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Nobel Economics Prize
Transcript of Nobel Economics Prize
Depressions Financing Growth, Promoting Investment Society's Institutions Model Builders
Gary Becker "for having extended the domain of microeconomic
analysis to a wide range of human behaviour and
interaction, including nonmarket behaviour" "for the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science" Paul Samuelson "for their pioneering work in the theory of
money and economic fluctuations and for
their penetrating analysis of the interdependence
of economic, social and institutional phenomena" Milton Friedman "for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy" Franco Modigliani Robert Merton Myron Scholes for their pioneering work in the theory of financial economics" 1990 "for his pioneering analyses of
saving and of financial markets" John Nash "for their pioneering analysis of equilibria
in the theory of non-cooperative games" "for a new method to determine the value of derivatives" Kenneth Arrow But the Academy reportedly hesitated before accepting Why add an economics prize?
Economics was becoming an “exact” science like those recognized by the other prizes
Feldman suggests: West’s economic prosperity; opportunity to credit economic theory with this success Prizes in this area deal generally with the “analytical stuctures of theoretical economic models, often highlighting the formal similarity of these structures, and clarifying the conditions for consistency, equilibrium stability and efficiency in the economic system” Macroeconomics “[T]he 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.” Microeconomics Trends Limits to Rational Theory Measuring to Understand Business Cycle Focus Model Building Economic Growth and Development Rational Theory Financing Growth Institutions a. Cost/Benefit Analysis
b. Emphais on Individual Choice
c. Optimization: People choose behaviors
that yield the best possible outcome for
d. Rational theory led the US to adopt
marginal analyis in economic policy A free market may not actually lead
optimal social welfare Empirical evidence more important than an imaginary model Focused on business cycles as a part of explaining economics and predicting depressions a. Everything builds on everything else
b. Even though models are just based on
imaginary situations with no mitigating
factors, they are something that economists
can base theories off of and apply to the real world Business cycles can have effects or depression
on an economy but can also stimulate economic growth a. This is the aspect of economics most
visible in the media
b. Balancing return and risk is a major
component of this area of economics
c. Useful in explaining trade flows Institutions include patterns of behavior
that exist because people interact with each
other and have to meet objectives 1970
USA Amarya Sen “dealing with decision-making by individual households and firms, and the allocation of resources among different uses and production sectors in the economy” Interdisciplinary Research Prizes awarded to economists who have “widened the domain of economic analysis to new areas”
Example: economics and political science, economics and sociology, economics and law
New Methods of Economic Analysis Example: “econometric model building” = integration of economic theory and statistical methods → methodological advancement in empirical analysis
Also prizes for methodological contributions in theory, for example: game theory
Controversial Issues in the awarding of the Prize: Should we even have an economics prize? Call for abolition of prize by several prominent laureates •“econometric orientation doesn’t constitute an advance in knowledge” but only gives everyday problems a “scientific aura” by using equations to explain them
•academic exercise, but impractical to the real marketplace
•may benefit stockbrokers, money managers, etc. but does not meet “benefit to humanity” standard of Nobel’s will
General argument: “In a 1977 letter to a Swedish newspaper, he rejected the idea that the field of economics could claim a Nobel on the basis of its scientific rigor. Economics should concern itself with political and social needs, he argued, and he called for an end to the prize in economics.” Gunnar Myrdal (free market conservative), “who shared the Nobel in economics with Myrdal in 1974 despite being his ideological opposite, agreed on that point. If he had been asked, Hayek said, he would have “decidedly advised against” creating an economics prize.” Friedrich von Hayek Definition of the scope of economics wide interpretation of the term “economic sciences” i.e. ‘interdisciplinary research’ awards Criteria for Selection -consideration of originality of contribution, scientific and practical importance, and impact on scientific work
-being the originator of an idea or providing “shoulders on which other scholars can stand” regarded as important
-big issue: economists who take a political stand, make policy recommendation (Friedman, Hayek, Tinbergen, Tobin, others); result: these specific contributions are not recognized
Order of Awards -by virtue of the fact that the Economics prize began so late, there was an enormous backlog of worthy candidates, but this lead to the issue of who goes first
•give early prizes to particularly important contributions
•shift among fields and methods of analysis
•tendency to give prizes in chronological order
Sharing of prizes -11/30 prizes shared, somewhat less frequent than in natural sciences
-winners linked by: collaboration, intellectual influence, similar but independent work, complementary contributions
issues and economists that are ignored -James K. Galbraith, an economist at the Lyndon B. Johnson School of Public Affairs at the University of Texas in Austin complained that “certain branches of economics have been more or less excluded,” citing as examples work on poverty, inequality, the economics of climate change, the collapse of communist economic systems and debt crises. (Cohen)
•John Kenneth Galbraith, one of the most influential economists of the 20th century but always an outsider to the academic ranks of the profession, never won the prize.
