Posts Tagged ‘Nobel Prize for Economics’
Nobel prizes in economics are Not convincing. As subjective as Literature and Peace
Posted on: October 16, 2015
Is Economics a science?
Nobel prizes in economics are Not convincing.
As subjective as Literature and Peace. Think of Obama, Menahim Began, Sadat, Shimon Perez…
Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the “Prize in Economic Sciences in Memory of Alfred Nobel”, to give it its full title.
Seven years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the “worst panic since the 1930s” that followed.
And yet on Monday the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue.
The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy.
A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars.
It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.
To illustrate just how dangerous that kind of belief can be, one only need to consider the fate of Long-Term Capital Management, a hedge fund set up by, among others, the economists Myron Scholes and Robert Merton in 1994.
With their work on derivatives, Scholes and Merton seemed to have hit on a formula that yielded a safe but lucrative trading strategy.
In 1997 they were awarded the Nobel prize. A year later, Long-Term Capital Management lost $4.6bn (£3bn)in less than four months; a bailout was required to avert the threat to the global financial system. Markets, it seemed, didn’t always behave like scientific models.
Andrew Bossone shared this link
Many economists seem to have come to think of their field in scientific terms: a body of incrementally growing objective knowledge.
Over the past decades mainstream economics in universities has become increasingly mathematical, focusing on complex statistical analyses and modelling to the detriment of the observation of reality.
Consider this throwaway line from the former top regulator and London School of Economics director Howard Davies in his 2010 book The Financial Crisis: Who Is to Blame?:
“There is a lack of real-life research on trading floors themselves.” To which one might say: well, yes, so how about doing something about that? After all, Davies was at the time heading what is probably the most prestigious institution for economics research in Europe, located a stone’s throw away from the banks that blew up.
All those banks have “structured products approval committees”, where a team of banking staff sits down to decide whether their bank should adopt a particular new complex financial product.
If economics were a social science like sociology or anthropology, practitioners would set about interviewing those committee members, scrutinising the meetings’ minutes and trying to observe as many meetings as possible.
That is how the kind of fieldwork-based, “qualitative” social sciences, which economists like to discard as “soft” and unscientific, operate.
It is true that this approach, too, comes with serious methodological caveats, such as verifiability, selection bias or observer bias.
The difference is that other social sciences are open about these limitations, arguing that, while human knowledge about humans is fundamentally different from human knowledge about the natural world, those imperfect observations are extremely important to make.
Compare that humility to that of former central banker Alan Greenspan, one of the architects of the deregulation of finance, and a great believer in models. After the crash hit, Greenspan appeared before a congressional committee in the US to explain himself.
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” said the man whom fellow economists used to celebrate as “the maestro”.
In other words, Greenspan had been unable to imagine that bankers would run their own bank into the ground.
Had the maestro read the tiny pile of books by financial anthropologists he may have found it easier to imagine such behaviour. Then he would have known that over past decades banks had adopted a “zero job security” hire-and-fire culture, breeding a “zero-loyalty” mentality that can be summarised as: “If you can be out of the door in five minutes, your horizon becomes five minutes.”
While this was apparently new to Greenspan it was not to anthropologist Karen Ho, who did years of fieldwork at a Wall Street bank.
Her book Liquidated emphasises the pivotal role of zero job security at Wall Street (the same system governs the City of London). The financial sociologist Vincent Lépinay’s Codes of Finance, a book about the division in a French bank for complex financial products, describes in convincing detail how institutional memory suffers when people switch jobs frequently and at short notice.
Perhaps the most pernicious effect of the status of economics in public life has been the hegemony of technocratic thinking.
Political questions about how to run society have come to be framed as technical issues, fatally diminishing politics as the arena where society debates means and ends.
Take a crucial concept such as gross domestic product. As Ha-Joon Chang makes clear in 23 Things They Don’t Tell You About Capitalism, the choices about what not to include in GDP (household work, to name one) are highly ideological.
The same applies to inflation, since there is nothing neutral about the decision not to give greater weight to the explosion in housing and stock market prices when calculating inflation.
GDP, inflation and even growth figures are not objective temperature measurements of the economy, no matter how many economists, commentators and politicians like to pretend they are.
Much of economics is politics disguised as technocracy – acknowledging this might help open up the space for political debate and change that has been so lacking in the past seven years.
Would it not be extremely useful to take economics down one peg by overhauling the prize to include all social sciences?
The Nobel prize for economics is not even a “real” Nobel prize anyway, having only been set up by the Swedish central bank in 1969.
In recent years, it may have been awarded to more non-conventional practitioners such as the psychologist Daniel Kahneman. However, Kahneman was still rewarded for his contribution to the science of economics, still putting that field centre stage
Think of how frequently the Nobel prize for literature elevates little-known writers or poets to the global stage, or how the peace prize stirs up a vital global conversation:
Naguib Mahfouz’s Nobel introduced Arab literature to a mass audience, while last year’s prize for Kailash Satyarthi and Malala Yousafzai put the right of all children to an education on the agenda.
