trump’s “economic” policies, such as they are.)
Anyway, this looks like a great book! Thanks to Yves for putting it up here….
P