Where they come from
(determined by where laureates taught when they did prizewinning work) U.S. 46
All of these people are Western (from developed democratic nations) and study liberal capitalism: what does this say? → Colonial ignores other political ideologies and explanations for successful economies that do not follow this model Come from a few elite universities: Chicago, Harvard, Cambridge MIT, Stockholm and Oslo, Yale, Princeton, Stanford and Berkeley
•Chicago won 5 times in 6 yrs., lists 25 as current or previous faculty
rhetoric of the Nobel committee
Dismal Science, Dismal future? War of the underrepresented worlds Fridrich von Hayek and Gary Becker Kenneth Arrow and Amartya Sen John Nash Ragnar Frisch and Jan Tinbergen Paul Samuelson and Milton Friedman Simon Kuznets Harry Markowitz, William Sharpe, Franco
Modigliani Robert Merton, Myron Scholes 1974
Autria -Investigation into the interdependence of economic, social,
and institutional phenomena.
-A major advocate of small government involvement 1992
USA -Neoclassical economics can clarify everything: human
family, crime, race discrimination, marriage, and so on
-He has a unique point of view, expressed in qoutes like:
"fireflies, antelopes, mountian sheep... also form efficient
mating market" 1976
USA -He had single-handedly rewritten
much of economics: international trade,
linear programming, and maximization
-He was an advisor to President Kennedy -Expansionary policy is a monetary policy that increases the size of money supply to set off business cycles
by lowering interest rate. He argues that expansionary
policy cannot reduce interest rates except for brief periods.
-"A master of publicity and controversy, he became courted by government and business leader, and has more public influence than any single economist of the last century.
-He is very inconsistent. 1985
Italy Merton Miller Harry Markowitz William Sharpe -Modigliani arrived at a sensible conclusion
that firm's cost of capital are determined not by how
the firm acquires funds but how it spends the fund.
The use of funds reflects the riskiness of the project.
Through understanding the cost of capital, firms can
make sure they are investing for higher return. -Portfolio is a collection of assets.
-Together with Sharpe, Markowitz developed Capital Asset Pricing Model (CAP-M). Investors define their own tolerance for risk and select portfolio at their preferred level of risk. Markowitz's portfolio theory was aided by the statistical techniques of his teahcer, Tjalling Koopmans, who developed linear programming that looks like: y=a+mx
-He also found the fundamental principle underlying portfolio diversification, reducing the risk without reducing the expected return. -The derivatives are financial instruments that are used to insure against a variety of risks.
-The derivative market in 1999 was estimated at $70 trillion, and its risks are huge. Part of the $1.64 billion loss suffered by Orange County in CA in 1994 was due to hedge fund failures. They advanced an equation to help. Their theory was widely applied 1997
USA -Each box represents the years they would spend in prison. For player A, ratting out results in fewer years regardless of B's decision. It is same for player B. So they would both confess and end up in upper left box, each spending 3 years in prison.
-Nash equilibrium states that all players are playing their best strategies. It does not have to end in good colectively.
-But in economic life, people have far less perfect knowledge. It also can end up in several different ways.
-This Nobel Prize received unusual publicity because of his personal tragedy. 1998
India -He restored philosophical dimension in economy
-He talked a lot on poverty and human condition
-He is an advocate of normative economics, meaning
what should be instead of what it is Simon Kuznets Measuring to Understand Ragnar Frisch Jan Tibergen 1969
Netherlands "for having developed and applied dynamic models
for the analysis of economic processes" -They brought mathematical tools essential for scientific analysis of economic behavior.
-Frisch developed the first national planning system, for Norway
-Tinbergen drew up a planning model for Netherlands, using 27 equations and 50 variables. In 1939, he used a more complex scheme to analyze the U.S economy from 1919 to 1929 1971
Russia "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development" -He gathered statistics on a vast national scal. He constructed table to show the total production of national goods, and another for total income, itemized by sources and types.
-For the first time, 1919-1938, the real magnitude of total investments in the country was known, their cyclical fluctuations could be measured, as well as the relation between distribuion of income and growth 1972
USA -He generalized a theory to cover all variables in any self-balancing market. To gain as simple and consistent a model as possible, he included primitive assumptions, such as everyone is rational...
-He is also an advocate of limits of rationality.