Nobel prizes in economics, meanwhile, go to “contributions to methods of analysing economic time series with time-varying volatility” (2003) or the “analysis of trade patterns and location of economic activity” (2008).
A revamped social science Nobel prize could play a similar role, feeding the global conversation with new discoveries and insights from across the social sciences, while always emphasising the need for humility in treating knowledge by humans about humans.
One good candidate would be the sociologist Zygmunt Bauman, whose writing on the “liquid modernity” of post-utopian capitalism deserves the largest audience possible.
Richard Sennett and his work on the “corrosion of character” among workers in today’s economies would be another. Will economists volunteer to share their prestigious prize out of their own acccord? Their own mainstream economic assumptions about human selfishness suggest they will not.
How Globalization can function adequately for the poorer countries?
Globalization is functioning according unilateral “rules of the games” in international institutions. Joseph Stieglitz, Nobel Prize for economics, had written a book in 2002 “The great disillusion” where he critiques the function and ideology of the international institutions such as the World Bank, the International Monetary Fund, and the World Trade Organization. I have already published reviews in two parts of the book.
This post focuses on Stiglitz’s recommendations for the international institutions (supposed to be public institutions) to reform in order to give a chance for Globalization to effectively comes to the rescue of the developing States. Thus, in order for world economy and financial stability be the norm then, three urgent reforms are needed.
First, the international institutions such as the World Bank, the International Monetary Fund, and the World Trade Organization have to focus on collective global problems that require collective participation. For example, when global market economy is not running satisfactorily; when one State harms others and gets away with it (no indemnization procedures) then there are over production of certain commodities and under production of others. We have to tackle defense spending that does not generate any public benefits.
For example, public education sectors must be financed by international institutions since private sectors have failed to consider that urgent facet in states’ economy. For example, we have the environment, oceans, atmosphere, CO2 emissions and the other harmful gases, sanitary challenges and discharges, clean water sources, diffusion of contagious diseases, famine, and natural calamities are becoming global problems that require global resolutions and cooperation. All the global problems are interrelated: poverty leads to degraded environment and deforestation which in return increases poverty. There are financial interventions that are beneficial locally in reducing local pollution.
Second, the mode of governance such as control, management, decision-making and administration of international institutions has to be drastically reformed. The economic and financial interests of developed States have established unilateral set of rules and regulations on how to be applied globally without any serious input from the concerned parties in the developing countries. Developing States were targeted for hegemony behaviors. For example, in the IMF administration it is the finance ministers of the developed States and their central banks governors who are presiding as decision makers. In the World Trade Organization it is the ministers of commerce in the developed countries that run the show: they have particular perspective in matters of global trade. Who has the right of vote in these international institutions? The poor States and the workers have no representatives in these institutions to offer pertinent alternative feedback as to their difficult situations. The voting rules and representation around the table of decision makers have to be reformed drastically. The fact is that the IMF is rich because it is the developing countries that are reimbursing their debts at high interest rates.
At least, reforms in the structures of official direction in the IMF and WB can help in the short-term. For example, African delegates should be allowed to participate and be listened to even if they still cannot vote. Participation in meetings can aid the developing State representatives gather pertinent information and intelligence on world problems may partially fill the gap in intelligence dissemination. The IMF and WB should invest in developing “think tanks” institutions in the developing countries in order for their representative to be at par with ongoing discussions.
Third, transparency within the international institutions administrations have to be made public since they are public. Public pressures should be directed toward greater transparency in management and decision processes; on time data should be available for the concerned parties and not only for the multinationals and the developed State governments. There is urgent need to open the working environment to independent and free press and researchers of developing countries. Transparency is best catalyst to encouraging democratic tendencies in developing States and fair availability of information in a timely fashion.
Thus, favoritism in behavior and focus on the interests of the richer States must be examined and expressed by the public before conditions escalate to global problems. As deliberations in international institutions become accessed directly to larger audiences, instead of being held in closed chambers, then the environmental challenges and the interests of the poorer sections in world societies will be heard and discussed openly. The current decision processes are not critiqued and analyzed by the public on a timely manner: it is generally too late to critique wrong decisions before they are applied. Public access to timely information and intelligence would pressure the IMF and WB to reconsider their debatable economic assumptions and ideology; so far, what is decided is restricted on “what is good to the financial institutions”.
Mass protests in World Forums were mainly targeting the secrecy and opacity of the decision processes. So far, the disseminated information by the current structures of the international institutions is viewed with great suspicion by the poor States; so far, reforms were lukewarm and basically the kind of talked intent for reforms but not effective in practice.
Adonis Diaries 